How Airlines Actually Hedge Higher Fuel Prices

Joe Weisenthal (0:00)

Hey, Odd Lots listeners, the Odd Lots tour continues, and our next stop is in Chicago.

Tracy Alloway (0:04)

That's right, Joe and I will be at the City Winery Chicago on October 15th for a live Odd Lots recording. Tickets are on sale now at bloomberg.com/oddlots.

Joe Weisenthal (0:15)

And of course, a special thank you to Barclays for supporting Odd Lots Live.

Tracy Alloway (0:19)

So that's October 15th at City Winery in Chicago. Get your tickets now.

SPEAKER_3 (0:27)

Bloomberg Audio Studios, podcasts, radio news.

Tracy Alloway (0:43)

Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:47)

And I'm Joe Weisenthal.

Tracy Alloway (0:48)

Joe, there's a topic that we've been wanting to do for a while.

Joe Weisenthal (0:51)

Yes. Yes.

Tracy Alloway (0:52)

And you would think it's kind of simple, but actually it's been really, really hard finding a perfect guest for this particular topic because it involves airlines. It involves a particular airline strategy. And airlines, having been a transportation correspondent for like a couple years, way back in the day, airlines, they're weird about things. They're kind of secretive and they often don't want to talk about stuff.

Joe Weisenthal (1:15)

I actually didn't know this. Like, this is an industry thing that I didn't know, that they have a reputation or a pattern of...

Tracy Alloway (1:23)

There's like two things in the airline world that I always wanted to know or see. And we're going to talk about one of them today, which is fuel hedging and the sort of inner workings of airline fuel hedging. But the second one, I always wanted to see a completed aircraft contract, like an actual aircraft order that included the discounts that airlines would get. Because when you see the announcement like Virgin Atlantic orders, I don't know, a certain number of planes from Boeing or Airbus, it's always at the list prices. So you never actually get a good feel for what they're actually paying for it. So I always wanted to see that. Never did in my transportation career. But at least I'm going to satisfy the fuel hedging urge right now.

Joe Weisenthal (2:03)

I'm very excited about this episode because fuel hedging by airlines, you know, you hear about it all the time or you hear, you know, every time there's a big price or usually jump in oil, there's something people talk about the airlines. And we've all said it, right? This is what I'm fascinated by. All of these things that we talk about all of the times. Oh, did they hedge their fuel? And then the conversation stops there. And they're like, oh, they did hedge their fuel. So, okay.

Or they didn't hedge their fuels. So their stock is going down, whatever. But we all talk about it and have no idea actually what it means. And I'm very fascinated too by, okay, they have traders, right?

And when we think of traders, we think of trading floors and all this stuff. But there's so much capital T trading activity happening on the corporate side that almost gets no coverage.

Tracy Alloway (2:52)

The other thing about fuel and airline costs. So fuel is, I think, the second biggest cost for airlines after labor, which makes sense. But it's also the most volatile cost. But people always imagine hedging as like, okay, airlines are worried about the price of oil going up. Or to be more specific, the price of jet fuel going up. And so they want to lock in a certain cost so that they don't get caught out suddenly when prices spike, as they have been doing for jet fuel recently. But at the same time, there's always another lever that airlines pull when you see higher prices, higher oil prices, which is they raise fares or they raise fuel surcharges. So you can get this weird environment where you both lock in a certain price and oil starts to spike. Maybe the price you locked in is lower. And you can institute a fuel surcharge as well. Because as we all know from doing these inflation episodes, if oil shortages, jet fuel shortages, everything else are in the news, customers aren't really going to complain that much if they see a big fuel surcharge on their bill.

Joe Weisenthal (3:55)

Airline prices are very expensive these days.

Tracy Alloway (3:57)

Yeah, they are.

Joe Weisenthal (3:58)

But bookings are really high too. People are flying and I keep seeing all these things. New TSA records, new global records. We are flying a lot in this world. Of course, if you hedged your oil and your competitor didn't, they're going to have to raise prices or if they're not going to lose money. Then it's like, okay, well, here's my opportunity, etc.