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One thing all airlines have in common, for now at least, is their reliance on oil. But how they pay for it varies widely. There’s a divide between those that hedge — notably European and Asian airlines — and those that don’t. Going au naturel seems riskier now, but there is much to recommend it.
There’s a lot to be said for making a business’s most volatile input more predictable. Fuel roughly accounts for between a quarter and a third of an airline’s costs. Hedges gained widespread popularity as a form of insurance after the early 1990s Gulf War sent oil prices soaring.
The big US carriers have mostly abandoned the practice after oil markets weakened, leaving them overpaying and red-faced. Scott Kirby, once American Airlines’ president and now boss of United, grumbled that bankers, not airlines, are the beneficiaries. Southwest gave up last year. Delta, for its part, owns a refinery.
Europeans, facing weaker profits and greater competition, have continued to shelter from market storms. Another reason might be the prevalence of airlines considered flag carriers. Predictability helps diminish the risk of unexpected losses and, in turn, unappealing scrutiny by governments — something US airlines can afford to worry about less.
When the oil price is creeping above $100 as it is now, hedging looks like a retrospective no-brainer. British Airways owner IAG said this month it was not currently planning to raise ticket prices because it had hedged; on the other hand, United’s Kirby conceded that high fuel costs meant a “meaningful hit” to the carrier’s first-quarter financials.
For those who do, there are choices to be made. The simplest way is to buy futures contracts that guarantee an amount of fuel at a fixed price at a fixed time. More complex options and strategies can confer the right to buy within a pre-set range of prices, say.
As for timing, some degree of protection for a year to 18 months is relatively common. Singapore Airlines took on five-year deals in 2017 and was then stung badly during the pandemic. Of course, shorter hedges have just as much power to mangle results: Southwest looked great in mid-2008 when oil prices passed $140 a barrel, only to produce its first quarterly loss in 17 years just months later as crude plunged towards $40.
Anything that involves so many decisions and inputs is no easy call for management. Fuel surcharges levied on passengers, while unpopular, are simple to apply.
There is a case for airline bosses to focus on their main task and accept that market forces, like bad weather, simply have to be navigated as they arise. Insurance is helpful but oil hedging requires the policyholder to be an expert on geopolitics, economics, financial engineering and, above all, market mood. Keeping passengers modestly happy is more than enough for most executives to be getting on with.
jennifer.hughes@ft.com
