Which airlines are protected from $100 oil

Jet fuel prices soared after Hormuz closed, and airlines split into two camps: those that had hedged their fuel and those buying at spot prices. On 11 March the International Energy Agency announced an emergency release of 400 million barrels from strategic stocks, which calmed nerves only briefly.

How a fuel hedge works

Airlines hedge in a few standard ways. A swap fixes the price of a set volume of fuel for future months. A call option caps the price the airline pays in exchange for an upfront premium, and a collar combines a purchased call with a sold put, so the carrier is protected above a ceiling but gives up the gains if prices fall below a floor. Most hedges are written on crude or heating oil rather than jet fuel itself, because those markets are deeper, which leaves the airline exposed to any widening in the gap between crude and jet fuel.

That gap, the jet crack spread, is where this crisis bites hardest. The Gulf is a large exporter of refined products as well as crude, so its closure tightens the jet fuel market even more than the crude market. An airline that hedged crude at seventy dollars is protected on the crude component but still pays the higher refining margin on every gallon it burns.

Hedged carriers hold up

Delta and Southwest run layered derivative collars and own refining assets, and they went into the crisis with fifty to sixty per cent of future fuel needs locked in at seventy to eighty dollars a barrel. Those hedges protect their cash flow and spare them from cutting routes straight away. Unhedged low-cost carriers in Europe and Asia are burning through cash, with fuel heading towards forty per cent of their total operating costs.

Delta's refinery is the unusual part of the story. It bought the Trainer refinery near Philadelphia in 2012, a move widely mocked at the time, precisely to control the crack spread that crude hedges leave exposed. In a market where jet fuel is scarcer than crude, owning the refining step protects the margin that financial hedges miss. Southwest built its reputation on hedging in the 2000s, when its long-dated contracts saved it large sums as oil climbed.

Why many stopped hedging

Hedging fell out of fashion for good reasons. When oil collapsed in 2014 and 2015, carriers with large hedge books lost money on their contracts while unhedged rivals enjoyed cheap fuel, and several large airlines, including American after its merger with US Airways, decided that the cost of hedging outweighed the benefit. The argument was that fuel shocks hit all airlines together, so fares rise across the industry and an unhedged carrier is no worse off than its peers. That logic works when every competitor is equally exposed. It fails when some rivals are protected and can hold fares down.

Fewer flights, dearer tickets

To get through oil at a hundred dollars, unhedged airlines are cutting loss-making secondary routes, parking older, thirstier aircraft and adding large fuel surcharges to fares.

The industry has been here before. When crude spiked towards $150 in 2008, several smaller American carriers stopped flying within months, and the survivors cut capacity and invented new charges, including fees for checked bags, which have stayed long after the fuel crisis passed. A similar pattern is likely now. Routes that barely break even at normal fuel prices are the first to go, and airlines that retire older aircraft early may never bring them back.

Balance sheets decide how long an unhedged airline can wait for prices to fall. Many carriers borrowed heavily to survive the collapse in travel in 2020, when American airlines also received federal support to keep paying staff, and some are still carrying that debt. A carrier with little cash and large debts cannot run losses for long, so it has to cut capacity and raise fares faster than a rival with a cushion. The fuel shock thus rewards not only hedging but also the balance-sheet discipline that makes hedging affordable in the first place.

Fares cannot rise without limit. Leisure travellers are sensitive to price and will fly less or choose cheaper destinations, while business travel responds more slowly. Airlines can pass on a large share of higher fuel costs only if all of them cut capacity together, so seats become scarce. That is why capacity cuts, rather than surcharges alone, are the measure of how seriously the industry takes the shock.

Winners and losers

The hedged legacy carriers are the obvious winners, along with lessors and manufacturers of fuel-efficient new aircraft, whose value rises when every gallon costs more. Airports and tourism businesses that depend on secondary routes lose as low-cost carriers retreat. Passengers pay higher fares, and business travellers find fewer direct flights. Lenders to highly leveraged, unhedged carriers face rising default risk, since fuel costs eat into the cash that services their debt.

The limits of protection

The case against the neat split is that hedges run out. Coverage of fifty to sixty per cent leaves the rest of a carrier's fuel bill exposed at market prices, and hedges are usually layered so that protection thins out further into the future. If the crisis lasts into next year, even the best-protected carriers will be buying most of their fuel at crisis prices. A collar with a sold put also cuts both ways: if the IEA release or a ceasefire brought prices down sharply, carriers would owe money on the floor. Demand is another risk that no hedge covers, because an oil shock that squeezes household incomes cuts leisure travel for everyone.

The signals to watch are the jet crack spread on the US Gulf Coast and in north-west Europe, capacity changes in airline schedule filings, airfares in the monthly consumer-price data, and the cash balances and credit spreads of the weakest carriers. The fuel shock will sort the airlines. Well-hedged legacy carriers can use their protection to win market share, while unhedged rivals will probably shrink their schedules and raise fares sharply just to stay solvent.