As the Price of Oil Decreases, Does Airline Profitability Increase?

With a dramatic decrease in oil prices over the past few years, the opportunity for increased profitability within transportation companies has become a relevant topic of discussion. Oil is a commodity that influences the price of gas and jet fuel. As commodity prices, and oil prices in particular, have collapsed, one would expect transportation companies to benefit from a decrease in operating expenses and experience an increase in profitability. Through this thesis, I seek to prove that despite a dramatic decline in the price of oil, airline companies have not benefited due to their engagement in hedging activities, and therefore have not experienced an increase in profitability. My dataset includes a collection of operating expenses and operating profit for the four major domestic airline companies over the past seven years. These companies include Southwest, Delta, United, and American Airlines. I tested my hypothesis through regression analysis, and used fuel derivative gains or losses as the independent variable and operating profit as the dependent variable. Although my results are not significant, my analysis indicates that operating profit has, in fact, decreased through this recent period of declining oil prices, due to an increase in operating expenses through airline companies’ hedging activities