Analysts say that airlines are betting that the recent surge in oil prices is temporary and they are not hedging their fuel costs any more at present.  Airlines “hedge” their fuel costs by buying contracts on fuel oil that closely track with the price of jet fuel.  If the price of fuel goes up, they earn more and that offsets the cost of jet fuel.  However, if the price of fuel goes down, they earn less (or even a loss) and that raises the cost of their jet fuel.

Frankly, I don’t think oil will stabilize until both the dollar and euro stabilize as a function of recovering economies.  The US economy is showing all manner of recovery now but it will remain slow and we still have an enormous debt to manage for the next few years.  The dollar will remain weak for the time being and weak currencies make for more trading in things like oil right now.  The more trading in oil, the more volatile its price is and the more likely it is to surge and retreat. 

It’s a hard bet but it’s something they, the airlines, will have to revisit in a few months again.

Filed under: Airline News by ajax
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