Fuel costs are always the most expensive cost component of an airline, followed by labor.
Purchasing fuel at the right price can make or break an airline, particularly during a time of crisis. It really does not matter what the price of a barrel is today because the fuel you are burning was locked in at a set price perhaps last month, 3 months ago or 6 months ago. There are various hedging techniques and the whole process can be quite complex as many factors are considered as to what price you should pay. The outcome is a serious one. For example, an airline might lock in 80% of their fuel at a set purchase price for 3 months. The other 20% is set at today’s rate. So if fuel today is $60 per barrel but you hedged 80% of it at $22 per barrel 3 months ago, even though it has steadily climbed to $60 per barrel, you’ve still done well because only 20% of your fuel is at the higher price. But if it is the reverse situation, you have just blown many many millions of dollars by making a poor decision. Qantas has generally done well with its hedging over the years. It hasn’t always got it right, but more often than not it has had skilled analysts who have called the right shots. Not so with Virgin. On numerous occasions they have screwed up the hedge price and it has cost them tens of millions of dollars. The idiot Manny Gill buggered it up twice and it almost sent the then Virgin Blue to the wall. However, being one of ‘Brett’s Boys’ he lived to get paid for another day and was in fact promoted.