How airline fuel hedging works and why it decides who survives a crisis

Fuel typically accounts for between 20% and 30% of an airline's total operating expenses — the second largest cost after labour in normal conditions and the largest when prices spike. At current levels, following the more than doubling of jet fuel prices since February, it is unambiguously the dominant cost pressure facing every carrier in the world. The ceasefire announced on April 8 has brought crude oil below $100 per barrel. Jet fuel costs will take months to recover, according to IATA, given the damage to Gulf refining capacity. The mechanism that determines who absorbs that cost and who does not is fuel hedging.

Understanding how it works explains most of what you need to know about why the current fuel crisis is hitting some airlines far harder than others.

The basic mechanics

An airline hedges fuel by entering into a financial contract — typically a futures contract or an options contract — that locks in the price it will pay for fuel at a specified future date. The contract is not usually for jet fuel itself. Most airline hedging programmes are written against crude oil benchmarks such as Brent crude or West Texas Intermediate, because those markets are deeper and more liquid than the jet fuel derivatives market.

The logic is straightforward. An airline selling tickets in January for flights in July does not know what fuel will cost in July. A hedging contract eliminates that uncertainty. If the airline agrees to buy crude oil at $80 per barrel in six months and the price rises to $130, it pays $80 regardless. The $50 difference is effectively a saving against what the unhedged market rate would have cost.

If the price falls to $60, the airline pays $80 under the contract — above market rate. This is the fundamental trade-off of hedging. It is not speculation on the direction of fuel prices. It is the purchase of certainty at a known cost, in the same way a business buys insurance against a fire it hopes never happens.

The structural flaw the Iran crisis exposed

Most airline hedging programmes have a significant limitation that the current crisis has made visible. They are written against crude oil, not against the refined jet fuel that actually goes into aircraft.

In normal conditions this distinction barely matters. Jet fuel prices track crude oil prices closely because jet fuel is refined directly from crude. The two move in tandem.

The Iran war created an abnormal condition. The near-total closure of the Strait of Hormuz disrupted not just the flow of crude oil but the refinery infrastructure across the Middle East that processes crude into refined products including jet fuel. The result was that jet fuel prices rose far faster than crude oil prices. Jet fuel prices doubled since the Iran conflict, far outpacing the roughly one-third rise in crude prices.

An airline hedged against crude oil at $80 per barrel received protection against the crude oil price increase. It received little or no protection against the additional surge in jet fuel refining costs above the crude price. This gap — known in the industry as the crack spread — is the portion of the fuel cost that crude oil hedging cannot reach.

Rebecca Sharpe, chief financial officer of Cathay Pacific, acknowledged the problem, noting that while the airline hedges crude oil, those contracts cannot fully offset the spike in jet fuel costs.

Who hedges and who does not

The hedging divide between European and US carriers is the defining financial story of the current crisis.

European low-cost carriers have historically hedged aggressively. Ryanair entered the Iran war with 84% of its current quarter fuel locked in at $77 per barrel — a position that has effectively insulated it from the bulk of the price shock while unhedged competitors faced spot prices that more than doubled since February. easyJet hedged 84% of its fuel for the first half of 2026 at an average of $715 per metric ton, declining to 62% for the second half. IAG, the parent of British Airways and Iberia, has similarly maintained consistent hedge coverage across its portfolio.

The picture changes sharply when you move to US carriers. None of the major airlines in the US are hedging. American, United and Southwest are flying into the current crisis at fully unhedged spot prices. The commercial rationale for abandoning hedging was developed over a decade of stable, low fuel prices — carriers found that the cost of maintaining hedging programmes outweighed the protection they provided, and that raising fares was a sufficient alternative response to cost increases in a strong demand environment.

The Iran war has comprehensively tested that rationale. Delta, the one major US carrier with a structural fuel cost advantage, does not achieve it through hedging contracts — it owns the Trainer refinery in Pennsylvania, which partially offsets the gap between crude oil prices and refined product costs. In Q1 2026 Delta paid an adjusted $2.62 per gallon for fuel while unhedged carriers were facing spot prices of $4.88.

The time dimension

Hedging is not a permanent shield. It is time-limited protection. Contracts expire. Wizz Air hedged 83% for its financial year ending March 2026 at between $681 and $749 per metric ton, but coverage drops to 55% for the following year. The protection that absorbed the initial shock of the Iran war expires precisely as the crisis shows no sign of resolution. Airlines with rolling hedge programmes face the same problem — each renewal is at a higher price than the last, progressively eroding the cost advantage over unhedged competitors.

This is the dynamic that explains why hedge funds are positioned so aggressively against Wizz Air specifically. Short sellers are not betting on immediate insolvency. They are pricing the mathematical deterioration of hedge coverage over the next twelve months against a fuel price environment that remains elevated even after the ceasefire announcement.

The limits of hedging

The Iran crisis has also demonstrated one limit of hedging that no financial contract can address. Beyond price, the crisis raised questions of supply. If the Strait of Hormuz remains effectively closed for long enough, no hedging contract matters if the fuel is simply not there. Italian airports implemented physical fuel rationing in early April, with caps as low as 2,000 litres per aircraft at seven airports including Bologna, Venice and Milan Linate. Hedging protects against price risk. It provides no protection against supply risk.

Airlines that hedged correctly entered this crisis in a structurally stronger position. They are not immune to it. The carriers that survive it best will be those that combined price protection through hedging with operational flexibility — the ability to cut unprofitable routes quickly, raise fares where demand supports it, and preserve balance sheet liquidity through the recovery period.