How is airline fuel hedging actually done?

Question

When airlines refuel at the airport are they all billed at the same rate on the day? Similar to cars at a gas station?

For example if Southwest has hedged and paying a dollar less per gallon than its competitors, how is that dollar realized? Are they billed at a different rate? Or is fuel hedging purely a stock market contract game where the profits or losses are just added/subtracted to the actual fuel costs after the fact at the accountancy/financial results reporting stage?

It’s usually described that airlines hedge against WTI or similar but as they are actually buying kerosene I assume the hedging must be an indirect insurance vs a literal contract to the supplier of the fuel?

Many questions but all essentially ask how does fuel hedging work in practice? I understand the basic concept of buying options at a particular price and selling above below the spot price at a future date but how does that actually work for airlines in practice at the fuel pump?

Answer 1

I am far from an expert on this subject, but I'd imagine it works something like this:

• Airline A contracts with FBO B (or the airport) to purchase 50,000Kg of fuel per day for \$1.99 per Kg.

• N12345, owned by Airline A, pulls up to gate A27, FBO B dispatches a truck to the gate and pumps 10,000Kg into the plane, making a note of the date/time/gate #, how many Kg were pumped, and the tail number of the plane in question.

  • This is repeated several times per day for the various aircraft of Airline A that need to be refueled.

• At the end of the month, FBO B sends a bill to Airline A for \$2,985,000 for 50,000Kg of fuel at \$1.99/Kg per day times 30 days, along with an itemized invoice showing how much fuel was actually pumped into which aircraft.

  • If Airline A actually used less that 50,000Kg of fuel for a day, they probably still have to pay for it per the contract.
  • If Airline A used more than 50,000Kg of fuel on a given day, there is an extra charge, at a pre-agreed price (maybe the same \$1.99, maybe \$2.50, who knows - it depends on the contract) for each additional Kg of fuel pumped.

• Airline C may have negotiated a contract with FBO B for fuel at the same airport and agreed to pay \$2.15 per Kg for their fuel.

  • It could be the same 50,000Kg/day as Airline A, but they negotiated at a different time when it appeared that prices would be higher in the future.
  • It could be that they negotiated for a smaller quantity of fuel, so have to pay a higher price for a lower usage.
  • It could be that their negotiators just aren't as good as those at Airline A, and that they need to go poach some better people for their purchasing department.

• At the end of the month, FBO B sends an invoice to Airline C for \$3,225,000 (assuming the same 50,000Kg/month) for their fuel with adjustments for any overage.

*Note: all names/prices/quantities/tail numbers/etc. are purely made up for this example and have little to no bearing on reality.