After fuel prices spiked, fees were implemented for everything from checked baggage to pillows and blankets. These were the predictable outcomes of recent airline turmoil. Some results, however, were not expected.



Hedge trimming

Soon after the price of oil hit US$147 a barrel earlier this year, some airlines shut down while others began shedding excess weight to stay afloat. Airlines were expecting fuel costs to rise in 2008, but they didn't expect an increase so fast and steep. To mitigate the wild price swings, airlines began to hedge their fuel costs for future quarters. They set aside money to buy fuel in a futures market, betting that prices would not fall below a certain price. What no airline predicted was that fuel prices would fall dramatically. Some airlines missed out on a modest profit in the 3rd quarter because they took a financial hit for hedging fuel costs above market value. Southwest Airlines, the champion of the fuel price guessing game, suffered a rare quarterly loss as a result. Was it overreaction? Sheer bad luck? Here's our bet: fuel hedging will be approached with a little more caution from now on.

Airline physics

For every airline action, there is an unequal, not-necessarily-opposite customer reaction. One of the more unpopular charges that many airlines implemented was the fee to check a single bag, let alone more than one. So what has happened since the baggage fees became the norm? Some airlines have seen a significant drop in the number of second bags being checked, though not necessarily in the number of first bags, even with fees for both. Given the extra cost of fuel burn caused by the added weight, airlines aren't too upset with this trend. They might lose out on additional baggage fees, but they can look forward to the financial benefits of less handling and manpower costs, plus better baggage reliability in the long run. At least that's the hope.

Open your skies -- in a New York minute

The U.S. – EU Open Skies agreement currently permits carriers from both sides of the Atlantic to fly to any city from their international gateway of choice. Did this mean more non-stops between Frankfurt and Phoenix? Not really. In a New York minute, airlines are going for the money. All roads to profitability seem to go through the bright lights of New York City, so airlines like Air France are moving their new transatlantic routes to the money-making route between Heathrow and New York. While many airlines have seen a drop in the sale of higher priced premium seats, some carriers like Continental are seeing this decline blunted by the lucrative New York - Heathrow market. Open skies was to bring about more competition but the clause that allows city pairs to be swapped for others has concentrated this competition primarily on one major route. Hardly the competitive free-for-all the agreement implicitly promised. Do you agree?