Airlines Losing Millions By Not Buying Fuel Hedges
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America’s largest airlines may have missed their chance to lock in low fuel prices. Since January, fuel prices have risen by nearly 80 percent. Late last year, fuel was at $0.80 per gallon, its lowest level since 2003.
Both Delta and United did not hedge when prices were below $1 per gallon. Even though prices were low, these airlines had to pay more for fuel because of futures they had purchased in the past, when gas prices were much higher.
Wary of getting locked into higher prices again, the airlines stopped hedging. In doing so, however, they missed an opportunity to lock in the lowest prices in more than a decade.
This was not a straightforward decision. Purchasing the futures themselves costs money, so locking in prices would have required a financial commitment that airlines were not willing to pay.
Delta stopped hedging in January after losing more than $4 billion over the past eight years. Delta CEO Ed Bastian blamed an unpredictable oil market for his airline’s unwillingness to gamble on futures again. “There is too much volatility. If we were to get back into the market, we wouldn’t get back until we saw a point where there was some longer-term stability to know what to expect.”
United Airlines is still about 12 percent hedged in 2016. However, the airlines has said that it no longer sees hedging as a way to protect itself from price spikes. American Airlines, meanwhile, has made similar overtures, saying that it will not return to hedging as a strategy in the future.
Southwest is still 30 percent hedged. It has lost approximately $275 during the first quarter of the year because it was locked into paying higher prices. However, the Dallas-based low cost carrier has said that hedging is part of its strategy to protect against volatility in oil markets.
There is one other reason that airlines are starting to abandon fuel futures. They are slowly adding more fuel efficient planes to their fleets. These gas-sipping aircraft give the crude market less power over airlines.
What do rising fuel prices and a lack of hedging mean for fliers? Fares should eventually rise as airlines pay more and more for fuel. However, airlines are slowly starting to raise fares anyway as they seek to raise revenue numbers to please investors. Fares should remain low over the summer, but may creep up in 2017 because of this combination of factors.
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