The aviation industry is facing a renewed cost crisis as fuel prices surge following the U.S.–Israeli war on Iran. While airlines routinely hedge against crude oil price swings to protect their balance sheets, the current crisis has exposed a critical vulnerability: jet fuel prices are rising much faster than crude itself.
Since the outbreak of the conflict, jet fuel prices have doubled, far exceeding the roughly one-third rise in crude oil prices. The widening gap between crude oil and refined jet fuel costs has created intense pressure on airline margins, forcing carriers across the world to respond with fare increases, fuel surcharges and capacity cuts.
The sudden shock has highlighted a structural weakness in airline fuel strategic most hedging programs are tied to crude oil benchmarks rather than the refined fuel airlines actually consume.
Jet Fuel Prices Break Away from Crude
Historically, jet fuel prices move closely in line with crude oil because the fuel is refined directly from petroleum. However, the Iran crisis has dramatically widened refining margins the difference between crude oil costs and the price of refined fuels.
In Asian markets, jet fuel was already trading about $21 per barrel above crude oil before the conflict began. But after the outbreak of hostilities, refining margins surged to as high as $144 per barrel before easing to around $65 still far above normal levels.
This surge has created a major mismatch for airlines that hedge crude prices but not jet fuel specifically. As a result, the protection offered by hedging contracts is only partial, leaving carriers exposed to the unusually large refining spreads.
Rebecca Sharpe, chief financial officer of Cathay Pacific, acknowledged the problem, noting that while the airline hedges crude oil, those contracts cannot fully offset the spike in jet fuel costs.
Hedging: Protection with Limits
Fuel hedging is a common strategy used by airlines to manage price volatility. By using financial derivatives such as swaps or options tied to oil benchmarks, airlines can lock in fuel prices for future months or years.
But the strategy has limitations.
Hedging contracts typically track crude oil benchmarks like Brent, rather than jet fuel prices themselves. When refining margins spike as they have during the Iran crisis airlines can still face significant cost increases despite having hedges in place.
The jet fuel hedging market is also relatively small and expensive, making it difficult for many airlines to secure meaningful protection.
This means that in extreme market conditions, even well-hedged airlines remain vulnerable.
Winners and Losers in the Airline Industry
The crisis is exposing sharp differences in how airlines manage fuel risk.
Many major carriers in the United States and China have no fuel hedging programs at all, leaving them fully exposed to price swings.
European airlines generally hedge more aggressively, though even they face significant pressure from rising refining margins.
Budget carrier Wizz Air could see its operating profit fall by as much as 31% this year if jet fuel prices rise another 10%, according to estimates from analysts at J.P. Morgan. Other major European airline groups such as Air France-KLM, Lufthansa, International Airlines Group and Ryanair could see profit impacts between 3% and 10%.
Some airlines have been more proactive in hedging jet fuel directly. Analysts say Singapore Airlines and Virgin Australia stand out in Asia for having stronger protection against refined fuel price spikes.
However, even airlines that are well hedged are already raising fares to protect their profit margins.
Airlines Far from the Conflict Still Feel the Pain
The crisis also demonstrates how globalized aviation costs have become.
Carriers such as Air New Zealand and Qantas Airways do not operate flights to the Middle East but are still being hit by higher fuel costs because jet fuel prices are determined by global markets.
Both airlines are more than 80% hedged against crude oil prices for the current half-year, yet they have already begun increasing ticket prices.
For passengers, this means higher airfares could soon become unavoidable, regardless of where they are flying.
Analysis: A Structural Weakness in Airline Economics
The current jet fuel surge reveals a deeper structural problem within airline business models.
Fuel is typically the largest operating expense for airlines, accounting for up to a quarter of total costs in many cases. Yet the industry relies on hedging tools that only imperfectly track the actual fuel it consumes.
The mismatch between crude oil hedging and jet fuel prices becomes particularly problematic during geopolitical crises that disrupt refining capacity or fuel supply chains.
Historically, fuel price spikes during Middle Eastern conflicts have remained elevated for months. If that pattern holds again, airlines could face prolonged pressure on profitability.
For the aviation industry, the Iran crisis is therefore not just a short-term shock it is a reminder that even sophisticated risk management strategies can fail when geopolitical disruptions ripple through the global energy system.
With information from Reuters.
