As Iran war drags on, airlines pull back on fuel hedges and warn on rising fares

With jet fuel prices roughly double their pre-Iran war levels, airlines are increasingly hesitant to lock in future fuel costs through new hedges, fearing steep fare hikes to offset higher expenses. Hedging allows airlines to secure future fuel prices, mitigating potential increases and providing cost certainty. However, as the Middle East conflict enters its ninth month, the strategy shift means passengers worldwide may face significantly higher airfares as carriers lose hedging protection.

AirAsia CEO Tony Fernandes announced in October that the company was budgeting for 12 months of high oil prices and has given up predicting geopolitical tensions' evolution, stating that no scenarios modeling falling oil prices were being considered. Finnair, which had already passed higher fuel costs to ticket prices in October, has ceased adding new hedges as fuel costs have surged in 2026.

The airline's finance chief, Pia Aaltonen-Forsell, expressed concern that securing low prices again would be more expensive. Jet fuel constitutes 30% to 40% of airlines' costs, with European and Asian carriers historically hedging more of their fuel needs than US counterparts, who largely abandoned the practice after costly bets on oil prices failed.

While hedging offers cost stability, it relies on accurately predicting future price movements, and carriers must assess the forward curve to gauge potential price drops. As hedges expiring after the war intensifies pressure on airlines, some European carriers, including Ryanair, are still far from being well-hedged by summer 2027.

Ryanair CEO Michael O'Leary warned that fares may need to rise by 15% to 20% to cover higher fuel costs. With global airline hedging policies fragmented, some carriers have expanded programmes since the war began, while others have reduced them. Budget carrier Norwegian Air Shuttle had to reverse some post-Iran war price increases due to consumers' unwillingness to pay.

Despite the fuel shock this year, US airlines have shown little interest in returning to hedging, as American, United, Delta, JetBlue, and Allegiant have no significant fuel hedges, while Frontier has no active hedging position. Southwest terminated its program last year, and Alaska and Hawaiian closed out remaining positions. The reduced appetite for hedging among US airlines, coupled with the European and Asian airlines' reluctance to add new hedges, may signal a broader shift in industry attitudes towards fuel hedging, despite the current surge in fuel prices.