Airlines Are Saving Billions By Hedging on Fuel Prices

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Hedging may not be a basic flight maneuver, but it’s helping some airlines weather the year’s economic thermo turbulence.

Thanks to hedges on oil prices, a handful of airlines stand to save billions of dollars in the face of sky-high jet fuel costs.

Cutting-Hedge Strategy

Before the pandemic, many airlines played the oil derivatives market by purchasing swaps and options to hedge against their fuel costs — it’s also a common tactic among oil and gas producers and other energy-hungry industries. While the exact structure of the hedges can vary — the general premise involves minimizing exposure to future price surges. The more prices rally, the greater the implied windfall:

  • Southwest Airlines and Air France-KLM told Bloomberg Wednesday that they are on track to gain $1 billion each from hedging policies. Air France-KLM hedged 72% of its fuel costs in the first quarter of 2022 and 63% during the second, according to Reuters, while rival Lufthansa hedged 63% of its jet fuel supplies this year.
  • IAG, the owner of British Airways, said it stands to gain about $1.2 billion from its hedging program, which will help offset a 45% increase in fuel costs this year. Overall, the world’s airlines are expected to lose $9.7 billion this year, a jumbo-sized improvement from a $42.1 billion loss in 2021, according to the International Air Transport Association (IATA).

Not everyone is sold on the practice, and the easy wins may be over. “Contracts for an airline our size would be just really expensive and quite frankly, not provide a heck of a lot of future coverage,” Robert Isom, the CEO of American Airlines, said earlier this summer. “It’s not a good time to start hedging when fuel prices are as volatile and rising as quickly as they have.” Delta and United airlines also haven’t hedged their jet fuel.

No Inflight Nuts For You: Because jet fuel prices will likely remain high, customers shouldn’t expect any savings to be passed on to them. In fact, the International Air Transport Association expects global airfares to climb 5.6% this year — though clever travelers can offset that with a euro that’s softer than a Neapolitan pizza crust.