Southwest Airlines success in using simple and complex investment techniques has, for almost a decade now, enabled it to lock in prices it pays for large amounts of jet fuel, months and even years ahead of time. This investment strategy has protected U.S.A's leading discount carrier from run ups in crude oil prices by dramatically cutting down its fuel expenses.When all other airlines were estimated at paying close to $4 a gallon, Southwest was estimated at paying only close to about $2.
Airlines assume a considerable amount of risk when they hedge jet fuel purchases. It is also possible that sometimes they end up paying more than the spot market price for contracted fuel. Had oil prices collapsed in the past year, Southwest's hedges could have cost them large sums of money.
I just thought this was really interesting since just the other day we were talking about speculation and its effects on the market.
5 comments:
My mom and I always fly Southwest because it's so much cheaper. I guess accurate speculation like that is how they keep their prices so low. However, one draw back is the constant lay-overs, even when they're out of your way. It probably has something to do with efficiency.
I just have to wonder why the other airlines don't do something like this to cut down on their own costs. It seems to be public knowledge what Southwest Airlines is doing, so it doesn't seem smart for the other airlines to not take advantage of the same technique. If they did, it would make them more competitive with Southwest, and the consumers would benefit from lower airfare.
I'm with Brenna in not understanding why more airlines are not following Southwest in hedging fuel prices. There is always a risk when speculating prices and this could be the reason why, but the way fuel prices are/have been going up, one would think it would be a relatively low risk to take in order to save tons of $$.
It is true that there is a lot of risk in hedging jet fuel purchases but it has seemed to be working well for Southwest. However, speculation has been blamed as one of the main causes of various economic crises everywhere, not just in the US. A good thing about speculation is that by risking their own capital in hope that that make a profit, they add liquidity to the market and make it easier for others to offset risk, including those who could be classified as arbitrageurs.
Post a Comment