Rising Fuel Cost in the Airline Industry

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Running Head: Rising Fuel Costs and the Airline Industry

Rising Fuel Costs and the Airline Industry

Of all the changes that we have seen in the economy, fuel has to be at the top of the list as an item whose pricing affects more than just the price we see at the pump. In addition to increased prices at the gas pump, we have also seen products, services, and virtually every item sold increase due to the high cost of fuel. Although fuel prices have dropped today versus what they were in the third and fourth quarter of 2008, businesses had to make quick decisions as to how they were going to handle the rising cost so that they could still return a profit. One of the industries that the increasing price of fuel has made a large impact on is the airline industry. Four of the top airlines: Southwest, American Airlines, Delta Airlines, and United Airlines have all had to institute changes within their organization to minimize the impact of rising fuel costs on their bottom line. Southwest Airlines

Last summer, when the price of crude oil increased at an astronomical rate, Southwest Airlines was praised as the airline that would make it through the crises. For years, Southwest used fuel hedging to keep their costs down (Reed, 2008). Fuel hedging consists of a future contract, and in this case, means that Southwest agrees today to pay a certain price per gallon for fuel in the future (Reed, 2008). When barrels of oil began increasing, Southwest was basically “locked-in” with their fuel pricing. That meant that they did not have the same sense of urgency that other airlines had at that moment in time. Southwest could still charge the same low rates, and not have to plan on making any drastic changes. Southwest began fuel hedging over 14 years ago (Reed, 2008), and was profitable by doing so. The executives of the company at that time developed a strategy many years ago that had paid off for them for quite some time.

However, by the end of 2008, when crude oil began dropping, Southwest was at the other end of the spectrum. They were now paying more for fuel than the current price of fuel. This caused Southwest, for the first time in 17 years, to post a loss for the quarter (Fuel contracts 2008). However, Southwest still did not start charging customers for additional items as other airlines began doing. Currently, on their website, they still boast “Low Fares…no hidden fees” (Southwest, 2009). Instead, Southwest opted to make other changes to their organization. These changes went into effect before the oil prices starting dropping. Southwest decided to hedge only 10% of their fuel, in contrast to hedging approximately 75% of their fuel (Cochran, 2009). Although touted as some that Southwest knows what they are doing (Cochran, 2009), it must also be noted that Herb Keller, the former CEO of Southwest, retired last summer. It is difficult to determine at this point if Southwest is as creative, and that is the reason they have dropped their fuel hedging, or if the new leadership is reluctant to take the risks that the former CEO was willing to take and institute into the corporation. It is also difficult to determine if the new CEO is possibly at the eighth stage of Kotter’s model, and trying to anchor new approaches to the Southwest culture (Kotter, 1996). Only time will tell if the CEO’s new approaches will be successful. American Airlines

When oil price increased sharply in the summer of 2008, American Airlines was the first major airline to start charging for the first piece of baggage (Johnsson, 2009). According to American Airlines CEO Gerard Arpey (2008), “Our company and industry simply cannot afford to sit by hoping for industry and market conditions to improve” (Maynard, 2008). Because American was the first to institute these fees, some saw the move as something that could

backfire on American, and called the move “stupid” (Maynard 2008). However, within weeks after American...
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