Dropping Oil Stings Airlines
Crude oil is currently trading at $80.91 on the NYMEX. It has fallen about 44% since peaking at a record of $147.27 on July 11. How are the airlines responding to this change? Well, most are doing nothing. A couple are reducing their fuel surcharges, including Thai Airways (dropping them by up to 30%) and Qantas (2-9%).
Others are actually reporting losses due to price of oil falling. I’ve blogged about Southwest’s success hedging fuel costs to their benefit, but it’s obviously possible for airlines to hedge fuel poorly and then for the cost of fuel to drop below their locked in price. In this case, they have to fork over the difference.
United and Alaska Airlines are experiencing this frustrating twist of fate right now. Alaska has announced it will suffer a “significant third-quarter loss” due to the decline in oil prices and a resulting $220 million loss on fuel hedges.
Similarly, United is predicting a $544 million loss on fuel hedges this quarter. I can’t imagine how frustrating it must be for airlines to watch oil drop, knowing full well they didn’t predict it correctly and alas, won’t benefit from the reduced costs. Talk about kicking you when you’re down….
