The price of jet fuel has rocketed by more than 35% in the past month and 75% in the last 12 months – a trend that is putting the squeeze on airlines. Supply concerns are driving the oil price upwards, and the cost of refined oil products such as petroleum-based fuels closely tracks the oil price. But some airlines are better protected than others against rising jet fuel prices.
Hedging levels vary across the airline industry
Many airlines hedge the cost of jet fuel. Hedging involves buying a certain amount of jet fuel at a fixed price for delivery down the track. Big airlines employ hedging analysts whose job is to identify when to buy and when not to buy. With jet fuel at 14-year price highs, now is clearly not the time to buy unless absolutely necessary.
But some airlines are now paying top dollar for their jet fuel. Last week, Simple Flying noted three major US carriers – American Airlines, Delta Air Lines, and United Airlines, have not hedged their jet fuel. However, other airlines are at least partially hedged, helping to offset the financial pain caused by the increased prices. Last week, Reuters looked at a range major airlines worldwide and found some were better protected than others.
Soaring jet fuel prices are having a big impact on an airline’s bottom line Photo: London Biggen Hill Airport
Hedging levels across European airlines
Air France / KLM has hedged 72% of its fuel costs for the first three months of 2022 and 63% for the second quarter of the year. The airline group paid US$90 per barrel for the fuel – a relative bargain compared to the current barrel price that is hovering just under $170.
Local competitor Lufthansa did even better, hedging all of their 2022 jet fuel supplies at $74 per barrel. IAG, the parent company of Iberia, British Airways, Vueling, and Aer Lingus, is partially hedged for the next two years, with 60% of its jet fuel consumption this year covered. Likewise, easyJet has 60% of its fuel costs hedged through to September 30, 2022.
Hedging relief for some Asian carriers
Elsewhere, some airlines are also better positioned than others. In Asia, Singapore Airlines and Cathay Pacific have provided some details of their hedging strategies. Singapore Airlines is partially hedged, with 30% of its fuel costs covered at $57 per barrel until the end of this month. Singapore Airlines also has 40% of its fuel hedged at $60 per barrel for the next five quarters.
Hong Kong-based Cathay Pacific has various hedging levels in place until next year. This quarter’s jet fuel consumption is fully hedged, and the three months to June 30 is about 50% hedged. Down in the Southwest Pacific, Air New Zealand has hedged 1.34 million barrels of oil in the six months to June 30 and 707,500 barrels in the following half-year period.
Air New Zealand is one of several airlines in its region with hedging strategies to help offset the cost of fuel – for the short term at least. Photo: Boeing
Australian-carrier Qantas has 90% of its jet fuel hedged through to June 30 and 50% covered across the following three months. Hedging strategies provide some short-term relief for airlines. But oil industry watchers don’t expect oil prices to come down anytime soon. Once existing hedging contracts run out, a now well-hedged airline will face the same cost pressures as an unhedged airline.
Most airlines are laying the ground for increases in fares or fuel levies, signaling to the market and their customers rises in ticket prices are on the agenda. It’s a problem for airlines. Following the pandemic, most airlines are keen to get people back in the air. Raising ticket prices does the exact opposite. But unless airlines want to start incurring losses again, they may have little choice.
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