Airline treasurers should reconsider how they manage fuel risk as the latest jet fuel shock is hitting airline profitability and financial liquidity, covenant headroom and broader strategy, according to an April 9 webinar hosted by Bloomberg Intelligence and KPMG.
The discussion centred on the rise in jet fuel prices following the Middle East conflict and the disruption to energy flows through the Strait of Hormuz. Speakers said the industry was facing not only higher prices but also the risk of supply fragility, longer routings, capacity cuts and delayed recovery of costs through fares.
The broad message was that fuel is no longer just a procurement or hedging issue. For airlines, it has become a wider financial resilience problem.
Yudeshtra Naidoo, associate director in KPMG’s corporate treasury advisory team, said airline treasurers needed to move beyond a narrow focus on forecasting prices.
“Fuel risk in aviation is often viewed primarily through the lens of price,” he said. “We increasingly see from a treasury standpoint, that perspective is no longer sufficient today.”
He said fuel now affects “earnings volatility, cash flow stability and credit and covenant headrooms” at the same time, often during a single stress event. As geopolitical tension and supply disruption challenge long-held assumptions, treasury teams are shifting “away from forecasting fuel prices and towards assessing how resilient the business is when underlying assumptions no longer hold”.
Compounding effects
Other speakers on the webinar said the present fuel shock was being compounded by airspace disruption, re-routings and concerns over physical supply at some locations. Even where no outright shortage emerges, airlines are still being forced to deal with sharply higher fuel costs and the pressure those costs place on fares, schedules and margins.
The webinar participants noted that many airlines still rely too heavily on government advisories, regulatory notices and general news feeds to track geopolitical risk, despite the growth of specialist intelligence platforms designed to flag aviation-specific risks earlier. Adoption of such tools remains limited, and even where carriers have them, they are often not well integrated into treasury and hedging decisions.
They said that disconnect matters because airlines may receive early warning of escalating operational risk without linking it quickly enough to fuel procurement or hedging decisions.
Naidoo argued that treasury teams must now assess fuel risk in more holistic terms. Price risk, geopolitical risk and physical supply risk all feed into cash flow risk and covenant or rating risk. “The real concern is not just higher costs, but loss of financial flexibility at the worst possible time,” he said.
He also said boards should stop judging hedging programmes by whether they end up in or out of the money. “Did we reduce volatility, firstly and foremost, and did it preserve liquidity and covenant headroom?” he said. “And also, and quite importantly, did this allow management to focus on operations rather than crisis response.”
Europe more exposed
During the webinar, speakers said airlines in Europe may be more exposed than those in the US because the European market is less consolidated and more operationally constrained. That could delay fare increases and keep too much capacity in the market, even as fuel costs rise. By contrast, US carriers are in a position to adjust more quickly.
There was also discussion of the likely industry response if fuel prices remain elevated. Capacity cuts are expected, especially on weaker or marginal routes, while older aircraft may be grounded ahead of newer, more fuel-efficient models. The pain is also likely to be unevenly distributed. Premium travellers may absorb higher fares more easily, while price-sensitive leisure demand at the lower end of the market could come under greater pressure.
Naidoo said the priority for treasurers should be stronger liquidity forecasting and scenario analysis. Rather than trying to predict every shock, airlines should stress-test what happens when assumptions break down and use that to guide hedging, funding and operational decisions. “The risk is no longer a spike, it is sustained volatility and supply fragility going forward,” he said.
The webinar ended with a warning that even if the recently agreed ceasefire holds, relief may not come quickly. Speakers said product flows and refining output would take time to recover, meaning jet fuel tightness could persist even if crude prices ease. That view was echoed by the IMF, which warned that shortages in refined products, including jet fuel, could continue “for some time” because of the disruption to flows through the Strait of Hormuz.
Meanwhile, media reports suggest that cargoes are still not flowing smoothly through the Strait of Hormuz to international markets despite the ceasefire. Iran is also reported to be demanding toll fees from ship owners looking to use the strait. Western ship owners risk violating sanctions imposed on Iran if they make such payments to the regime.