Airlines pull back on fuel hedging as Iran war pushes up fare risks

Traders Union
All News
Business & Wealth
Companies
Airlines cut fuel hedging over Iran war

Highlights

Airlines including AirAsia and Finnair are reducing or ending new fuel hedges due to high oil prices linked to Middle East tensions and costly premiums.
Ryanair CEO Michael O'Leary warns limited hedge cover in Europe until summer 2027 may push fares up 15% to 20%, while airlines like Lufthansa cut route capacity.
Airlines face passenger resistance to fare hikes, as Norwegian Air reversed increases, EU air fares rose 5.8% year-on-year in September, and weaker carriers risk insolvency.

Fuel hedging retreat reshapes airline pricing

As reported by Reuters, the industry is moving away from new fuel hedges because locking in at current elevated prices can leave airlines stuck with expensive fuel if Middle East tensions ease and oil prices fall. Hedging can also require premiums, collateral or other costs, making the strategy harder to justify when balance sheets are under pressure.

AirAsia CEO Tony Fernandes said most hedging is ending and the airline is budgeting for another 12 months of high oil prices rather than trying to predict the geopolitical outlook. Finnair has also stopped adding new hedges as fuel costs surge this year, with finance chief Pia Aaltonen-Forsell saying new positions would be more expensive at current prices.

Jet fuel accounts for about 30% to 40% of airline costs, and the pressure could intensify in 2027 as pre-war hedges expire. Alton Aviation managing director Jeffrey Goh said hedging provides cost stability but still amounts to a bet on how quickly prices may fall from current levels.

Higher fares test consumer demand

Airlines are warning that reduced hedging protection is likely to feed through into ticket prices, especially in Europe and Asia where carriers have historically hedged more fuel than their U.S. rivals. Ryanair CEO Michael O'Leary said earlier this month that weak hedge cover across European airlines until summer 2027 could require fare increases of 15% to 20%.

Ryanair said in September it had stopped hedging, although it has hedged about 80% of its jet fuel needs for the year ending March 2027. Even with more than 70% of fuel needs hedged for this year, Ryanair and Lufthansa are cutting capacity on some routes to limit the impact of unhedged fuel costs.

There are also signs that passengers may resist further price increases. Norwegian Air Shuttle said on Wednesday it had to reverse some post-Iran war fare increases because customers were not willing to pay, while official data show September air fares in the European Union rose 5.8% from a year earlier and U.S. air fares climbed more than 20%.

Hedging strategies remain fragmented globally, with some airlines expanding programs since the war began and others scaling them back. Carriers with weaker balance sheets are often less able to absorb hedging-related costs and can remain fully exposed to fuel-price swings, contributing to a recent wave of bankruptcy and insolvency filings.

In our earlier report on the conflict-driven surge in oil shipping costs, we explained how attacks and heightened risks on key routes such as the Strait of Hormuz and the Red Sea pushed tanker rates sharply higher, making freight a much larger share of delivered crude prices. We also noted that these logistics and insurance premiums can quickly filter through to higher fuel and consumer prices, with import-dependent markets facing the most immediate strain.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.