Southwest Airlines prides themselves on being THE low-cost airline. In 2015 they had fares as low as $49 for some of its shortest flights, while regularly offering up $100 flights to prime destinations all around the United States.
Their mantra “bags fly free” has won over travelers of all sorts through the years, and in 2014 they were the 9th most admired company in the United States according to Fortune.
So, what’s their secret?
We know they empower their employees to be themselves and have fun onboard, but how have they been able to keep costs low during all this success?
Well, oil futures, to be exact.
With any major airline, fuel is always the biggest cost. In an effort to reduce risk, Southwest hedged the oil market. This just means they locked in a certain oil price for a certain amount of time.
For example, imagine going to a gas station and asking the owner whether you could pay $2.25 per gallon for the entire year. What if the price decreases? The owner would be making a good amount of money from you. But if the price increases, then you’re paying a significantly lower price than all the other drivers and motorists on the road. You’re happy.
In a nutshell, this is exactly what Southwest Airlines did.
While other airlines made costly hedge bets and in some instances paid the full price for oil in the late 2000’s and early 2010’s, Southwest was paying much cheaper rates for jet fuel.