Transport Operators · Airlines
Airline Fuel Costs and Hedging
A mid-cycle jet fuel price vs EIA spot; Delta Monroe refinery as operational hedge; Southwest hedge exit; European rolling books.
Selborne Research · Airlines coverage: 7 guides, 6 company profiles, a primer and Excel model
Educational analysis. This guide is not investment advice or a recommendation to buy or sell any security, and it is not personalised.
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Fuel Is the CASM Swing Factor
Fuel decides whether an airline’s ex-fuel unit spread survives the quarter. In FY2025 fuel was 3.29¢ of Delta’s 19.31¢ cost per available seat mile (CASM), about 17%. The share rises with the jet price: at $2.85/gal in the worked example below, fuel is about a quarter of unit cost. On a large carrier a $0.50/gal move is measured in billions.
Spot vs Mid-Cycle: Two Different Numbers
Our mid-cycle jet price has sat below the market for most of the time since March 2026, so models built on it flatter airline earnings.
| Mark | Price | Use |
|---|---|---|
| Mid-cycle jet fuel | $2.85/gal | Model and worked-example input |
| WTI assumption | $70/bbl | Crude anchor the jet price is built from |
The $2.85 is WTI at $70/bbl ($1.67/gal) plus a jet crack, the price gap between jet fuel and crude, of about $1.18/gal. US Gulf Coast (USGC) jet fuel traded at $3.290/gal on 8 June 2026 and $4.354/gal on 22 September 2026 (US Energy Information Administration, EIA). Use $2.85 for through-cycle work and exchange prices to stress-test near-term earnings.
Hedging: Three Different Postures
US majors have mostly stopped hedging fuel with derivatives. European groups, Lufthansa among them, still run rolling books, which hedge a share of fuel several quarters ahead and top up as time passes.
| Carrier / group | Posture | Detail (FY2025 / latest filed) |
|---|---|---|
| Southwest | No financial hedging | Discontinued programme 2025; no additional derivatives intended (10-K) |
| Delta | Operational hedge | Monroe Energy refinery; no broad passenger-fuel derivatives |
| Air France-KLM | Financial rolling book | 62% of FY2026 consumption hedged; policy extended 6→8 quarters from Jan 2026 |
| International Airlines Group | Financial rolling book | 62% of 2026 fuel hedged (FY2025 results, Feb 2026) |
| Ryanair | Financial rolling book | 77% of FY2026 (year to Mar 2026) jet fuel hedged at 31 Mar 2025 |
Worked Mini-Example: Fuel Sensitivity on 200bn ASMs
An illustrative large carrier, with capacity measured in available seat miles (ASMs):
| Input | Value |
|---|---|
| ASMs | 200bn |
| Fuel burn | 15 gal / 1,000 ASMs → 3.0bn gal/yr |
| Ex-fuel opex | 200bn × 13.0¢ = $26.0B |
| Total revenue | 200bn × 18.0¢ = $36.0B |
Fuel cost and operating income before other items, at four jet prices:
| Jet fuel ($/gal) | Fuel ¢/ASM | Fuel cost ($B) | Op income ($B) |
|---|---|---|---|
| $2.35 | ~3.5¢ | ~$7.1 | ~$2.9 |
| $2.85 (mid-cycle) | ~4.3¢ | ~$8.6 | ~$1.5 |
| $3.35 (+$0.50 vs plan) | ~5.0¢ | ~$10.1 | ~$0.0 |
| $3.85 | ~5.8¢ | ~$11.6 | ~−$1.6 |
A $0.50/gal rise from $2.85 to $3.35 costs 3.0bn gal × $0.50 = $1.5B, wiping out all of the ~$1.45B operating income at the mid-cycle price. That is why fuel sits beside free cash flow in the credit story: with margins this thin, a fuel spike leaves little to pay down debt.
Reading Filers on Economic Fuel Price
A carrier’s reported fuel price per gallon is all-in, so it compares with neither the exchange price nor a peer’s until you read the reconciliation table. It blends taxes, delivery, hedging gains and losses, and refinery results. Delta’s FY2025 adjusted $2.30/gal sat above the 2025 average USGC exchange price of about $2.11/gal (EIA) for that reason: the refinery’s contribution is netted inside it, alongside taxes and delivery.
When comparing carriers, pair ex-fuel cost with how exposed each is to the fuel price, from unhedged at Southwest to partly offset by a refinery at Delta. A European hedge ratio buys time. A rolling book spreads a price rise over several quarters but does not stop it arriving.
EBITDAR builds from a thin unit margin on seat miles, the leases are capitalised into net debt, and the value moves on what a small load-factor drop costs.
- 15 sections, unit economics to lease-adjusted EV/EBITDAR and the downturn
- 41 pages
- a premium network carrier and a low-cost carrier
- 2 worked examples
- US and European carriers on filed unit revenue, unit cost and leverage
- 6-company screen
The Excel model is the primer's airline build live across 11 sheets: EBITDAR from seat miles and unit margin, leases capitalised into adjusted net debt, a through-cycle EV/EBITDAR valuation for a network carrier and a low-cost carrier, a load-factor downturn, a lease-adjusted leverage screen and a sensitivity grid. Change the unit revenue, fuel or leases and the value moves.
See what's in the Airlines Sector Primer →£25 PDF · £59 with the Excel model · £159 for all three Transport Operators industries
Frequently Asked Questions
- What jet fuel price do the worked examples use?
- Selborne models use a mid-cycle price of $2.85/gal US Gulf Coast (USGC), linked to a $70/bbl WTI assumption plus a jet crack. It has sat below exchange prices for most of the time since March 2026 (USGC jet was $4.354/gal on 22 September 2026, EIA), so it flatters modelled earnings relative to spot. Worked examples use it; stress tests should use current prices.
- Do US airlines still hedge jet fuel with derivatives?
- Largely no. Southwest discontinued its fuel-hedging programme in 2025 and stated it does not intend to add new derivatives. Delta carries no broad passenger-fuel derivatives book; it uses the Monroe Energy refinery as an operational hedge. European groups maintain rolling hedge books: Air France-KLM and IAG each reported 62% of 2026 fuel hedged in their FY2025 results.
- How much does a $0.50/gal fuel move affect a large US carrier?
- On an illustrative carrier (200bn ASMs, 15 gal per 1,000 ASMs), a $0.50/gal increase adds roughly $1.5B of fuel cost (3.0bn gallons × $0.50). That is operating income, not net income, and assumes volume and non-fuel costs are unchanged.
- What is Delta's adjusted fuel price and how does Monroe affect it?
- Delta reported an FY2025 adjusted fuel price of $2.30/gal. It is an all-in figure: taxes and delivery are in it, and so is the Monroe refinery's result, which offsets part of the fuel bill. It is not a discount to the exchange price; USGC jet averaged about $2.11/gal over 2025 (EIA).
Read next
RASM and CASM: Airline Unit Economics
TRASM, PRASM, RASM and CASM-ex defined from carrier filings; the FY2025 US unit-margin comparison; matching revenue to cost; why European metrics differ.
Airline Free Cash Flow and the Capex Cycle
Non-GAAP vs computed FCF for DAL, UAL, AAL and LUV; FY2025 FCF compared; capex cycle and deleveraging targets; why the label on FCF matters as much as the sign.
Airline CASM by Carrier: Unit Cost Compared
FY2025 CASM and CASM ex-fuel for six US and European airlines, each on its own definition, unit and year end, and what makes unit cost differ.
See it applied
These company profiles apply the concepts from this guide to real public companies.