Airlines with oil hedges are set to save billions of dollars on their fuel bills this year, the first such gains since the industry was ravaged by the coronavirus pandemic.
Both Southwest Airlines Co. and Air France-KLM said they stand to gain about $1 billion each from their hedging policies, a benefit that will at least partially cushion the companies against higher oil prices. British Airways parent IAG SA said its fuel hedging program was worth about 1.2 billion euros ($1.2 billion). Meanwhile, its fuel bill was up 45% from a year ago compared with a 150% increase in jet fuel prices.
The hedging gains represent a turnaround in fortunes for a sector that lost a huge amount of cash on oil derivatives during the pandemic when demand collapsed as planes were grounded. The hit to the tune of billions of dollars saw many carriers pull back from dealing in the oil contracts, but in recent months the practice has resumed meaningfully. That comes as Brent crude trades around $100 a barrel and is on course for its highest annual average price since 2013.
“Revenue certainty is part of the rationale for airlines hedging,” said Jay Stevens, vice president of market analytics at Aegis Hedging, which helps producers and consumer companies with their strategies. “But they really want to protect against the really bad scenario, which is where jet prices have been recently.”
Jet fuel prices globally have been volatile this year, at times touching the equivalent of more than $220 a barrel in April and May in a key US pricing hub. They were still near $140 on Wednesday.
Even so, the savings enjoyed by the airlines won’t be passed onto consumers given the overall elevated costs of fuel. The gains from the hedges are also realized slowly over time, so could decrease if oil prices fall.
Airlines typically buy oil derivatives including swaps and options to hedge their fuel bills. Those with strong levels of coverage benefit when prices rally as profitable financial contracts offset the higher cost of jet fuel, which is currently the industry’s biggest expense.
Though most carriers in Europe tend to hedge, the number of US airlines that do so is more limited. American Airlines Group Inc., Delta Air Lines Inc and United Airlines Holdings Inc. haven’t hedged their fuel for some time, having retreated from the market after previous sector-wide losses.
“Contracts for an airline our size would be just really expensive and quite frankly, not provide a heck of a lot of future coverage,” American Airlines Chief Executive Officer Robert Isom said in June. “It’s not a good time to start hedging when fuel prices are as volatile and rising as quickly as they have.”
Still, traders and brokers have reported the busiest spell of consumer hedging in years in recent months. Low-cost European airline Wizz Air said in June that it would resume its hedging program after being one of the few European airlines not to have one in place. Ryanair Holdings Plc, one of its European rivals, reported last week that it had a benefit of 1.6 billion euros from its jet fuel forward contracts and call options, as well as other contracts associated with jet fuel purchases.
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