Amid the ongoing oil price volatility sparked by the conflict in the Middle East, KBRA has said in its latest report that fuel hedging is “no longer a sectorwide shock absorber” – particularly amongst US carriers. As a result, the ratings agency said this raises the importance of airlines’ capital flexibility and operational flexibility.
“Fuel hedging is no longer a core risk management tool for much of the airline industry, particularly in the US, where the largest carriers now appear willing to absorb more direct fuel price volatility than in prior cycles,” said KBRA.
The US’ ‘big three’ airlines – American, Delta and United – do not fuel hedge. Additionally, Southwest had historically hedged before exiting the practice early last year.
United CEO Scott Kirby had told CNBC on March 6 – days before Brent crude would spike to over $100 a barrel on March 9 – that jet fuel prices could impact US carriers’ bottom line sooner than anticipated. Airlines largely in the US avoid hedging due to difficulties surrounding crack spread pricing – the margin between crude oil and refined jet fuel.
“Alaska provides a useful nuance, as its disclosures still reflect a fuel hedging programme, but the realized mark-to-market effects in 2025 were modest, indicating that whatever hedge protection remains is limited rather than transformative,” said KBRA.
S&P Global said a number of North American airlines have the ability to absorb sustained high jet fuel prices, though Delta is afforded some insulation, given its ownership of refinery operations. The agency doubts US airlines being able to pass on the added costs to customers, with air fares largely unchanged since 2022.
The lack of hedging leaves carriers more exposed in the current fuel price volatility environment – particularly at a time where fares and capacity “may be slow to adjust”.
“In a normal market, the absence of hedging can avoid premium drag and allow airlines to benefit more fully from lower fuel prices,” said KBRA. “However, in a geopolitical shock it also means that fuel inflation flows directly into margins, cash flow, and liquidity.”
Fuel hedging strategies have remained more prominent in the European market, particularly among low-cost carriers and some large network groups. KBRA said the level of protection varied across carriers and is “often partial rather than absolute”.
During its earnings call on March 6, Lufthansa Group noted that its hedging ratio was just over 80%.
“The only other airline hedged like we are is Ryanair with which we hardly overlap and should give us a relative advantage when prices in the market need to go up to cover for higher fuel prices – especially of course for our American competitors who more or less are not hedged at all,” said Lufthansa group CEO Carsten Spohr.
Some airlines in Asia Pacific have hedging protection, including Air New Zealand, Cathay Pacific and Qantas. KBRA said Air New Zealand’s hedging strategy focuses on Brent crude rather than jet fuel, which leaves it more exposed to crack spread widening. Cathay’s approach is a more selective protection with only partial hedge coverage and exposure to crack spread. Meanwhile, Qantas uses derivatives to manage future fuel cost exposure.
The report also said that hedging strategies may protect in the short-term, but a prolonged fuel stress could eat into earnings and cash flow over time.
“A prolonged fuel shock would likely increase airline credit stress, but we view the large aircraft lessors as relatively well positioned to manage a period of weaker cash collections given their strong liquidity, capital bases, and demonstrated workout flexibility,” said KBRA.
S&P Global and Fitch Ratings have estimated a similar outcome, believing that most of the larger airline can withstand higher fuel prices if the conflict is short-lived.
Fitch said on March 6 that most EMEA airlines have sufficient headroom to “absorb the implications” were the conflict to last fewer than four weeks. The conflict will reach its four-week mark this weekend after US-Israel strikes on Iran began on February 28.