You can pack a bag, grab your significant other, and hop in your sports car for a weekend away at your favorite bed and breakfast. Or, you can load up the minivan with luggage and a cooler full of bologna sandwiches, grab all your kids, and head out on a multi-state family vacation. Regardless of what you choose, you can’t do either without one very important thing: fuel.
This is the same scenario for the airline industry. Whether you are referring to a large commercial airliner or a light private jet – you can’t get very far without fuel. This is exactly why the cost of fuel has a direct impact on the travel industry.
Jet fuel hedging is one strategy that some airlines use to protect themselves when the cost of fuel is predicted to rise. Here’s what you need to know about it.
The Rising Cost of Fuel
It takes a lot of money to maintain and run a private jet. And the same applies to commercial airliners too, but on a much larger scale. In fact, it is safe to say that fuel is likely the largest operating cost in the air travel industry – which is why when the cost of fuel fluctuates, adjustments need to be made to make up the difference or the bottom line is going to take a hit.
According to the International Air Transport Association, IATA, the cost of jet fuel is on the rise. Just this year alone, fuel costs have increased 70% – and we are only in the second month of 2022! The cost of fuel today is higher than it was before the pandemic. This isn’t good news for those looking to recover costs.
During the global pandemic, the airline industry took a big hit. Very few travelers wanted to risk catching the virus and chose alternate options for travel – and travel bans lead to a change in plans, as well. Eventually, as the pandemic continued for longer than expected, changes were made in the way travelers got to their destination – many choosing private air travel for the first time as it didn’t involve the same health risks as commercial travel. As the commercial world kept taking a hit, the private travel world was finding the silver lining.
What does all of this mean? With the rising cost of fuel, the prediction that it will continue to rise, and no sign of slowing down – the air travel industry is going to be forced to take steps to protect itself. Aside from a higher price tag to travel, more and more are looking toward fuel hedging.
What is Fuel Hedging?
Fuel hedging helps to ease the burden high fuel prices can put on everyone in the air travel industry. So, what is it?
Though there are various different hedging strategies, hedging itself refers to purchasing something you will use in the future but paying for it today. Therefore, fuel hedging means paying for your future deliveries of fuel today – hopefully benefiting from today’s price. For example, in the 2nd quarter of 2020, the fuel cost was $29 per barrel. Fast forward to the first quarter of 2021 and it was $60 per barrel. Those who took advantage of fuel hedging in 2020 would have benefited greatly as the cost of fuel more than doubled.
Other fuel hedging strategies include call options, collar hedges, and swaps.
Call options give airlines the option to purchase fuel at a certain price during a certain period of time. In other words, you are not buying the fuel just yet, but you have the ability to purchase it at a certain rate if needed. You pay for the option.
Collar hedges are another strategy, but this one involves call and put options. It protects the airline on all sides regarding the price of the fuel, whether it increases or decreases.
Finally, there is another strategy known as swaps. A swap locks in the price for a future date. This can be beneficial if the price in the future increases. However, not so great if it drops.
With the cost of fuel expected to rise, many in the air travel industry are looking at fuel hedging to help.
Fuel Hedging and the Impact on Air Travel
Fuel hedging’s impact on air travel can be a positive one. What happens when the price of fuel rises too high? It can result in higher ticket prices. But, for commercial airliners who have taken a big hit in the decline of travelers, raising the price of a ticket could be a damaging move.
By taking advantage of fuel hedging, those in the travel industry can protect themselves from dangerously high fuel prices. For consumers, it can keep things as they are today. This means more and more are able to afford air travel – and may be more enticed to do so as concerns and worries about COVID-19 begin to relax.
What Does Fuel Hedging Mean for Private Air Travel?
The increase in the cost of fuel does not just impact commercial air travel, but it impacts private air travel, too. So it is common for private jet charters to also engage in fuel hedging in order to protect the interests of their travelers. After all, they too want to offer their services to consumers and keep them protected and affordable regardless of the rising costs of fuel.
If we have learned anything over the last couple of years it is that the world around us is surrounded by uncertainty. We could not have predicted the coronavirus or just how powerful of an impact it would have on the air travel industry – and the rest of the world. We can, however, predict the cost of the fuel. So, by taking steps and using effective strategies, such as fuel hedging, commercial and private air travel can both find themselves in a more profitable position moving forward.
Although we don’t know what tomorrow holds, jet fuel hedging is the choice today that will benefit tomorrow.