Free stories left to read

Airline Weekly subscribers get unlimited access to daily news and weekly issues.

Airlines That Hedged on Fuel Prices Emerged Winners in Second Quarter

Jay Shabat
August 5th, 2022 at 10:28 AM EDT

Demand for air travel hit pandemic highs — and in some places historic highs — during the second quarter. Airlines reported record revenues and full planes as issues from staffing to weather and an elevated number of employees out sick with Covid kept capacity constrained.

Sounds like a recipe for financial success, right? Well, there’s the matter of fuel. The average price per gallon for U.S. Gulf Coast jet fuel reached a record $4.12 in March, up from $1.86 per gallon a year earlier — a more than two-fold increase — according to the U.S. Energy Information Administration.

Some airlines, though, had a secret weapon: fuel hedges. Southwest Airlines is one example. It paid just $3.36 per gallon for its fuel last quarter, a big reason why it produced the best second quarter operating margin — 17 percent — of any airline worldwide that’s reported thus far.

Hedges behave like insurance contracts. In Southwest’s case, it expects to pay what’s essentially a two-cent per gallon insurance premium this quarter. But at current spot prices, it expects to collect a cash settlement of 46 cents per gallon. As of July 28, Southwest had 59 percent of its third quarter fuel needs hedged, with contracts currently holding a market value of about $235 million, far above the $13 million in premiums the airline paid.

Alaska Airlines was not quite as well hedged but had enough protection to also pay below $4 per gallon for fuel last quarter. The same was true for Delta Air Lines, which benefited from its ownership of an oil refinery near Philadelphia.

Most other U.S. airlines, burned by fuel hedges in years past, largely refrain from hedging today. This lack of protection left Frontier Airlines, for one, paying $4.41 per gallon. American Airlines, JetBlue Airways, and United Airlines paid above $4 as well. The non-hedgers argue that in the long-run, hedging is a losing proposition, with periodic gains outweighed by periodic losses, plus the cost of the premiums. During the 2008-09 financial crisis, when fuel prices initially plummeted, holding wrong-way hedges nearly bankrupted Air Canada. Others, like Delta, suffered giant hedge losses as well. Hong Kong’s Cathay Pacific Airways was another carrier to post extreme fuel hedge losses in recent years.

Fuel hedging is more prevalent among airlines outside of the U.S. So is foreign exchange hedging, also a big help this year as a strong U.S. dollar adds to the cost of dollar-denominated input costs including fuel. Aircraft are also generally priced in U.S. dollars.

Like Southwest in the U.S., Ryanair was a big beneficiary of hedging this spring. It currently pays the crude oil equivalent of $62 per barrel for about 60 percent of its needs. That amounts to huge savings — spot prices for Brent crude have been well above $100 per barrel for most of this year. Ryanair reported an 8 percent operating margin for the June quarter, the highest among reporting European airlines. Larger airlines like Air France-KLM, International Airlines Group, and the Lufthansa Group, however, are active fuel and foreign exchange hedgers too.

The importance of fuel hedging this year is no less evident in Asia. Singapore Airlines, for example, had one of its best quarters in many years thanks in part to a roughly $150 million gain from its hedging contracts. Its operating margin was 14 percent.

Hedges might prove less of a tailwind in the September quarter. Oil prices are falling and the average cost of a gallon of Gulf Coast jet fuel dropped to $3.48 in July.

Jay Shabat
August 5th, 2022 at 10:28 AM EDT

Photo credit:  Flickr / Craig Chew-Moulding

Up Next

Middle East

Emirates Earnings and Booming Brazil

In part one of this week's Airline Weekly Lounge Podcast, Gordon Smith and Jay Shabat discuss Emirates' record-breaking results and ask how long these good times can last. In part…
North America

Spirit Airlines and a Japanese Update

Gordon Smith and Jay Shabat explore two big topics in this week's episode. In part one, we examine what Spirit Airlines' Q1 numbers mean for the future direction of the…


In this week's episode, Gordon Smith and Jay Shabat take a deep-dive into the latest earnings from carriers across the European continent. From airline supergroups to more niche Nordic players,…
North America

JetBlue and Volaris In Focus

With earnings season well underway, Gordon Smith and Jay Shabat examine the key trends and finer details from JetBlue and Volaris - two of the largest low-cost carriers in the…
North America

United’s Fascinating First Quarter

Fresh out of United's Q1 earnings call, Gordon Smith and Jay Shabat discuss the headline numbers and critical trends facing the U.S. carrier. Don't forget, you can find a full…

Special Offer: Choose From Quarterly or Annual Subscription Plans

2 of 3 free stories left to read

Already a subscriber? Login