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Airlines Seek Oil Hedging Amid Risks Stemming from Israel-Hamas Conflict

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Airlines Hedge Oil Bills Amid Risks from Israel-Hamas Conflict

Airlines are taking proactive measures to hedge against higher oil prices as the Israel-Hamas conflict raises concerns about potential surges in fuel costs. Traders and brokers in the oil market have reported increased consumer hedging activity since the outbreak of the conflict. This surge in hedging is reflected in the rising volumes of call options, which allow buyers to protect themselves against significant price increases. Despite oil prices currently returning to prewar levels due to the conflict being contained away from major crude-producing regions, airlines remain cautious about the risk of price spikes.

Hedging Strategies and Risks

Airlines typically hedge their fuel bills using various derivatives instruments, including options contracts and swaps. While hedging provides protection against price volatility, it is not without risks. During the pandemic, airlines suffered significant losses from hedging due to the collapse in global travel and the absence of offsetting lower fuel bills. This led many airlines to reduce their hedge positions. However, more recently, airlines have seen profit boosts from their fuel-price protection measures, with some carriers reporting gains from hedging in their latest earnings reports.

Increased Hedging Coverage

Major carriers such as Air France-KLM, Deutsche Lufthansa AG, and IAG SA have reported larger hedging positions recently. These airlines have taken steps to increase their hedging coverage for next year, reflecting a cautious approach to manage fuel price volatility. The generally higher oil-price environment, with Brent crude approaching $100 a barrel, has also enticed some players back into hedging after years of staying away from the market. In conclusion, airlines are actively hedging their oil bills to mitigate risks arising from the Israel-Hamas conflict. While hedging provides protection against potential price spikes, it also carries risks that airlines must carefully manage. The current higher oil-price environment and the recent profit gains from hedging have encouraged airlines to reassess their hedging strategies and increase coverage for the future.

Implications of Airlines' Oil Hedging Amid Israel-Hamas Conflict for New Businesses

The recent surge in oil hedging by airlines due to the Israel-Hamas conflict presents a crucial lesson for new businesses about risk management. The conflict has sparked fears of potential oil price spikes, prompting airlines to hedge their fuel bills using derivatives such as options contracts and swaps.

Learning from the Airlines' Hedging Strategies

New businesses, particularly those with significant exposure to commodity prices, can learn from airlines' proactive hedging strategies. Despite the risks involved, as evidenced by airlines' losses during the pandemic, hedging can provide a safety net against price volatility. It's a strategic tool that new businesses can consider to protect their bottom line.

Adapting to Market Conditions

The airlines' decision to increase their hedging coverage in response to the current higher oil-price environment demonstrates the importance of adapting to market conditions. New businesses should remain agile, reassessing their risk management strategies in response to changing circumstances. In conclusion, the airlines' oil hedging practices amid the Israel-Hamas conflict provide valuable insights for new businesses. By understanding and managing risks, and by adapting to market conditions, new businesses can better navigate uncertainties and protect their financial health.
Story First Published at: https://financialpost.com/pmn/business-pmn/airlines-rush-to-hedge-oil-bills-against-risks-from-israel-hamas-war
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