A MARTÍNEZ, HOST:
People looking to buy plane tickets are feeling the pain of higher fuel prices. Airlines do have a tactic to keep prices down. Most are not using it. NPR's Wailin Wong and Darian Woods of The Indicator podcast explain.
WAILIN WONG, BYLINE: Sometimes when I drive past a gas station, I look at the price on the sign and do some quick mental math about how much it'll take to fill my tank.
DARIAN WOODS, BYLINE: That's your version of what airline executives are doing.
WONG: Exactly, but they do it on a much bigger scale.
WOODS: Gerry Laderman is an airline veteran. He worked in the industry for around four decades, mostly on the finance side.
GERRY LADERMAN: It's tens of millions of dollars on an annual basis for each movement of just 1 cent and a gallon of jet fuel.
WOODS: And the war in Iran is making prices spike more than just a cent per gallon. This week, the global average price for jet fuel was creeping towards $5 per gallon. That's more than double what it was a month ago.
WONG: One reason is because Middle Eastern refineries that produce jet fuel and other products can't ship through the Strait of Hormuz.
WOODS: Now, airlines can't control the global price of oil or what's happening with refineries. One notable exception in the U.S., though, is Delta. It owns its own refinery through a subsidiary.
WONG: As for other airlines, former United CFO Gerry Laderman says they generally try to keep their fuel costs down by using more energy-efficient planes and carrying less weight. But for many years, airlines have also done something called fuel hedging. This practice was common in the U.S., but that changed.
WOODS: And before we get into why that changed, first, we should talk about what fuel hedging is. It involves financial instruments like futures contracts. Investors that use these contracts agree to buy or sell a certain asset, like a stock at a specific price on a specific future date.
WONG: There are futures contracts for all kinds of commodities, including crude oil. So an airline that is fuel hedging might enter into a contract to buy crude oil at a set price in the future. Let's say it agrees to pay a hundred dollars a barrel six months from now.
WOODS: And six months goes by, and let's say the cost of crude oil has gone up to a hundred and fifty dollars. The futures contract, it locked in a price of a hundred dollars, though. So now the airline has made a $50 profit. Of course, if oil prices have gone down to $50 a barrel, the airline loses money.
LADERMAN: It's really viewed as insurance to protect the financials against a sudden spike in jet fuel.
WOODS: And for years, this insurance policy worked well. So, for example, American Airlines said in 2003 that it saved almost a hundred and fifty million dollars in fuel costs thanks to hedging.
WONG: However, Gerry says most of the major airlines in the U.S. eventually soured on fuel hedging. One reason - the Wall Street transaction fees to make these hedges got expensive.
WOODS: Plus, Gerry says the airlines found that they could make money the old-fashioned way by raising prices. Today, none of the major airlines in the U.S. are hedging. Many outside of the U.S. are, but even airlines like Cathay Pacific and Qantas are increasing airfares or fuel surcharges. It appears that hedging alone isn't enough to keep prices low for fliers.
WONG: Wailin Wong.
WOODS: Darian Woods, NPR News. Transcript provided by NPR, Copyright NPR.
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