How Airlines Actually Hedge Fuel: The Solution a 44% Cost Line Forced Into Existence

Contents

1. What the episode is about
2. 1. The 44% line forced the creativity
3. 2. They hedge something other than what they burn
4. 3. The instrument ladder, and whether you’ll pay for insurance
5. 4. “I do not want to see any more red on the balance sheet”
6. 5. Treat the ticket as a product, and you find you’re long oil
7. 6. What $130 million actually bought
8. 7. Carrying fuel home from Dubai
9. When a company says it hedged, can I relax?
10. Is there a position in my portfolio I haven’t recognised?
11. The one thing to take away

Knowing others is intelligence; knowing yourself is clarity. Mastering others takes force; mastering yourself takes strength.

—— Laozi, Tao Te Ching, Chapter 33 (Spring and Autumn period; translation mine)

On 2 October 2026, Bloomberg’s Odd Lots ran “How Airlines Actually Hedge Higher Fuel Prices,” with hosts Traci Alloway and Joe Weisenthal and guest David Kang, former group treasurer of Qatar Airways (2011–2013; his formal title was VP, Treasury and Risk Management). He said fuel was 44% of Qatar Airways’ cost base at the time, against 25% to 30% for most of the world’s carriers. He inherited a hedge book down $280 million, which widened to $360 million. He then measured the correlation between the fuel surcharge inside a ticket and Brent crude at roughly 75%, which meant the airline was already long crude on the revenue side, and rebuilt the position around that. The hedge book made $130 million that year. Two conditions made it work: a balance sheet and revenue base large enough to carry the risk, and crude sitting near $100 for the five months the structure was live.

What the episode is about

Traci opened by saying that during her years on the transport beat, two things always eluded her. One was how airline fuel hedging actually works. The other was a real aircraft purchase contract, because the press releases always quote list prices and nobody outside ever sees the discount. She said the industry guards this material closely, which is why finding a guest willing to walk through the mechanics took so long.

Joe framed it the way most of us talk. Every time crude spikes, someone asks “did they hedge their fuel?” and the conversation stops there — they hedged, fine; they didn’t, the stock falls. Almost nobody can describe the trade behind that sentence. This episode opens the sentence up.

Kang’s background runs through FX, rates, government bonds, oil broking, structured products and physical trading; he calls himself an energy man. The 1998 Asian financial crisis cost him a bond trading job, he moved into oil broking, joined JP Morgan as a structurer in 2006, then ran Asian products trading at Sumitomo. He walked into an airline treasury with a trader’s eyes, and that shaped everything that followed.

1. The 44% line forced the creativity

Most carriers run fuel in the mid-twenties as a share of cost, with labour larger. Qatar Airways ran it the other way. They recruited heavily from Eastern Europe and Asia, pay went further in Doha than at home, labour stayed cheap — and fuel climbed to 44%, close to half of all expenses. Kang said that number is why he had to find another route.

Their balance sheet was $6.6 billion. First-year consumption ran 24 to 27 million barrels, with three million more added the next year. They hedged three years out because the operating plan was predictable: 1.5 aircraft delivered per month, roughly one new route every two months. Consumption climbed on a known slope, so they knew how much fuel the next three years would burn.

2. They hedge something other than what they burn

Airlines burn Jet A1. That market is thin — at the table, the only buyers are airlines, while the sell side holds a row of refiners and trading houses. Without liquidity you cannot hedge in it. So international carriers use Brent as the proxy, and US carriers mostly use heating oil, whose spread against jet is tighter domestically; some use WTI.

There is a crack here. Joe pulled the chart up live: normalised to early February, Brent rose 50% while Singapore jet fuel more than doubled. Through that stretch, a carrier hedged cleanly in Brent still bled on the barrels it actually bought. Kang’s answer was that Singapore jet is a different animal, because a handful of trading houses and majors hold heavy sway over a market whose only buyers are airlines. His phrasing was careful: sometimes people talk to each other, they agree on something, and because everyone is looking and trading the same way, the thing they agreed on happens. He added that the printed assessments sometimes have no offer behind them, which is why few people trust jet assessments — and why, in his telling, only the Singapore incumbent hedges jet at all.

3. The instrument ladder, and whether you’ll pay for insurance

The plain trade is a swap, symmetric by construction: crude rallies and your cost is locked, crude falls and you bleed. Kang said buying swaps is fine when oil sits at $25 to $35. Up at $70 or $80 the question becomes how long crude can stay elevated, so buyers move to call options — which cost a premium. Some airlines, in his words, are too cheap to pay for their calls, so they fund them by selling puts and end up with a zero-cost collar. At JP Morgan he structured target redemption notes around this: a vanilla zero-cost collar faced the airline, while the bank wrapped the exotic side into a note redeeming in five months, a year or two years, and used that to improve the airline’s call pricing. Traci’s reaction stuck with me — she had always filed those structures under products sold to Asian retail investors betting on whether an index would move, and had never connected them to jet fuel.

4. “I do not want to see any more red on the balance sheet”

The book was down $280 million when he arrived, and while he was still learning how the company worked it widened to $360 million. The CEO called the CFO and him upstairs and asked the CFO why they were down $360 million. Kang used a rugby term for his own position: a hospital pass, where the ball reaches you and everyone can see you are about to get hit.

He explained the symmetry he believed in — crude up, swaps gain, physical costs more; crude down, the hedge loses, but fuel gets cheaper. The CEO broke that symmetry. When crude falls, odds are the global economy is weak. Weak economy, seats go unsold. Planes that don’t take off burn no fuel. So on the downside the airline takes the hit twice: revenue management loses, and the hedge book bleeds. That part made me stop the tape. Whenever I had thought about hedging, I thought about protecting a cost — never about whether the thing I was protecting was tied to demand.

5. Treat the ticket as a product, and you find you’re long oil

He sat down with his deputy treasurer and redrew the airline as a refinery. A refinery is consumer and producer at once: it buys crude, sells product, and sells the crack. So what does an airline produce? A seat that moves you from A to B. What sits in the seat? A ticket. What sits in the ticket? A fuel surcharge.

They ran the correlation between the surcharge and Brent and got 75%. He took that number to the senior VP of revenue management and his deputy, who had not realised they were holding a long crude position — their revenue tracked the oil price. The airline was short fuel on one side (it burns jet to fly) and long fuel on the other (the surcharge collects more as crude rises). That opened the producer-hedging door.

He sold a strangle: calls above $120, puts below $80, collecting premium while crude stayed between. The calls were not naked — if they were exercised, surcharge revenue would cover them. The short puts would lose on a selloff, while the physical jet he bought got cheaper. Nothing in the structure, he said, was uncovered. They took no view on direction; they took a view that price would mean-revert around $100, and it held for five months. He added, unprompted, that they got somewhat lucky.

6. What $130 million actually bought

The hedge made $130 million that year while the revenue side lost $65 million. Without the hedge the airline would have finished in the red. The more interesting use came next: the gain gave revenue management room to cut fares. Qatar Airways had been a follower — Emirates cut, they cut; Emirates raised, they raised. That year they cut fares 20%, led the market, and ran planes 80% to 90% full. His own summary was plain: whatever you do, try to add something to the value chain.

He also explained why nobody copied it. He was due to present the approach at a treasury conference in Singapore and the CEO blocked him, on the grounds that nobody else was doing it and the secret should stay in-house. As for why nobody else does it, he pointed at auditors and the sovereign wealth funds that own pieces of these airlines: a fuel consumer selling oil doesn’t strike them as kosher. He said too many treasurers work like a horse in blinders, seeing only the buying of fuel and none of the airline’s other sides.

7. Carrying fuel home from Dubai

This is my favourite detail in the episode. Qatar’s national oil company had a subsidiary selling them jet fuel at $3.65 a gallon. Fly to Dubai and Chevron sold it at $2.95. In his words, they were getting taken for 70% by their own national petroleum company.

So when the 787s were delivered, the airline told the world the aircraft were running Dubai turns for crew training. The training was real — but they flew over with three to five tonnes aboard, on fumes by his account, unable to hold even one circuit over Dubai and required to land straight in. Then they lifted a hundred tonnes and brought it home to their own tanks at Doha, which held 9 to 10 million gallons, about one day of cover for the whole airline.

When a company says it hedged, can I relax?

I used to read “the company has hedged its fuel exposure” in a filing and translate it instantly into “the cost risk is handled.” This episode killed that translation.

Kang put it bluntly: hedging is a misnomer, it is a view, it is a trade. The people doing it inside corporates avoid calling themselves traders, because compliance goes ballistic at the word — they believe hedging is good for the company, so the language has to be hedging. Yet selling a call, selling a put, choosing strikes, choosing expiries: every one of those carries a directional judgement.

The accounting matters more than I expected. He mentioned a mismatch: the fuel surcharge does not run through P&L, while the hedge does. So when the hedge gains, outsiders see the gain and not the surcharge revenue behind it; when the hedge loses, outsiders see a clean loss while the surcharge may be quietly offsetting it. Delta lost over $1 billion on fuel hedging in 2020, and an unnamed highly ranked Asian carrier lost close to $2 billion. Those figures write themselves into headlines, and they are half the risk picture. Drawing conclusions from “hedging loss” alone is where the error lives.

Is there a position in my portfolio I haven’t recognised?

The question that made me sit up came from Joe at the end: how much of a corporate treasurer’s job is identifying the company’s natural position in a market?

Kang’s answer was that he has only worked corporate-side in aviation, but that these links exist elsewhere — find a product you sell whose price is tied to the risk you carry, and you can build a hedge that actually protects you. He even improvised one for fresh food: if some technique extends shelf life, that business turns from short vegetables to long them.

I took the question back to my own holdings. Are revenue and cost being pushed by the same variable? If they are, and I model the exposure as one-directional, my judgement is already skewed. Traci’s other comparison belongs here too: the Chicago baker who raises prices when egg costs make the news, because everyone has seen the story and nobody complains. An airline adding a fuel surcharge during an oil shock walks the same path. So the instinct that rising input costs compress margins needs re-running in industries with real pass-through power.

How do you verify pass-through? The episode offers a measurable handle: load factors and total traffic. Both hosts kept noting that fares are expensive while bookings run hot, with TSA and global records falling. Prices up and volume holding is the evidence that pass-through is working; the day fares keep climbing while load factors slip is the day demand elasticity actually bites. That is something I can track without waiting for anyone to tell me.

The one thing to take away

One idea: before deciding whether to protect yourself, work out which side you are already standing on. Qatar Airways assumed it was only a buyer of fuel, so every hedge covered half the problem. Once they measured the surcharge at 75% correlation with crude, they saw the other foot had been planted on the long side the whole time. Misreading your own position costs far more than picking the wrong instrument.

Here is something I have tried, and it needs one sheet of paper. Pick the variable you fear most — the oil price, interest rates, the cycle in your industry, the pace at which AI absorbs a category of work — and draw two columns. On the left: if this goes badly, what of mine gets worse. On the right: if the same thing goes badly, what of mine gets better. Most people leave the right column blank, and blank usually means not yet thought of rather than genuinely empty. Mortgage rates, inflation, whether your skills get scarcer in that scenario, whether your job gets safer because competitors fold — all of it counts. If the right column is still empty when you finish, you now know you are one-sided, and the one side is what to work on next.

Raw Markdown

This article is an educational discussion of investment method. It is not advice to buy or sell any individual security, offers no target prices, and does not analyze any current holding. Investing carries risk; make your own decisions or consult a qualified professional.