Why don’t airlines hedge fuel prices ?
A lot has been said about how Southwest got a significant edge in 2008 because it had hedged 70% of its fuel costs. It would seem the most natural thing for airlines to hedge against fuel price variations – which are, after all, the biggest contributor to their costs … and the one they have the least control over.
And yet. By and large, they don’t.
Turns out, in an ultra concentrated market with well-defined routes and a mutual interest in not encroaching on a competitor’s trade routes (to avoid mutually assured margin destruction) it’s quite ok to let customers absorb whatever the fuel markets will do.
Loved this counter-intuitive piece explaining it all How Airlines Explain the Economy – by Byrne Hobart
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