Airlines hedging oil to protect against geopolitical turmoil

Airlines—who has massive jet fuel bills—have been buying oil derivatives contracts to insulate themselves from the rising cost of crude oil and oil products courtesy of geopolitical tensions in the Middle East.

Traders and brokers have shared with Bloomberg that they are seeing increased hedging activity since Hamas attacked Israel on October 7. Earnings calls within the airline industry have backed up what those traders and brokers are seeing, with confirmation of extra hedging—particularly in increased call options, which would help protect large fuel consumers such as airlines from rising prices.

For now, Brent crude oil prices are trading about $2 per barrel higher than they were before October 7. But recent analyst forecasts have pegged oil heading to as high as $140 per barrel should the conflict between Israel and Hamas escalate.

Of course, hedging would offer a layer of protection to airlines should oil prices spike to levels that high, eating into their profits, with as much as 20% of their operating expenses going towards fuel. But as Oil Price’s Alex Kimani pointed out during the pandemic, “hedging is far from a silver bullet that is guaranteed to protect anybody from volatile markets.” During the pandemic, it was persistently low oil prices combined with lower demand for air travel that proved to be quite the liability for the airlines that hedged.

Not all airlines hedge. Southwest Airlines has a history of very light hedging, and Chinese and Indian airlines are not major hedgers on jet fuel. Air Canda isn’t a major hedger either, but high prices have recently seen the airline come back onto the hedging scene and lock in almost one-third of its jet-fuel costs for the first time in years—an action the company referred to as “prudent” given the current price volatility.