Southwest Airlines offsets rising fuel costs with fuel hedging
As the volatile oil market has surged to record highs, triggered by Russia’s invasion of Ukraine, Southwest Airlines has mitigated the soaring prices by hedging fuel costs.
Why it matters: The airline won’t speculate publicly about the price of future flights, but by agreeing to purchase fuel at pre-set prices months or years in advance, Southwest has significantly offset the steep costs facing most other airlines in America.
- The Dallas-based airline says it’s approximately 64% hedged for the rest of 2022.
- Fort Worth-based American Airlines stopped hedging fuel in 2014, when oil prices cratered, per CNBC.
Context: Because the profitability of an airline is so dependent on the volatile oil market, some carriers agree to purchase fuel in the future at a predetermined earlier price. Former Southwest CEO Gary Kelly made fuel hedging a cornerstone of the airline’s business strategy.
- United Airlines and Delta Air Lines are also fully unhedged, though Delta owns an oil refinery.
- Several international carriers, including American, are facing additional fuel costs from the need to fly longer routes to avoid Russian and Ukrainian airspace.
By the numbers: The average cost of jet fuel in North America has gone up 82% over the last year, according to the International Air Transport Association’s jet fuel price monitor.
- Southwest purchased a large percentage of its fuel when the company estimated that gas prices would be between $2.05 to $2.15 per gallon for all of 2022, according to a Barron’s report late last year.
What they’re saying: "The current energy price environment is exactly why we have a systematic hedging program — to provide insurance in the near-term, particularly over the timeframe of our published schedule," a Southwest spokesperson tells Axios.
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