American Airlines to Save $1.3 Billion in Fuel Costs Compared to Rivals
Dumping Fuel Hedges Pays Off with Lower Price at the Pump
A decision made back in 2008 is saving American Airlines Group a lot of money in purchasing fuel, it turns out, and its fuel costs will be significantly lower in 2015 than those of its rivals, Delta Air Lines and United-Continental Holdings.
Back then, with crude oil prices having hit an all-time high of $147 in July that year, US Airways’ management team decided not to hedge their exposure to fuel prices, paying market price for jet fuel going forward.
Following the 2013 merger of American with US Airways, that policy went into effect at the merged airline this past July and, given the sharp decline in world oil prices since June, the decision is paying off nicely.
A report issued by Wolf Research on Friday indicates that American will pay roughly 30 cents less per gallon than Delta or United. This will translate into savings of at least $1.3 billion, according to the research firm.
Essentially, a fuel hedge fixes the price a company would pay for fuel. If the market price rises, the company saves money. However, if the price falls, the company will end up paying more than the current market price.
“Other major airlines mitigated their own gains through their hedging programs, and so, although the long-term benefit still stands, in the short term those companies won’t profit as much off lower oil prices as American Airlines,” said the report.
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