Air Transport World

A fuelish problem. (hedging)

There are a 1,001 reasons for not hedging and they all work. At least in theory.

Next to the cost of employing the thousands of workers that it takes to operate a large airline, fuel is the single greatest operating expense facing any carrier. But unlike wages and benefits of these employees, which are fixed over the life of a contract and relatively predictable even over the long term, changes in the price of fuel can and often do occur with little or no warning. Furthermore, although airlines can exert a good deal of influence over labor expense, they have little control over the price of oil, which in turn largely determines the price of jet fuel.

Given these realities, it is somewhat surprising that so many airlines take a laissez-faire approach to dealing with the cost of purchasing fuel, preterring to focus only on controlling consumption as a way of reducing fuel expense ATW, 10/90).

It is not as if airlines are unaware of the existence of financial-market mechanisms intended to reduce their vulnerability to rapid shifts in the price of fuel. It's just that the carriers prefer not to use them. Their reasoning runs from the theoretical to the practical.

For example, one executive with a major U.S. airline explained recently that airlines do not need to hedge their fuel costs, because they can pass increases along to the paying customer in the form of higher ticket prices. That strategy works in theory. Of course, it assumes that there are enough passengers willing to fork over extra money for tickets and not enough airplanes to carry them on or, in industry lingo, that traffic demand is strong and capacity is tight. …

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