How Airlines Actually Hedge Higher Fuel Prices

Fuel is an airline’s second-largest cost after labor and its most volatile, Joe Wiesenthal said. Hedging can stabilize fuel costs and soften sudden price increases, while fares and fuel surcharges offer another way to pass costs to customers. Southwest pioneered a strategy that other airlines copied with mixed results, and effective hedging can give a carrier a competitive advantage. Smaller airlines may rely on ticket prices or surcharges instead; some U.S. carriers pulled back from hedging after losses in 2014–15, in part because their balance sheets could not support the risk.

Qatar Airways illustrates why fuel exposure can be large but also partly predictable. David King said fuel represented 44% of the airline’s expenses, compared with roughly 25%–30% at many airlines. It consumed about 24–27 million barrels in his first year, with use rising by roughly 3 million barrels the next year. Qatar forecast fuel needs up to three years ahead as it accepted about 1.5 aircraft a month and opened a route roughly every two months. That growth made a significant share of its future consumption possible to plan for.

Many airlines cannot hedge jet fuel directly because its markets are too thin, so they use more liquid benchmarks such as Brent, WTI, heating oil, or London gasoil. That creates basis risk: a hedge can track the benchmark but fail to match the airline’s actual fuel costs. A chart discussed in the episode showed Brent rising about 50% from early February to mid-May while Singapore jet fuel more than doubled. King also questioned the reliability of some jet-fuel price assessments, saying Argus and Platts quotes may not be supported by firm bids or offers.

A swap is the basic hedge: the airline gains value when prices rise and loses value when they fall. King considered swaps more suitable when oil is around $25–$35, while airlines might favor call options around $70–$80, paying an upfront premium for protection while judging how long high prices could last. Other structures include calls funded by selling puts and target redemption notes that can redeem after five months, one year, or two years. In one short-strangle example, the seller collects premiums while oil stays between $80 and $120, but sells calls above $120 and puts below $80, making the result depend on prices remaining within the range.

King said Qatar’s hedge book was down about $180 million when he joined, later about $280 million, and at one point $360 million. Falling oil prices reduced the book’s value, while weak economic conditions could also cut ticket revenue and leave aircraft underfilled or grounded. He came to view the airline as exposed on both sides: it bought fuel, but ticket revenue included a fuel surcharge about 75% correlated with Brent. He proposed hedging that oil-linked revenue as well as fuel consumption. Qatar used a strangle selling calls and puts, which King described as a producer-style hedge rather than a naked position because surcharge revenue would cover the calls if exercised. The accounting was not symmetrical: hedge values flowed through the P&L, but fuel-surcharge revenue did not, and surcharges offered no protection when oil was low.

The episode’s examples show how hedging and pricing can work together, but not without trade-offs. In one year, a hedge made $130 million while the revenue side lost $65 million; King said the hedge kept the company from losing money overall. Hedge proceeds also gave Qatar’s revenue team room to cut fares by 20%, gain a first-mover advantage, and fill planes to nearly 80%–90%. King said the airline’s “weapon of choice” was ticket pricing, while auditors, airline-owning sovereign wealth funds, and limited treasurer experience could discourage strategies beyond buying fuel hedges. He cited Delta’s loss of more than $1 billion on fuel hedging in 2020. The speakers said strong travel activity had not yet been dented by higher prices, but warned that a fuel-price shock would pose a different challenge if it became a physical shortage.