Airlines should give up their fuel-hedging dogfight
Even for battle-hardened CEOs, this latest crisis is a chance for some helpful new thinking
Airline bosses are used to crises. As an industry with many moving parts, aviation often involves coping with several at the same time. High fuel prices are proving themselves to be a particularly intractable problem, however. And it adds new frisson to an old industry question: to hedge or not?
Jet fuel, like its fellow oil distillate diesel, is becoming more of a problem the longer conflict in the Middle East drags on. Spot prices surged when the US began bombing Iran in late February and have remained painfully high ever since. But the steady rise in recent months of rates for future delivery — implying traders expect prices to remain elevated for longer — is what is causing airlines to re-examine their 2027 strategies.
Southwest, American Airlines, easyJet and Lufthansa are among those who have responded to tough times by making cuts to their winter schedules. Both the Europeans are also moving up plans to retire older aircraft. US giant Delta last week cut its December profit forecasts and said soaring fuel prices would add $6bn to its full-year costs.
But this cost shock doesn’t hit everyone the same way. Big US airlines don’t hedge fuel costs, accepting the swing in their profits. American Airlines said recently that a $1 dollar per gallon rise to the fuel price assumed in July had added $1bn to its fourth-quarter costs. A year ago, analysts expected American would produce $1.6bn of earnings in 2027, according to LSEG estimates; now, they are forecasting just $720mn.
Even European carriers, who mostly do hedge, have not fully offset their surging costs. And as the protection they do have comes up for renewal, they face a quandary: go without and risk paying even higher market prices, or buy hedges, with the danger of getting stuck with costly fuel if they fall.
Past examples of hedges going painfully wrong suggest leaving things to fate. Several carriers were caught out in 2014 when crude prices tumbled by two-thirds in six months. Hong Kong’s Cathay Pacific lost $2.2bn on derivatives over the next two years — more than its previous four years’ earnings. The same episode cost Delta $3.5bn and ended its hedging program all together.
Hedges haven’t separated the share performance of the haves and have-nots, either. Delta, up 11 per cent since the US began bombing Iran, has outperformed the European and US pack without protection, while British Airways owner IAG, 70 per cent hedged for the rest of 2026, is down 3 per cent and only just ahead of United and American. Ryanair’s 80 per cent hedge through March 2027 at less than half the spot fuel price hasn’t stopped its shares sliding a quarter.
There is a strong case, then, to give hedging the heave-ho. True, it would introduce new volatility for some. But it would also simplify the investment story for European airlines, allowing stockpickers to focus on their relative operational skills and ability to lure customers, rather than their knack for financial wizardry. Even for battle-hardened CEOs, this latest crisis is a chance for some helpful new thinking.