Fuel hedging

What 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.