Oh, the irony! Airlines decry oil speculation — then lose money doing it

by Christopher Elliott on October 23, 2008

Oh, the irony! The domestic airlines, which only a few months ago were asking for your help in stopping oil speculation, are losing money — lots of money — because they speculated on the price of oil themselves.

Northwest Airlines is the latest carrier to report a loss because it guessed wrong on the price of fuel. The mistake reportedly cost it $410 million. Other airlines with hedging-related losses include United Airlines and, surprisingly, Southwest Airlines.

Back in July, I pointed out the absurdity of asking the very passengers who had been abused by the airlines for help. As it turns out, that was just the tip of the absurdity iceberg.

Instead of heeding their own advice, the airline industry turned around and did what they wanted the government to stop others from doing — betting on the price of oil.

They lost.

And now they want us to bail them out by paying one of their new, surprise surcharges.

Defending the fees that offset United’s huge quarterly loss, its chief operating officer John Tague said, “these are just things that are going to be necessary if we’re going to be a real industry.”

(A real industry? It hasn’t been a real industry since the Carter administration.)

But these airlines must think their customers have no memory. A reasoned look at the airline industry’s foolish fuel hedging and the rhetoric of the last few months can lead to only one conclusion: The money-losing airlines want us to pay for their mistakes.

It’s time for the government to start regulating the way ticket prices are quoted, to prevent airlines from deceiving their passengers.

And it’s time for the airlines to start practicing what they preach. If they don’t want anyone speculating on the price of oil, then they shouldn’t do it, either.

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Tagged as: airline, fuel hedge, surcharge

  • Victor

    Correct me if I’m wrong, but if the airlines were properly hedged, they wouldn’t need to be concerned with price fluctuations either way. Sounds like they were speculating rather than hedging. And I’m crying a river for them right now.

  • Eric Voth

    When the new President of the USA takes office, he need to consider re-regulating the entire industry. Nationalize it.

  • Frank

    One of the airline industry’s HIGHEST COSTS is not fixed. It’s an attempt to LOCK IN a price for oil so they can protect themselves from increases. It sometimes means the difference between profit and loss. Their goal is to minimize the volatility of fuel expenses. Hedges carry risks, but you most likely will not see airlines discontinue this practice. Most view it as insurance.
    There are two kinds of speculators in the futures markets. Traditional speculators are those who need to hedge because they actually take physical possession of the commodities. Index speculators, on the other hand, are merely allocating a portion of their portfolio to commodity futures.

  • Frank

    (A real industry? It hasn’t been a real industry since the Carter administration.)
    =============================================================

    Thirty years ago on October 24, the Airline Deregulation Act of 1978 was signed into law and what followed has been a long and costly lesson in what happens when government fails to regulate a vital component of our economy – as we have recently observed in the dramatic decline of the financial industry. Over the last 30 years, the airline industry has been cluttered with over 150 bankruptcies and defunct airlines, thousands of displaced and unemployed airline workers and their families, the worst consumer rankings and on-time performance in history and an out-dated air traffic control system that cannot handle the demand. This is the legacy of the Airline Deregulation Act of 1978.

    Prior to deregulation, the aviation industry developed under federal policy crafted to ensure its stability and to promote its economic development. While imperfect, this former regulatory structure did allow carriers a return on investment and ensured that many communities, big and small, received air service. In the post-deregulation environment however, the industry was thrown into a massive market-driven restructuring which clearly has not worked for consumers, communities and employees.

    Currently, the aviation industry supports more that 12 million jobs and accounts for more than $1.3 trillion in national output. Yet, we continue to allow the marketplace, exclusively, to decide which communities receive air service and at what price. Deregulation has caused a serious and harmful disconnect between long-established federal oversight of the commercial aviation industry and the real void in federal guidance. The regulatory vacuum has not only abandoned communities but has also left employees with no support, as the rights and protections they once had were eliminated thirty years ago.

    Meanwhile, airline executives have continued to collect unprecedented compensation while thousands of employees and communities have been left behind. In the past year, three Essential Air Service carriers have ceased operations and as a result, thirty-seven communities have lost air service.

    Airline employees, communities and management believed in 2007 that the industry had emerged successfully from an era of record financial losses and countless bankruptcies and that the industry was on stable footing. Then came record high oil prices and the race to furlough employees, shut down carriers, reduce service and implement new fees became priority one. The percentage of capacity cuts in the industry is now in the double digits and the projected decline in growth will take bigger tolls on communities, employees and related industries.

    In the name of deregulation, we have witnessed the dismantling of an industry that has provided millions with secure jobs. Working families clearly understand the devastation that can result from unregulated industries; hopefully Wall Street and Capitol Hill have learned from this painful lesson as well.

    It is time for industry leaders to initiate a comprehensive national dialogue about creating a sound and rational aviation policy that works for everyone – employees, consumers, communities and shareholders – including the possibility of regulating portions of the industry. We must recognize the troubled track record of de-regulation and demand a new approach and fresh ideas as part of a constructive dialogue that leads to practical solutions.

  • Kevin Morgan

    OK, I couldn’t let this industry-apologetic, self-serving glop go unchallenged. I’ve never heard such a pile of manure.

    Just to address the most egregious points:

    >>Over the last 30 years, the airline industry has been cluttered with over 150 bankruptcies and defunct airlines, thousands of displaced and unemployed airline workers and their families, the worst consumer rankings and on-time performance in history and an out-dated air traffic control system that cannot handle the demand. This is the legacy of the Airline Deregulation Act of 1978.<>Prior to deregulation, the aviation industry developed under federal policy crafted to ensure its stability and to promote its economic development. While imperfect, this former regulatory structure did allow carriers a return on investment and ensured that many communities, big and small, received air service. In the post-deregulation environment however, the industry was thrown into a massive market-driven restructuring which clearly has not worked for consumers, communities and employees.<>Meanwhile, airline executives have continued to collect unprecedented compensation while thousands of employees and communities have been left behind.<>Airline employees, communities and management believed in 2007 that the industry had emerged successfully from an era of record financial losses and countless bankruptcies and that the industry was on stable footing.<>Then came record high oil prices and the race to furlough employees, shut down carriers, reduce service and implement new fees became priority one. The percentage of capacity cuts in the industry is now in the double digits and the projected decline in growth will take bigger tolls on communities, employees and related industries.<>In the name of deregulation, we have witnessed the dismantling of an industry that has provided millions with secure jobs.<>It is time for industry leaders to initiate a comprehensive national dialogue about creating a sound and rational aviation policy that works for everyone – employees, consumers, communities and shareholders – including the possibility of regulating portions of the industry.<<

    Fine, as long as “re-regulation” isn’t the fore-ordained outcome. Maybe we need to cut even more – frankly, any flight between two points that could be traveled by Acela-speed trains in less than 3 hours ought to be eliminated in favor of developing rail–airlines increasingly expect you to show up at the airport at least 90 minutes before your flight, and most flights (including takeoff and landing) are close to an hour at a minimum. Add the time to collect bags and/or rent a car, and you’re looking at a minimum of 3 hours. If your airport(s) are located outside the city, as is frequently the case, and you have to both drive out to the airport AND drive in from the airport to your destination, then it can easily take longer to fly than ride. Would that be an accepted “regulation” for the industry to swallow?

    Now, I’m not a one of those “all regulations are bad” kind of nutso Republicans we’ve had running the show the last eight years. But there are different kinds of regulation.

    Disclosure & performance regulations – like the kind that the airlines fight constantly, like what exactly they consider a weather delay, or regulations that require them to disclose all the mandatory fees they charge at the time a fare is advertised, or regulations that require them to actually DO what they agreed, ie get you from point A to point B roughly when they said they would – those are good regulations.

    Regulations that mandate an airline charge at least X amount for flights from A to B, or that require a minimum of so many seats service daily from town A to a bigger airport, or the like – that’s bad regulation. No matter how smart the government thinks it is, it can’t possibly know what the “right” level of demand for that kind of a service is, and the only way to find out is for an airline to experiment and find out.

  • JasonZ

    Before you go spanking the Airline Deregulation Act of 1978, please answer this question: Compare the average price of a flight within the US in 1978 to the average income in 1978. Then compare the average price of a flight within the US in 2008 to the average income in 2008.

    Show me that the average flight costs me (the consumer) a larger percentage of my income today than it did in 1978, and I’ll join the “Deregulation Sucked” bandwagon. I suspect, though, you’ll find the typical domestic US flight costs the average person a smaller piece of their paycheck today than it did 30 years ago.

    Run that comparison for each of the 30 years. I can pretty much guarantee that, in the vast majority of those 30 years, domestic air travel cost less (as a fraction of average income) than it did pre-deregulation.

    “But wait!” I hear you cry. “You can’t attribute all of that to deregulation!” It’s certainly hard to teast all the factors apart. Growth of personal income isn’t driven by exactly the same factors that drive the cost structure of airlines. But many factors are in common: inflation, interest rates, all impact my personal income in ways that aren’t wildly different from the way they affect airfares. The cost of fuel is the biggest wildcard that makes the comparison a bit dodgy; that’s why you have to look at all 30 years to see whether deregulation was good for the wallets and purses of Americans.

    Show me the money.

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