Why cheaper jet fuel won't mean lower airfares anytime soon
Airlines will save billions this year thanks to cheaper jet fuel, but they aren't likely to share the bounty with passengers - not while so many flights are already full.
Instead, the airlines will use their windfall to pay down debt and reward shareholders.
Airline CEOs worry that oil prices could just as easily go higher. They hope consumers benefiting from cheaper gasolene will splurge on airline tickets. But the biggest reason airfares are not falling: Planes are full at current prices.
Fuel is the biggest single expense at most airlines, and spot prices for jet fuel have tumbled by half since mid-September. If prices stay around these levels, United States airlines could save US$20 billion this year by some estimates.
The road to fuel savings at an airline is not always as simple as it is for a driver at a gas station.
Airlines often buy contracts known as hedges to protect themselves against sudden upward swings in fuel prices. However, when the price of oil crashes, those contracts can lose a great deal of value. Analysts say the accounting losses will be more than offset by lower fuel prices.
For example, Delta Airlines Inc, the nation's third-biggest airline company, reported yesterday that it spent US$342 million less on fuel in the fourth quarter than it did a year earlier. But it reported a US$712 million loss because it had to write down the value of future fuel-hedging contracts by US$1.2 billion.
Airlines will not benefit equally from cheaper fuel because some, like Delta, will suffer losses on their hedging strategy. The biggest winner could be American Airlines Group Inc, which generally does not hedge.
Airline executives also cite the volatility of oil prices - they spiked to records in 2008, collapsed, then surged again until the recent drop - as a reason not to cut fares now.
Delta CEO Richard Anderson said that his airline expects to save US$2 billion this year on fuel, even with hedging losses. He said Delta will pay down debt and reward shareholders by buying back company shares, which raises the value of the remaining stock. As for passengers, he suggested that they can shop around.
"The marketplace is incredibly competitive, and there are always differences in fares," Anderson said.