STORY: As a sharp rise in oil prices rattles global transport markets, airlines face an additional threat: the price of jet fuel.
It's risen far faster than crude prices.
And even airlines that use hedging contracts to protect against sudden spikes prices are rapidly announcing fare hikes, fuel surcharges and capacity cuts.
Hedging is a financial strategy used to protect against the risk of price swings in commodities, currencies, or interest rates.
When it comes to oil, companies that rely heavily on fuel--like airlines--use hedging to lock in future fuel costs or limit their exposure to shocks in the market.
Jet fuel prices normally move in tandem with oil prices.
But they have doubled since the Iran conflict, far outpacing a one-third rise in crude prices.
Major carriers in the U.S. and China have no hedging contracts in place.
That leaves them fully exposed to jumps in the fuel price.
Hedging remains a double-edged sword.
While it can shield airlines from sudden spikes in fuel costs through the use of derivative contracts...
... it risks losses when prices fall, exposing carriers to above-market rates in swaps - a certain type of hedge contract that has burned some carriers in the past.
In Europe, where hedging is common, a sustained 10% increase in jet fuel prices could hit budget airline Wizz Air's operating profit by as much as 31% this year.
That's according to J.P. Morgan.
With impacts between 3% and 10% for Air France, Lufthansa, British Airways-owner IAG and Ryanair.
Air New Zealand and Australia's Qantas Airways do not even fly to the Middle East and are more than 80% hedged against crude oil for the half-year ending in June.
But they too have already lifted fares to protect margins.
