Even though oil is around $50 a barrel at the moment, those lower prices won’t necessarily translate into cheaper tickets for you. It’s all comes down to fuel hedging, where some airlines lock in an oil rate to avoid fluctuations in costs. Hedging saves airlines from paying more when prices go up, but insulate you from cheaper airfare when prices drop.
The problem is that even this type of insurance has gotten more expensive, CNN explains:
The basic insurance-type of policy is when airlines purchase the right to buy oil at a set price at some point in the future. If the price of oil has gone up, they can use that option to buy oil at the original, lower price. If oil went down, then the option simply served as an insurance policy that never got used.
The problem here is that with the price of oil being so volatile over the past few years, the cost of simply locking in a fixed price has gone up.
Since it’s more risky, the financial institutions selling the options need to be paid more to make it worth their while. That’s why other types of hedging have become popular. They help lower the cost to the airlines, but they also require that the airlines take on more risk.
Some airlines have decided that the high price of hedging isn’t worth the money.
US Airways and Allegiant Air are two examples of airlines that don’t hedge.
Ultimately, the airlines want to cut their costs to increase profits – whether or not they have to lower airfare to do so.
