Kai Koenig

How many times is this gonna get posted

✈️⛽️Why don't airlines hedge all their fuel needs? There's been a lot of talk about airlines & fuel price hedging given current event. We thought we'd put together an explainer, highlighting why they hedge fuel prices, but also why not all airlines do & why airlines don't fully hedge👇 🔴Airlines hedge fuel prices as an insurance policy against price volatility. Reason is asymmetric risk → airlines sell a lot of tickets in advance of when they eventually purchase fuel for any given flight 🔴In some cases one can buy tickets 11 months in advance → once a passenger has bought it the price is locked in, but fuel prices aren't! 🔴Example: end of 2025 financial year, Qantas had already sold $4.7 billion in tickets over next 11 months → that's nearly 3 months of revenue 🔴Fuel accounts for 23% of Qantas's expenditure & its price is volatile → with an operating margin of 11.1%, if fuel prices ↑45% it'll will wipe out the $525m in operating profit they'd expect to earn from those forward sales 🔴This is where hedging comes in → airlines can buy fuel today for delivery in several weeks or months → this means they lock in current prices & reduce the risk of higher future prices 🔴But there's a catch! In the same way selling tickets in advance creates risk, buying too much fuel in advance also creates risk → if prices fall you'll end up being stuck with the higher price you paid when locking it in 🔴Volatility is a two-way street & this is why airlines don't hedge all future fuel needs, rather aligning proportion of fuel they hedge with forward sales in magnitude & timing 🔴Qantas hedge about 80% for the next 6 months, decline thereafter; Cathay are 30% hedged through 2026; Singapore about 50% 3 months out, then declining → each utilising their own strategy based on their risk assessment & needs 🔴In practice, airlines don't actually buy fuel ahead since airport fuel providers won't take that risk, but also because they'd have to make arrangements with hundreds of different providers around the world 🔴Instead, they buy their fuel from airport providers as needed (basically on the day) & hedge through various instruments in financial markets (e.g. futures contracts, swaps, options, collars; in many cases, they don't even hedge fuel prices, rather utilising crude oil as a proxy) 🔴Their financial statements will show the actual cost paid for fuel & then adjust that by gains/losses made on the hedging instruments 🔴Basically, when fuel prices ↑ they take higher charge for higher fuel prices & offset that from gains on the hedging instruments; if fuel prices ↓ they take lower charge for lower fuel prices & offset with losses on the hedging instruments 🔴Looking at Qantas's financial statements we can see this in action over time → in years when fuel prices ↑ they show gains from hedging whereas in years when fuel prices ↓ they show losses from hedging 🔴While gains outweigh losses by a small amount that's not the point or goal → a good hedging strategy aims to break even → too much profit from hedging would suggest their strategy wasn't focused on risk mitigation, but speculation 🔴Hedging isn't free & intermediaries charge a margin on hedging instruments & trading fees, etc → these costs can be substantial & some airlines would rather take on the fuel price volatility rather than the ongoing costs of hedging 🔴But most are happy to take on the cost of hedging since it gives them more certainty, allows better planning, etc → there's no right or wrong, but hedging is clearly a more conservative strategy & those airlines with substantial hedging are probably a lot less stressed at the moment than those that have less or no hedging!

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