High risk premium on energy markets and the fears of supply disruptions have started acting on aviation fuel prices, even as airlines sector resort to aggressive hedging, which is increasingly becoming a strategic risk management tool.
Iran's warnings to vessels to avoid transiting the Strait of Hormuz, through which 20% of the world’s oil and natural gas shipments transit, have contributed to sharp jumps in crude oil prices, feeding into higher jet fuel costs, which usually account for 20% to 35% of total operating costs of the airlines industry.
"We now think oil prices will sit at around $80 per barrel for the second quarter (Q2), falling back to $60 by the end of the year," Oxford Economics said in its latest update.
Air fares may rise as airlines pass on higher operating costs to customers over time, especially on routes affected by detours or extended flight times.
Rerouting a single long-haul flight to avoid the Middle East adds roughly 90 to 120 minutes of flight time, costing carriers an estimated $10,000 extra per flight in fuel and crew wages.
"The combined impacts of re-routing costs, which typically lead to longer journey times and more fuel burn and capacity reductions across the Middle East, will likely put an upward pressure on fares. The combination of higher prices and greater perceived risk (through weaker sentiment effects) will likely lead to weaker forward bookings should the disruption persist," the update said.
Airlines have been actively locking in fuel prices using futures and options to protect against volatile jet fuel costs amid rising crude oil prices and geopolitical risk.
Many major carriers globally have increased hedging coverage to lock in fuel prices for future periods, aiming to reduce exposure to spot market spikes as part of measures to deal with volatile jet fuel costs.
Hedging, which is now increasingly becoming part of the strategic risk management for fuel costs, vary by airline. Hedged carriers can offer more stable and predictable fares and cargo contracts, potentially capturing share from less hedged competitors during price spikes.
Jet fuel prices had peaked in 2022, averaging about $135 per barrel, driven by high crude oil costs amid the Russia-Ukraine war. After that peak, crude prices and therefore jet fuel eased into 2025, with Brent crude slipping fast and jet fuel followed.
IATA data from late 2025 showed global jet fuel average about $90 per barrel, a modest decline compared with 2024, even as Brent moved above about $80–$85 per barrel as markets price in disruptions to shipments through the Strait of Hormuz and broader supply risk.
Jet fuel price indices are likely to climb above the recent baseline levels, reflecting the crude price shock and risk premiums with analysts anticipating continued volatility in prices until the geopolitical situation stabilises.
“Surge in crude oil and jet fuel prices have underscored the vulnerability of carriers to market volatility, reinforcing the need for proactive hedging strategies as part of disciplined financial and risk management,” said a top official of a financial institution, which has sizeable exposure to the aviation sector.
With geopolitical tensions rising, oil markets add a risk premium, prompting airlines to go in for either increasing the hedge ratio or extend hedging duration as hedging offers predictable fuel cost exposure and allows more accurate cash-flow forecasting.
This stability is particularly valuable in periods of rapid price escalation, where spot market exposure could materially distort operating margins.
Air France-KLM, Air New Zealand, Easy Jet, Qantas, Ryanair, Virgin Australia and Wizz Air were among those had high hedges of 80-85%; while IAG, Lufthansa, Norwegian Air, Cathay Pacific, Singapore Airlines and Iceland Air have seen hedging at 75% to 80%.
"We’ve got pretty good hedging in place, but these are pretty significant impacts on aviation and we’re just continuing to watch how it all unfolds," Qantas chief executive officer Vanessa Hudsonshe told the Australian Financial Review’s business summit.
Airline stocks in Asia and Europe extended losses on Tuesday as the US and Israeli air war against Iran escalated.
