Airlines rush to hedge oil bills against risks from Israel-Hamas war

Airlines have been snapping up oil derivatives contracts to protect against higher prices in recent weeks as the Israel-Hamas war raises the spectre of a surge in fuel bills. Traders and brokers active in the oil market say consumer hedging activity has increased since the conflict broke out, and industry executives have confirmed those moves in earnings calls in the last few days. The flurry of activity is showing up in surging volumes of call options that help buyers protect against significantly higher prices.<br/>While oil has fallen back to pre-war levels as the conflict remains contained away from major crude-producing regions, airlines still see the risk of a spike in the price of the commodity that is typically their largest single expense. “We will build it up very quickly,” Air France-KLM CFO Steven Zaat said on an earnings call last week, referring to how soon his company would reach its desired hedging volume of 70 per cent of fuel consumption for early 2024. “We are close to that 70 per cent to make sure there’s no spike increase coming from what’s happening in Israel.” Airlines generally hedge their fuel bills using a variety of derivatives instruments, including options contracts and swaps. The strategy is not without its risks. Airlines lost billions of dollars on the practice during the Covid-19 pandemic, when the collapse in global travel left them with huge loss-making derivatives positions but no offsetting lower fuel bills as flights were grounded.<br/>