I read an interesting article on airline pricing over the weekend. Much of it is not surprising– customers want low prices, and they get them where there is competition. Most airlines have a cost structure that makes it almost impossible to make money in the market.

One thing jumped out at me: only Southwest is cited as having hedged against rising fuel prices. Do other airlines not do this? Not to the extent of Southwest? Or did Southwest just get lucky? It seems like fuel hedges would be critical in the airline industry.

Another interesting data point was that some customers (not quantified) are choosing to save $10 by adding a stop in their route. This may just be an illustrative anecdote, but if it reflects reality in a sizeable segment of fliers, that will really take away a “premium” offering where majors could charge a premium. Really– $10 to add a stop? I’m cheap, but…

One Comment

  1. Jon

    Reuben,
    I believe Southwest have hedged less and less of their annual fuel puchases over the coming years. So it may be X% at $A in 2006, Y% at $B in 2007 and so on.
    Could this mean that there competitive advantage in this area will be diluted in years to come?
    In announcing their latest financial results a week or two ago, they also mentioned that they have successfully raised prices 3 times this year….an outcome that would turn Continental, NorthWest et al green with envy I’m sure.
    Two interesting observations about the aviation industry: (a) its a commody business where airlines spent a heap of money trying to tell passengers they are different from each other and (b) few if any low cost airlines are competing against each other. Will the results of Southwest, easyJet, RyanAir, Air Asia be so heathly once they start competing against each other?

    Jon

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