With jet fuel prices roughly double their pre-Iran war levels, airlines are becoming less willing to secure future fuel costs through hedging, leading to warnings of significant fare increases to cover rising fuel expenses. Hedging allows airlines to lock in fuel prices, providing cost certainty, but can involve added costs like premiums and collateral. If airlines hedge at current high prices, they risk being stuck with expensive fuel if prices fall due to improved geopolitical conditions. As conflict in the Middle East continues, passengers worldwide may face much higher air fares as airlines lose hedging benefits, testing consumer willingness to pay more for travel.
AirAsia’s CEO, Tony Fernandes, indicated that the airline is planning for continued high oil prices and has stopped predicting geopolitical changes. He mentioned that airlines have to either cut costs or increase fares. Finnair has ceased adding new hedges due to soaring fuel prices and has a low average hedging ratio for future years. The European airline sector, particularly Ryanair, is not well-hedged until summer 2027, which could result in air fares increasing by 15% to 20%, according to Ryanair’s CEO.
Jet fuel typically accounts for 30% to 40% of airline costs. European and Asian airlines usually hedge more than US airlines, which have stepped away from the practice due to past losses. Some airlines are facing challenges raising fares, as seen with Norwegian Air Shuttle reversing price hikes due to low customer acceptance. Airline hedging strategies are varied globally, with some airlines expanding hedging while others are pulling back. Carriers with weaker financial positions have less flexibility to absorb hedging costs, contributing to recent bankruptcies.
US airlines show little interest in returning to hedging despite rising fuel costs, with various carriers, including American Airlines and Delta, lacking significant fuel hedges. In contrast, European airlines like Ryanair and Lufthansa, despite having substantial hedging, have reduced capacity on certain routes to mitigate unhedged fuel costs. Overall, fuel costs remain a major uncertainty for airlines, with claims that hedging offers short-term protection but is not a comprehensive solution.
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With information from Reuters
