Airlines have nobody to blame but themselves

Southwest AirlinesIn the midst of oil-mania, Southwest significantly hedged their fuel consumption. Delta and American did not.

Guess who’s winning?

This is a management problem. Hedging is NOT speculation – you shouldn’t “lose” because you hedge, as the cost of fuel should wind up fixed if the hedge is managed appropriately. You determine your need for fuel, and figure out how that flows through to ticket price. Then you purchase forward contracts for that fuel and fix your ticket price appropriately. If fuel prices go up you take your gains on the contracts, which in turn offset your rising costs at consumption time. If fuel prices go down, you lose on the contracts but your fuel price has fallen as you’re buying it. Margin on your service stays the same, as you set your prices in advance.

Not hedging your fuel costs in this environment is the real speculation. And I’ll add that those who do cover their butts have the addition perk of being able to raise their ticket prices (even if slightly) on the back’s of their competitors’ misfortune without significantly effecting volume.

UPDATE: Forbes says: “The sky may not be falling for airlines just yet, but darker clouds could be just around the corner.”

Agreed (particularly if they don’t update their financial management tools to at least late 20th century levels).

UPDATE 2: Southwest turns its 69th consecutive profitable quarter.

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