Can Airlines Hedge Rising Jet Fuel Prices?

For more than a year now, the major airlines have backed a public-relations blitz against speculation in the crude oil markets. Jet fuel costs are airlines' biggest expense, and with prices soaring to a record last year, the carriers were looking for anything they could find to lower prices.

The anti-speculation move, which the carriers are ramping up again, is odd because airlines themselves engage in speculation to hedge against rising fuel prices. There's no futures market for jet fuel, so airlines typically buy call options in crude or heating oil to offset higher jet fuel prices. The Air Transport Association, an industry trade group, argues that this is different from speculation by, say, hedge funds simply looking to profit from rising prices.

This year, market speculation definitely seems to be working against the airlines, which have seen jet fuel prices increase 43 percent since early March. Normally, by this time of year, speculation in heating oil contracts subsides, as market players begin to focus on gasoline. Not this year.

Crunching some numbers on a Bloomberg terminal shows that the spread between gasoline and heating oil futures remains well below normal levels for this time of year. By the end of last month, speculators' activity in heating oil was higher than it's been in any of the past five years.

That, of course, means higher hedging costs for the airlines, but it's also a sign that market players are willing to bet that airlines will continue to struggle with higher fuel costs this year.

Disclosure: no positions