According to the wife, when I'm wrong I'm wrong, and when I'm right still I'm wrong
The same could be said for the airline industry. As big users of fuel, the price of oil plays a massive part in their margins.
Like a lot of commodity users, hedging makes up a great part of protecting those margins but right now airlines are paying the cost for hedges that have been blown out due to falling oil prices.
Business Insider details that while airlines are benefitting from lower fuel prices, they've had to give up a large chunk of that due to their hedges against oil going higher. It's causing them to rethink hedging strategies in light of the oil moves
Southwest Air said that current hedges hold a loss of $1.8bn through 2018. Some of that will be offset with around a $500m saving for 2015. It's exited some hedges leaving around 30-35% of H2 2016 fuel is hedged. That's down from 60-70%. Their chief finance officer said;
"While our hedging philosophy has not changed, our tactics have in this environment. We will focus on catastrophic protection with no downside risk."
Delta Airlines said it has exited contracts 2016 which would cost it $100-200m per quarter
Those that don't hedge are finding themselves the biggest winners of all. Another thing the lower fuel prices is doing is giving major airlines the capacity to cut the gap in prices from budget airlines which could lead to price wars and falls in revenues
On the price front, all the airlines should be locking in these low prices as far out as they can but profit wise, while lower prices are the way to capture new business, that in itself is a risk if revenues tumble. It shows that there's always more to the picture than low oil means higher profits.
Damned if you do, damned if you don't
Have a great weekend all
