The rise in fuel prices is hitting everyone hard in the United States as they fill up at the pump. For the average person the $1.00+ increase in the price of gas is equal to an extra $40 per month for a small car to $80 or more for larger vehicles and SUV’s. Now imagine that same dollar per gallon added to the hundreds of thousands of gallons of fuel used by major airlines like Hawaiian. For every penny change in the cost of a gallon of jet fuel, Hawaiian’s income can change by as much as $1.6 million.
By hedging their fuel costs, which is essentially locking in the price of fuel for a period of time by committing to a purchase agreement, Hawaiian was able to save about eight and a half million in fuel costs. It’s a little like locking in a mortgage rate for a fixed amount of time. If rates go up, you win. If they go down, you miss out.
While it can be a bit of a gamble, when it works, like it has recently for Hawaiian, and like it did for Southwest Airlines when prices skyrocketed in 2008-2009, it can put an airline in a much more advantageous position over its competition.
As fuel prices rise for a competitor they are forced to raise fares, while those who locked in their prices for fuel can keep fares low. If fuel costs drop, of course, the exact opposite can happen.
For Hawaiian Airlines the strategy paid off giving them a net income of $855,000 for the last quarter. At the same time, the five largest U.S. carriers lost over a billion dollars combined.
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