How Airlines Actually Hedge Higher Fuel Prices
David Kang, former group treasurer at Qatar Airways, explains how airlines hedge fuel costs through derivatives like swaps, options, and structured products, using Brent crude as a proxy since the jet fuel market is too thin. He describes an innovative revenue hedging strategy that generated $130 million in profit by recognizing that airlines are structurally long oil through fuel surcharges, allowing them to sell protective options without naked exposure.
Summary
The episode explores airline fuel hedging strategies with David Kang, who served as vice president of treasury and risk management at Qatar Airways from 2011-2013. Kang explains that fuel represents approximately 25-30% of operating costs for most airlines, but was 44% for Qatar Airways, making hedging critical. He describes plain vanilla hedging instruments: swaps (which lock in costs symmetrically but expose airlines to losses if prices fall), call options (which require premium payments), zero-cost collars (funded by selling puts), and more complex structured products like target redemption notes.
A key challenge is that the jet fuel market is too thin to hedge directly, forcing airlines to use proxies like Brent crude (internationally) or heating oil (in the US). This creates basis risk—during the Iran-Israel conflict in early 2023, Singapore jet fuel surged over 100% while Brent rose only 50%, exposing airlines hedging with Brent.
Kang describes his innovative approach at Qatar Airways: recognizing that airlines are not simply consumers of fuel but also producers of a fuel-inclusive product (the airline ticket). He identified a 75% correlation between fuel surcharges and Brent crude prices, meaning the airline was structurally long oil through its pricing mechanism. This insight allowed him to implement a producer hedge strategy—specifically, a strangle position selling both calls (protected by fuel surcharges if oil spiked) and puts (beneficial when oil fell and cheaper fuel could be purchased). This strategy generated $130 million in profit, allowing the revenue management team to cut fares by 20%, giving Qatar Airways first-mover advantage and significantly increasing load factors.
Kang also explains that most US carriers reduced hedging after losses in 2014-2015 and 2020 (Delta lost over $1 billion), preferring to pass costs to customers via fuel surcharges. International carriers with larger balance sheets continue hedging. He notes that hedging is most valuable when oil prices are low and economies are weak—situations where fuel surcharges cannot be raised and demand is soft. The strategy is not about predicting oil direction but about balancing natural business exposures. Kang also describes Qatar Airways' controversial practice of tankering fuel from Dubai (where jet fuel cost $2.95/gallon) back to Doha (where Qatar Petroleum's subsidiary charged $3.65/gallon), storing 9-10 million gallons as insurance against supply disruptions.
About this episode
<p>Fuel is a huge expense for airlines, and even on a good day, jet fuel prices are pretty volatile. Throw in two major wars now effecting energy infrastructure, and fuel prices across the board are higher and higher. Airlines have long tried to manage this expense through fuel hedging, using things like swaps and options to hedge against future increases in the price of jet fuel. David Kang, former group treasurer at Qatar Airways, has firsthand experience hedging for a large carrier, and he tells us exactly how it all works. He also explains why airlines use heating oil as a proxy for jet fuel, how much they can make by raising ticket prices and fuel surcharges, and why airlines and oil refineries aren't so different.</p> <p>Read more:<br /><a href="https://www.bloomberg.com/news/articles/2026-09-30/war-exposes-the-cost-of-the-west-s-retreat-from-oil-refining?utm_medium=referral&utm_source=podcast&utm_campaign=odd_lots&utm_content=article">War Exposes the Cost of the West’s Retreat From Oil Refining</a><br /><a href="https://www.bloomberg.com/news/articles/2026-09-30/mideast-crude-oil-flows-hit-98-of-pre-war-level-jpmorgan-says?utm_medium=referral&utm_source=podcast&utm_campaign=odd_lots&utm_content=article">JPMorgan and Goldman See Mideast Oil Flows Near Pre-War Levels</a></p> <p>Only <a href="http://Bloomberg.com">http://Bloomberg.com</a> subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at <a href="https://www.bloomberg.com/subscriptions/oddlots?in_source=oddlotspodcast">bloomberg.com/subscriptions/oddlots</a></p> <p><a href="http://bloomberg.com/subscriptions/oddlots">Subscribe to the Odd Lots Newsletter</a><br /><strong>Join the conversation:</strong> <a href="https://discord.gg/oddlots">discord.gg/oddlots</a></p><p>See <a href="https://omnystudio.com/listener">omnystudio.com/listener</a> for privacy information.</p>
Key Insights
- Jet fuel markets are too thin to trade directly, forcing airlines to hedge using Brent crude or heating oil as proxies, creating basis risk where the proxy and actual fuel costs diverge significantly.
- Airlines are structurally long oil through fuel surcharges built into ticket prices, which correlate 75% with Brent—meaning they simultaneously benefit and suffer from oil price movements through different mechanisms.
- Plain vanilla hedging instruments include swaps (symmetric risk), call options (require premium payments), and zero-cost collars (funded by selling puts), each with different risk-reward profiles depending on expected oil price direction.
- Most US carriers abandoned aggressive hedging after suffering major losses in 2014-2015 and 2020, preferring to pass fuel costs to customers through surcharges rather than managing exposure through derivatives.
- Hedging is most valuable during economic weakness and low oil prices, when fuel surcharges cannot be raised and demand is soft—situations where locked-in costs protect profitability.
- Qatar Airways generated $130 million in hedging profit by identifying itself as both a fuel consumer and producer, allowing it to use a strangle strategy (selling both calls and puts) without naked exposure because surcharges protected upside and lower fuel costs protected downside.
- International carriers with large balance sheets continue hedging because they can sustain temporary mark-to-market losses, while smaller US carriers cannot afford the balance sheet volatility.
- Qatar Airways tankered fuel from Dubai to Doha despite owning a national petroleum company because market prices in Dubai were lower than the subsidiary's internal pricing, revealing how regulatory and organizational constraints can create arbitrage opportunities.
Topics
Transcript
There are some market stories where you want every detail. Tracy and I have made quite a few podcasts on that basis, but sometimes you've only got 10 minutes and need to know what's moving markets and why. That's the Barclays Brief podcast. Every week, experts from Barclays Markets and Research get you up to speed on what matters and what to watch next, about the time it takes to grab a coffee. So search Barclays Brief wherever you get your podcasts. Some people treat ChachiPT like some kind of smart search engine, and some use it to get work done. ChachiPT Work is a new way of working in ChachiPT that can take action across your apps and files,…
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