Q&A: Why Would An Airline Not Hedge Its Fuel Costs?

Q&A: Why Would An Airline Not Hedge Its Fuel Costs?

almost 2 years ago1 min

Question: “Why would an airline not hedge its fuel costs?”

Answer: “Let’s start with why an airline would want to hedge – that is, lock in fuel costs ahead of time via futures contracts – in the first place: it protects them from any spikes in the oil price, and gives them more certainty around their outgoings moving forward. But you can also look at it another way: as a bet that fuel prices will rise, which isn’t necessarily a bet every airline wants to make. They mightn’t think the oil price is going to rise, in which case they’d only be taking on the risk of paying even more for fuel than they have to. The start of the pandemic is a good example: the cost of fuel plunged when demand tanked, and carriers that were hedged ended up paying a lot more than the market price. So hedging can work out well, sure, but it can also backfire spectacularly.”

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