How’s that oil hedge working out?

by Grant Martin on

With airlines in their worst state since 9/11 and bankruptices posting left and right, one lone airline, Southwest, has prevailed in staying profitable for the last few years.

How have they done this? Sure, they’ve got a pretty interesting business model, friendly customer service and a comprehensive network across America, but is that what’s really keeping them on top?

Partially. It’s more got to do with the oil hedge that the airline locked in well before it spiked up to $140 a barrel. Purchasing their fuel at rock bottom prices while the competition had to pay through the nose helped give Southwest the competitive edge. They could set their fares at lower prices (thus forcing the competition to match), not instill any crazy baggage or superfluous fees and still make a profit while the others were getting crushed.

Now that oil has come down from the stratosphere though, the oil hedge can actually work against them — instead of paying the now $70/barrel of light sweet crude, they’re still pinned to their commitment. And this last quarter, Southwest finally broke and actually posted a loss. Yesterday’s Marketplace has an interesting piece to this effect.

So does this mean that the glory days of Southwest are now over? I doubt it. The airline had several consecutive quarters where they could stockpile cash above the competition, build their aviary and prepare themselves for the future. And lets face it — they’ve got a business plan that’s built around paying for jet fuel at that hedged price, so all they have to do is keep cooking.

Once oil rebounds and demand increases again, Southwest will be right back up on top.

Consumer rally keeps meals on United flights — what about other fees?

by Grant Martin on

Nice work team. Late last week we reported that United Airlines was going to charge for meals on overseas flights departing from Washington Dulles. Thanks to a great deal of outcry from United’s passengers, bloggers and you readers, the embattled airline has now decided to rescind their decision.

A small victory in the face of many negative changes that have recently plagued the airline industry.

So with the price of oil sinking back to outrageous prices (down from take-a-second-mortgage-on-your-condo prices), are we going to start to see fewer ridiculous fees? Will fuel surcharges drop back down after taking a leap through the roof?

Don’t count on it. In some ways, oil prices were an excuse for the airline industry to make back some of the inflationary ground that they haven’t been pursuing over the last twenty years. At least this way some of our favorite carriers might be able to start operating consistently in the black rather than the cyclical merger-bankruptcy model that isn’t working.

I’m dedicating my next soggy chicken and spinach airplane meal to you, Gadling readers. Keep up the good work.

How much are those Heathrow landing slots worth?

by Grant Martin on

Now that Open Skies is in full effect, carriers left and right are scrambling to take advantage of all of the sweet landing slots in the EU’s congested airports.

Case in point, London‘s Heathrow Airport. Most travelers flying into the United Kingdom prefer landing at Heathrow because of better connections and proximity to London via the Tube. But landing slots at LHR are all full, so whenever one opens up, competition is hot to fill it in. Similarly, carriers want to hold on to their high-value slots to make sure that any competition doesn’t come in and snatch up some capacity.

So what do you do when you can’t book enough passengers to justify flying in and out of your slot? This case might show up if, say hypothetically, you’ve been cutting capacity like crazy to save cash and demand is low because travel is so expensive. Sound like any economy you know?

In that case, what do you do with your landing slot? Well, according to BMI, or British Midland Airways, you keep flying. Without passengers.

British Airways did the same thing earlier this year to try to preserve landing slots and we figured that the subsequent disgust with their MO combined with the price of fuel would be a deterrent for other carriers to do the same thing. But I guess those slots are just too valuable.

Why not at least auction off the empty seats on the aircraft? I know that you have to pay flight attendants if you have passengers onboard, but I feel like you can make enough to pay a few employees and offset the price of jet fuel a bit. But I guess that would make too much sense.

Midwest Airlines cuts 40% of workforce

by Grant Martin on

Further adding to the speculation about the future of Midwest Airlines, the embattled airline today announced that it is cutting forty percent of its workforce via furloughs and layoffs. In light of the escalating fuel crisis, this cut follows the announcement that it will be grounding all of its MD-80 aircraft.

Sad news for a small airline that is struggling to make its mark in the ultra competitive and expensive market that currently is the airline industry. Will they make it through the oil surge?

Over the Fourth of July weekend my girlfriend flew Midwest through Kansas City and generally had good things to say about the airline. Seats are nice, leather and spacious while food and beverage is not only existent and free but also quite supple. Her main observation? “There are only like ten people on this flight.”

If, even over a holiday weekend, you can’t fill up your planes, then you either have a serious pricing or a serious consumer confidence problem. Why? Since many people have been hearing rumors about the airline going under, demand for tickets has probably gone down. What’s an airline to do to inspire confidence?

Well, you could always promise 100% refunds on your tickets if you liquidate. With so many people booking flights and losing their money on flops like Skybus and Maxjet, I think that the least they deserve is a guarantee that they’ll get their money back if you take the plunge.

Hedge your gasoline purchases with MyGallons

by Grant Martin on

I was JUST thinking about this on the ride in this morning when I passed the Shell station at the corner of Platt and Ellsworth when I saw regular fuel at $4.25 a gallon: “Man, I wish I could buy gas at today’s price tomorrow”.

That’s basically what oil futures are: speculators decide that they think the price of oil is going to rise, invest in futures and watch their money go through the roof. More people make money, more speculate and the price goes up. It’s the phenomenon that many economists think is leading the surge in oil prices today, beating out real market supply and demand economics and essentially crushing our transportation infrastructure.

The theory is identical to what Southwest Airlines did. Back when oil was at believable prices, that airline decided to hedge their oil purchases and lock in prices at the past rate of $51/barrel. Now that fuel is at over $140, they’re making a killing over other airlines.

Now, with gasoline at $4.25 a gallon, you can purchase as many gallons as you want at that price with MyGallons.com and watch the market fluctuate independent of your fuel consumption. If gas keeps surging to $5.00 a gallon? You’ve just saved a bunch of money. If it drops to $2.50 again? You’re out.

Based on how many gallons you buy, the service sends you a “debit” card that lets you purchase as much fuel (per gallon, not dollar) as you have stored up.

The crux of your investment is on where you think the price of the oil is going to head. If you, like many others, think that the price will keep going up, now might be a good time to buy your MyGallons card before your summer road trip.

Subscription to the MyGallons service ranges from $30-$40 per year, but if gas keeps going up that will be a drop in the bucket compared to what you could save.