Airlines rush to hedge oil bills against risks from Israel-Hamas war
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Airlines have been snapping up oil derivatives contracts to protect against higher prices as the Israel-Hamas war raises the spectre of a surge in fuel bills.
PHOTO: REUTERS
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LONDON – Airlines have been snapping up oil derivatives contracts to protect against higher prices in recent weeks as the Israel-Hamas war raises the spectre of a surge in fuel bills.
Traders and brokers active in the oil market say consumer hedging activity has increased since the conflict broke out, and industry executives have confirmed those moves in earnings calls in the last few days.
The flurry of activity is showing up in surging volumes of call options that help buyers protect against significantly higher prices.
While oil has fallen back to pre-war levels as the conflict remains contained away from major crude-producing regions, airlines still see the risk of a spike in the price of the commodity that is typically their largest single expense.
“We will build it up very quickly,” Air France-KLM chief financial officer Steven Zaat said on an earnings call last week, referring to how soon his company would reach its desired hedging volume of 70 per cent of fuel consumption for early 2024. “We are close to that 70 per cent to make sure there’s no spike increase coming from what’s happening in Israel.”
Airlines generally hedge their fuel bills using a variety of derivatives instruments, including options contracts and swaps.
The strategy is not without its risks. Airlines lost billions of dollars on the practice during the Covid-19 pandemic, when the collapse in global travel left them with huge loss-making derivatives positions but no offsetting lower fuel bills as flights were grounded.
The losses made many airlines, particularly those in Europe, slow to return to the market and prompted them to shrink their hedge positions.
Even before the pandemic, losses had caused some in the United States to abandon the practice.
More recently, airlines have got a profit boost from their fuel-price protection measures, with Norwegian Air Shuttle and Air Canada both flagging gains from hedging in their latest earnings reports.
In addition to Air France, other major carriers have also reported bigger positions lately.
Deutsche Lufthansa said on Thursday that it is already more than 70 per cent hedged for next year.
That is about 20 per cent more than it had in place at the same time a year ago.
Similarly, British Airways owner IAG also reported higher hedging coverage for the end of 2023 and all of 2024 than it held a year ago.
The generally higher oil-price environment – with Brent crude approaching US$100 a barrel earlier this quarter – has also coaxed some players back into hedging after years away from the market.
In August, Air Canada disclosed that it locked in about 30 per cent of its jet-fuel cost for the first time since 2019.
The company said this week that it has boosted those volumes to 45 per cent for the fourth quarter. BLOOMBERG
