Fuel hedging is the practice of making advanced purchases of fuel at a fixed price for future delivery.
This is utilised to reduce an airline’s exposure to volatile and potentially rising fuel costs.
The cost of fuel hedging depends on the predicted future price of fuel. Airlines can place hedges either based on future prices of jet fuel or on future prices of crude oil. However, because crude oil is the source of jet fuel, the prices of crude oil and jet fuel are normally correlated (linked).
Typically, airlines will hedge only a certain portion of their fuel requirements for a certain period. Often, contracts for portions of an airline’s jet fuel needs will overlap, with different levels of hedging expiring over time.
The advantage of hedging is that it gives the airline certainly over a future price of fuel especially if it is expected to increase.
The disadvantage is that the price of fuel drops then the airline is paying more than it needs to. During global crisis events, hedging of fuel tends to increase as it gives certainty to an airline operation.
An example of a disadvantage was during the COVID pandemic were the price reduced dramatically but most larger airlines had already hedged their fuel at a set price the year before; as illustrated in the graph below: