NEW YORK (TheStreet) -- For most consumers a collapse of oil prices equates to lower prices for everything from the cost at the pump to the food on your table. Since fuel is the largest single component in the price of an airline ticket, would-be travelers may be wondering why ticket prices haven't fallen further.
The fact is that passengers may not see a precipitous fall in airline prices for months to come -- if at all. The reason for this apparent disconnect is most airlines can't afford to lower ticket prices due to losing huge bets they made on fuel prices months ago.
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To understand this situation, we must travel back to late 2007 when the housing bubble was near its peak and oil prices spiked to all-time highs, forcing gas and jet fuel prices to skyrocket higher. The United States Oil Trust ETF (USO) was just north of $116. These days, it's under $22 a share.
Most airlines were caught off guard and didn't anticipate jet fuel would climb as high, and remain as expensive for as long as it did before finally falling lower. One notable exception was Southwest Airlines (LUV) . By using commodity derivative contracts, Southwest was able to hedge successfully against fuel price spikes.
Shares in Delta Airlines (DAL) , American Airlines (AAL) and United Airlines (UAL) were crushed. Delta and United lost over 70% of their valuations. American, ATA, Frontier, Sun Country and others declared bankruptcy. To be sure, Southwest shares fell also, albeit relatively speaking; shareholders dodged the worst of it.
It didn't take long before the other airlines decided they needed to change the way they pay for fuel. In order to protect against another price spike, they began or increased the amount of hedging and/or betting that fuel prices would climb or spike higher. Delta airlines even bought an oil refinery in hopes of dampening price volatility.
Depending on the price, jet fuel can easily comprise 30% or more of an airline's expenses. Accordingly, the only way airlines can accurately predict any given future flight cost is accurately budget the price of fuel purchased for the flight.