Airlines act as if $80 oil is heading even higher

Fresh from losing billions of dollars from bad oil-price hedges because of Covid, many of the world’s airlines are once again trying to protect themselves from soaring fuel costs. European carriers including Lufthansa Group, Air France-KLM and Ryanair have said in recent days that they fixed at least half of their fuel bills for parts of next year. Others from further afield like Southwest, Alaska Air and Turkish Airlines have all boosted their hedge positions in recent months. Not every company in the airline industry hedges against higher oil prices, but those that did racked up losses of almost $5b at one stage during the pandemic because they effectively forward-purchased millions of tons of fuel they didn’t need. Their return signals confidence about future demand to travel. For the oil market, it also means a large consumer is back and bidding for barrels in the future again, easing a liquidity vacuum that built up late last year. “We continue to see significant opportunities to buy fuel forward,” Michael O’Leary, CEO of Ryanair said on a call with analysts. “We’ve hedged our fuel requirements with a mix of jet swaps and caps.” Carriers are coming back to the market as they have eaten through the hedges they placed before the pandemic, just as capacity picks up again and fuel prices rally to near their highest level in seven years. Still, while they’ve returned, the way they are hedging has changed compared with the pre-Covid era. Where in the past they would sell put options to cheapen the cost of their hedges, now they are favoring swaps that give a less risky exposure to price moves. Also, while airline capacity is still down, they are also hedging a smaller portion of their fuel bills, meaning they are less insured against a surge, but equally less at risk of another demand implosion. The hedges also tend to be shorter-term than they used to be.<br/>