The Fuel Bill Has an Address

Thursday, October 22, was a bad day to buy a gallon of jet fuel. The average price in the United States reached $4.90, NPR reported, citing the tracking firm Argus: "the highest single-day average the firm has ever recorded, and more than twice what the price was a year ago." It was also the day two of the country's big fuel buyers explained their summers to Wall Street.

Robert Isom, the chief executive of American Airlines, had good news and then the other kind. Revenue had grown 19.3%, which, setting aside the years after the pandemic, was "the strongest quarterly revenue growth of my career." Then the fuel. American lost money in a quarter that, he said, "but for this fuel spike, would have been solidly profitable."

Jim Vena, who runs Union Pacific, sounded like a man discussing the weather. His railroad, he told analysts, "will deal with fuel, with the fuel surcharge," adding that "our customers understand where it is." Union Pacific's operating income rose 15%, to $2.9 billion.

Same gallon, same Thursday. The difference was not in the fuel. It was in a clause.

The usual story about an oil shock is that it taxes everything that moves, and on the cost side the story holds. We read the third-quarter 10-Q filings of the four largest US airlines and three of the big freight railroads. Fuel expense rose by between 60% and 77% at every one of them. The four airlines together paid about $6.3 billion more for fuel than a year earlier, in a single quarter.

This is not an ordinary wobble. On the Gulf Coast, the benchmark jet fuel price averaged $3.83 a gallon over the quarter, against $2.12 a year earlier and $3.36 in the third quarter of 2022, the last time fuel made headlines. Union Pacific's 10-Q says locomotive fuel "climbed to record levels."

Then the paths split. All three railroads earned more than a year before. Of the four airlines, one held level, two earned less, and the fourth, Southwest, is a story of its own. The chart has every company. The reason is a single paragraph in a freight contract.

A railroad fuel surcharge is a line in the contract that moves the freight rate with the price of diesel. Norfolk Southern describes its reach in one sentence: "Approximately 95% of our revenue base is covered by contracts that include negotiated fuel surcharges." In the third quarter its fuel bill rose $183 million. Its surcharges rose $260 million. That is $1.42 back for every extra dollar of diesel.

Union Pacific's surcharge revenue roughly doubled, to $1.2 billion, while its fuel bill rose $424 million: the same shape in rounder numbers. Part of the gap is volume, which the filing names alongside price. The rest is the clause doing its job. Union Pacific paid $4.21 a gallon for diesel, more than any of the four airlines paid for jet fuel, and still made more money than a year before.

Shippers have noticed. In 2007 the Surface Transportation Board banned surcharges computed as a percentage of the base rate, a rule its chairman said would "remove the possibility that railroads will view fuel surcharges as a profit center." The same year, shippers sued CSX and three other big railroads, alleging their surcharges came from a conspiracy. The railroads won summary judgment in 2025; the appeal is set for argument on December 11. Nineteen years in court is one way to tell that a clause works.

The economics are simple. A surcharge makes the customer the hedge. The railroad does not need to guess where diesel goes or pay a bank to insure against it; the invoice moves when the pump price does, and the shipper carries the risk. CSX's revenue rose 12%, the company says, "primarily due to increased fuel surcharge revenue." An airline has to do something harder.

An airline's contract with its customer is a ticket, priced weeks or months before the fuel is bought. To get the fuel back it has to raise fares and hope the seats still sell.

United did it about as well as anyone. Its passenger revenue rose $2.4 billion against $1.8 billion more fuel, and its finance chief, Michael Leskinen, put a number on the chase: "We recaptured 72% of the increase in fuel expense." The rest, he said, comes later: "We are highly confident in our ability to recapture 100% of increases in our fuel cost, but with a lag." That lag is the whole difference between a fare and a surcharge. United's operating income rose 4%.

American had no fuel hedges outstanding at the end of September, its 10-Q says, so it paid the market, about 60% more a gallon than a year earlier. On $16.3 billion of revenue, it made $115 million of operating income: less than a penny on the dollar.

Southwest is the exception, and it has to be explained rather than dropped. Its operating income rose from $35 million to $379 million. The airline that, by its own account, "historically aimed to reduce volatility in operating expenses through its fuel hedging program" closed that program in 2025 and met this spike unhedged. Part of what carried it was a different kind of clause. Revenue from extras sold separately rose by almost half, which the 10-Q puts down to bag fees from May 2025 and assigned seats from January 2026. Southwest found new things to charge for in the year its fuel bill rose $821 million.

And then there is Delta, which tried to write itself a better clause than either.

On April 30, 2012, Delta announced that a subsidiary would buy the Trainer refinery south of Philadelphia from Phillips 66, for $150 million after state aid. The chief executive, Richard Anderson, called it "an innovative approach to managing our largest expense": a "modest investment, the equivalent of the list price of a new widebody aircraft," that would cut Delta's fuel bill by $300 million a year. Delta's president at the time, quoted in the same release, was Ed Bastian. An airline that owns a refinery, the idea went, is hedged by its own pipes.

Fourteen years later came the quarter the refinery was bought for, and it was not running at full strength. An outage halted production "beginning in the middle of June 2026," Delta's 10-Q says, and the refinery lost $33 million in the third quarter, against a $53 million profit a year earlier. Delta's operating income fell $230 million. The refinery still shaved 13 cents off each gallon, and Delta expects the benefit to run at "roughly 3x the September quarter level" now that the plant is back.

Bastian, now the chief executive, summed up the quarter on the call: "it is really hard to show margin improvement when fuel prices are doubling on you." A hedge you own is still a machine, and machines break.

When a cost doubles, do not ask who buys the commodity. Ask who signed the clause that moves it. A company with a surcharge formula is hedged by its customers, and its revenue line will say so. A company without one has to win the money back in price, and its operating income will tell you whether it did. A company that owns its hedge gets one more question: is it running?

The fourth quarter will test the difference. Union Pacific is planning on diesel at about $4.85 a gallon, American on jet fuel at about $4.70. The railroads' fuel bill already has an address. The airlines' is still in the mail.