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Rising Fuel Cost in the Airline Industry

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Rising Fuel Cost in the Airline Industry

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  • September 2009
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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...

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