I know, it hurts my brain too, but check this Wired post: Dropping oil prices hurt airlines. Huh? It's what happens when airlines literally hedge their bets on oil futures. From Wired:
- Here's a very simplified explanation of how fuel hedging works, using a hypothetical scenario: Let's say oil is selling for $130 and the price is expected to rise. An airline signs a deal with a supplier to buy, say, three months worth of fuel at $110 a barrel. That's called a fuel hedge. The price of oil rises to $140 a barrel, but since the airline is locked in at $110, it can sit back and laugh as its competitors pay more for fuel. Smart move.
But let's turn that scenario on its head and say the airline hedges at $110 but the price drops to $92. Oops. Now the airline is paying more for fuel than it costs on the open market, placing it at a competitive disadvantage. The balance sheet craters.