Aviation
Fuel hedging
Locking in the price of part of future fuel to reduce the risk of price swings.
Facts checked against sources onWhat does Fuel hedging mean?
Fuel hedging means using financial contracts, such as futures, swaps or options on jet fuel or crude oil, to fix or cap the price an airline will pay for part of its future fuel. Fuel is often one of an airline's largest costs, so hedging steadies costs and helps planning. Example: an airline hedges 60 percent of next year's fuel at 90 per barrel. If the market price rises to 110, it pays 90 on the hedged part and 110 on the rest, an average of 98. If the price falls to 70, it still pays 90 on the hedged part, an average of 82, and loses out against rivals that did not hedge. Hedging reduces swings in cost; it does not reliably save money.
Where does it come up in case interview prep?
- The case, start to finishLesson in What a case interview is, and how to prepare
- Slide titles that state the pointLesson in Saying so what: synthesis and communication at work
- Airline unit economics: RASK, CASK, load factor, fuel, and leasingLesson in Airlines, airports, and aircraft leasing
- Aviation players, trends, and how to crack the casesLesson in Airlines, airports, and aircraft leasing
Related terms
- CASK (cost per available seat kilometre)Total airline operating cost divided by ASKs.
- Sensitivity analysisChanging one assumption at a time to see which matters most.
- Variable costA cost that rises and falls with how much you make.
- ASK (available seat kilometre)One seat flown one kilometre: the standard measure of airline capacity.
- RPK (revenue passenger kilometre)One paying passenger flown one kilometre: the standard measure of airline traffic.
- Load factorThe share of seats filled with paying passengers: RPK divided by ASK.
- Yield (airlines)Passenger revenue per revenue passenger kilometre: the average fare per kilometre.
- RASK (revenue per available seat kilometre)Total airline revenue divided by ASKs.
Learn it in context
See Fuel hedging at work in a lesson from What a case interview is, and how to prepare, with checks as you go.
Spotted something wrong or out of date? Report a mistake. We check every report and correct the page.