Introduction

In December 2024, Southwest Airlines announced it was abandoning its fuel hedging program — a strategy that had saved the company $3.5 billion and essentially funded its profits throughout the early 2000s. The decision marked the end of an era in airline risk management. Even as a major oil price spike remains possible, airlines have collectively decided that paying premiums to hedge fuel risk no longer makes economic sense.

Fuel is the single largest variable cost for every U.S. airline, typically representing 20–30% of total operating expenses. The industry consumed approximately 20–21 billion gallons of jet fuel in 2024 at an average Gulf Coast price of $2.338 per gallon. How airlines manage this exposure — or choose not to — has profound implications for their profitability, creditworthiness, and capacity decisions, which in turn affect airport landing fee revenue and capital planning.

The trajectory is clear: from an era of active hedging (1998–2015) through declining effectiveness (2015–2023) to wholesale abandonment (2024–2025). This article traces that arc, examines the instruments and economics involved, and evaluates the implications for airport finance professionals.

The Southwest Hedging Saga

The Golden Decade: 1998–2008

Southwest Airlines' fuel hedging program was one of the most successful corporate risk management initiatives in history. Beginning in 1998 under then-CEO Herb Kelleher and CFO Gary Kelly, Southwest built a sophisticated derivatives portfolio that provided extraordinary value during a period of rising oil prices.

The numbers were remarkable. From 1998 through mid-2008, Southwest's hedging gains totaled approximately $3.5 billion — an amount equivalent to 83% of the airline's total profits during the period. During 2003–2008, Southwest paid 25–40% less for fuel than its competitors, a cost advantage that funded profitable operations while peers hemorrhaged cash.

The program's defining moment came during the 2008 oil crisis. With crude oil spiking to $130 per barrel, Southwest held hedging contracts covering 70% of its fuel consumption at an effective price of $51 per barrel — a $0.79 per gallon advantage over spot prices. The resulting hedging gain exceeded $1.3 billion in a single year, enabling Southwest to remain profitable while virtually every other carrier posted significant losses.

Declining Effectiveness: 2010–2023

The brilliance of Southwest's program obscured a structural shift. After 2008, oil price volatility declined and hedging premiums began escalating. The "costless collar" structures that had defined Southwest's program — simultaneously buying call options (protection against spikes) and selling put options (generating offsetting premium income) — became increasingly expensive as the options market repriced.

Southwest's annual hedging premiums rose from approximately $90 million in 2020 to $120 million in 2022–2023 and then to $157 million in 2024 — a compound annual growth rate of 14.8%. This premium escalation outpaced any benefit the hedges were providing. As CEO Bob Jordan stated, the program had "not been beneficial [in the] past 10–15 years."

The Exit: December 2024

On December 31, 2024, Southwest formally announced the discontinuation of its hedging program. Existing contracts will mature through 2027 (with maximum 47% coverage in 2025), but no new hedge positions are being initiated. The decision reflected a clear-eyed assessment: $157 million in annual premiums on a $9.5 billion fuel bill — a 1.65% cost tax — with zero demonstrated profit benefit in the current low-volatility environment.

Industry Hedging Strategies Today

The U.S. airline industry has converged on three distinct approaches to fuel cost management, with the overwhelming majority choosing not to hedge at all.

Strategy A: No Hedging (United, American, and Most Carriers)

Three of the four largest U.S. airlines — United Airlines, American Airlines, and (now) Southwest Airlines — maintain zero financial hedging positions. JetBlue Airways exited its hedging program entirely as of December 31, 2024. Frontier Airlines, Allegiant Air, and most regional carriers similarly do not hedge.

The rationale is straightforward. American Airlines' CFO has articulated the prevailing philosophy: hedges come at a cost for insurance that, over time, does not improve profitability. In the current environment of moderate fuel prices and low volatility, the premiums airlines would pay for hedging contracts exceed the expected benefit. In FY2024, non-hedging carriers benefited from declining fuel prices without the drag of premium costs.

Strategy B: Refinery Ownership (Delta Air Lines)

Delta Air Lines pursues a unique approach through its wholly owned subsidiary, Monroe Energy, which operates a 185,000-barrel-per-day refinery in Trainer, Pennsylvania. Acquired in 2012 for approximately $150 million, the refinery provides an implicit hedge covering 40–50% of Delta's network fuel needs through direct supply control rather than financial derivatives.

Monroe's performance varies with refining margins. In FY2023, when crack spreads were wide, the refinery delivered a $0.10-per-gallon fuel cost benefit — roughly $390 million in annual savings across Delta's 3.9 billion gallons of consumption. In FY2024, however, refining margin compression reduced that benefit to a 3-cent-per-gallon loss, illustrating the strategy's dependence on favorable refining economics.

The strategic logic remains intact: in a severe fuel price spike — the scenario that matters most for airline survival — Monroe provides Delta with direct supply access and insulation from derivative counterparty risk. The tradeoff is capital intensity and exposure to refining-specific margin risk.

Strategy C: Residual Hedging (Winding Down)

A small number of carriers maintain limited hedging positions, generally legacy contracts winding down rather than active programs. Southwest's existing contracts provide declining coverage through 2027. Alaska Airlines maintains limited and largely undisclosed hedging activity. Spirit Airlines held minimal positions before its Chapter 11 filing. No carrier has initiated a new financial hedging program.

How Airline Fuel Hedging Works

Collar Structures

The most common hedging instrument historically used by airlines is the collar — a combination of a long call option (providing a ceiling price) and a short put option (establishing a floor price). In a typical "costless collar," the airline buys the right to purchase fuel at a cap price (say, $2.80 per gallon) while simultaneously committing to buy at a floor price (say, $2.00 per gallon) if spot prices fall. The premium received from selling the put offsets the premium paid for the call, resulting in zero or near-zero upfront cost.

If spot fuel prices rise above $2.80, the airline exercises its call and buys at $2.80 — protection achieved. If prices fall below $2.00, the airline must buy at $2.00 regardless — the cost of that protection. Between $2.00 and $2.80, the airline buys at spot prices with no hedge impact. This structure worked brilliantly when oil was volatile and the put premium (from the airline's floor commitment) was sufficient to offset the call premium. It broke down when volatility declined and put premiums shrank, requiring airlines to pay net premiums for the same protection.

Swaps, Options, and Futures

Other instruments in the airline hedging toolkit include fixed-for-floating swaps (where an airline agrees to pay a fixed fuel price and receive the floating spot price, providing certainty but eliminating upside from price declines), standalone call options (pure spike protection at a premium cost), and exchange-traded futures contracts on the CME/NYMEX Gulf Coast Jet Fuel (Platts) market. Futures carry margin requirements of 10–15% of contract value, creating significant cash collateral demands that limit their appeal for cash-constrained airlines.

Crack Spread Hedging

Delta's Monroe Energy strategy involves a different form of hedging: crack spread management. The "crack spread" is the difference between the price of crude oil (input) and refined jet fuel (output). By owning the refinery, Delta hedges the crack spread directly — when refining margins are favorable, Monroe delivers below-market fuel; when margins compress, the benefit diminishes. This is functionally an operational hedge rather than a financial one, and it eliminates counterparty risk entirely.

Why Collars Became Uneconomical

The economics of collar structures deteriorated for two interrelated reasons. First, post-2008 oil price volatility declined substantially, reducing the value of options and making the short put less remunerative — airlines had to accept wider floors (deeper downside commitment) or pay net premiums. Second, hedging premiums escalated independently of the hedge benefit: Southwest's premium costs grew at a 14.8% compound annual rate from 2020–2024, reaching $157 million — a 30% year-over-year increase in 2024 alone. At that trajectory, premiums would double every five years, far outpacing any expected hedging benefit in a moderate-price environment.

What Airlines Actually Spend on Fuel

FY2024 Fuel Cost by Carrier

The following table summarizes fuel costs across major U.S. carriers based on SEC filings and published operating data:

A notable paradox emerges: Southwest — the only major carrier with an active hedging program in 2024 — paid $2.37 per gallon plus $157 million in premiums, while non-hedging competitors like American achieved an average cost of $2.25 per gallon with no premium overlay. The hedging program that once provided a decisive cost advantage had become a net cost disadvantage.

Jet Fuel Price Trajectory & Forecast

Recent Price History

Gulf Coast jet fuel averaged $2.338 per gallon in 2024, down from approximately $2.60 in 2023 — a 7–8% decline that provided meaningful relief to airline cost structures. The decline tracked falling Brent crude prices ($77 average in 2024 versus $85 in 2023) while the crack spread — the premium jet fuel commands over crude — remained elevated at approximately $26 per barrel, well above the historical range of $15–20 per barrel.

The elevated crack spread reflects structural changes in refining economics: environmental regulation compliance costs, early-stage sustainable aviation fuel (SAF) blending requirements, and refinery capacity constraints. Even as crude oil prices decline, jet fuel may not fall proportionally if the crack spread remains wide.

EIA Forecasts: 2025–2027

The U.S. Energy Information Administration's Short-Term Energy Outlook (STEO, February 2026) projects continued moderation in oil prices:

• 2025: Brent crude ~$62–68/barrel; jet fuel ~$2.20–2.30/gallon
• 2026: Brent crude ~$62/barrel; jet fuel ~$2.25–2.35/gallon
• 2027: Brent crude ~$53/barrel; jet fuel ~$2.10–2.20/gallon (excess supply scenario)

If these forecasts hold, the industry's collective decision to exit hedging will prove correct — premiums paid for protection against price spikes would have been wasted. The risk, however, is a geopolitical shock or supply disruption that pushes Brent above $90 per barrel, a scenario in which unhedged airlines would face rapid margin compression with no protection.

Impact on Airport Revenue & Operations

Fuel costs do not directly appear on airport financial statements, but they exert powerful indirect effects on airport revenue through their influence on airline capacity decisions. The transmission mechanism is straightforward: higher fuel costs compress airline margins, prompting carriers to reduce frequencies, defer new routes, and park older (less fuel-efficient) aircraft. Fewer flights translate directly into lower landing fee revenue, reduced terminal concession activity, and slower passenger growth.

Elasticity Estimates

Based on published academic research and observed airline behavior during price shocks:

• Capacity elasticity to fuel: A 1% increase in fuel costs typically leads to a 0.3–0.5% reduction in airline seat capacity (measured by ASMs). Major hubs show lower elasticity (capacity is "stickier" due to hub economics and slot obligations), while secondary airports experience larger swings.
• Landing fee revenue elasticity: A 1% increase in fuel costs leads to a 0.2–0.4% decline in landing fee revenue, slightly lower than capacity elasticity because per-landing fee rates may rise even as volume declines.

2024 Case Study

The benign fuel price environment of 2024 provided a real-time demonstration. With the U.S. airline fuel bill declining approximately 7% year-over-year, airlines deployed an estimated 2–3% additional capacity (new routes, frequency increases, larger aircraft). Airports in aggregate saw landing fee volumes rise 1–3%, contributing to record passenger throughput at many facilities.

Scenario Analysis for Airport Finance

For airport finance professionals, the key takeaway is that fuel prices function as a leading indicator of airline capacity decisions. Incorporating fuel price sensitivity into 10-year financial projections — rather than assuming flat capacity growth — produces more robust revenue forecasts and better-calibrated debt service coverage estimates.

What the Research Says

Academic research on airline fuel hedging has produced a clear and somewhat counterintuitive consensus: hedging significantly reduces earnings volatility but does not increase absolute profitability after accounting for premium costs. This finding, replicated across peer-reviewed studies published in ScienceDirect, FDIC conference proceedings, and university finance departments, supports the industry's move away from financial hedging.

Key findings from the literature include:

• Optimal hedge ratio: Research suggests 60–70% of expected fuel consumption as the optimal coverage level. Beyond this threshold, the cash collateral requirements and administrative costs of maintaining larger positions exceed the marginal risk reduction benefit.
• Scale matters: Large hedging programs (Southwest's historical approach) demonstrate measurable effectiveness in reducing margin volatility. Small programs may function more as speculation than genuine risk management.
• Collateral costs are underestimated: Airlines frequently underestimate the liquidity drag from cash collateral requirements on derivatives positions. Federal Reserve research has highlighted this "hidden cost" as a significant factor in hedging program economics.
• Operational hedging may be more effective: BCG research suggests that operational strategies — fleet modernization for fuel efficiency, crew training, flight path optimization, load factor management — can reduce fuel burn 2–5% at lower cost than financial derivatives.

The practical implication is clear: hedging is a rational insurance policy during periods of high oil price volatility (such as 2003–2008), but it becomes an uneconomical cost burden in stable, moderate-price environments (2015–2026). Southwest's exit aligns precisely with this academic consensus.

Outlook

The era of active airline fuel hedging has ended. With EIA forecasts projecting Brent crude in the $53–68 per barrel range through 2027, the economic case for reinstating hedging programs is weak. Airlines are instead betting on operational efficiency, capacity discipline, and balance sheet strength to navigate fuel price variability.

Delta's Monroe Energy refinery stands as the sole alternative model — capital-intensive but strategically sound for a carrier of Delta's scale. No other airline has signaled interest in replicating this approach, and the refinery option is realistically available only to the largest carriers with the balance sheet capacity to absorb the acquisition and ongoing capital expenditure.

The residual risk is a tail event: a geopolitical shock, supply disruption, or sustained OPEC production cut that drives Brent above $90 per barrel. In such a scenario, every major U.S. airline would face the full impact of fuel cost escalation without derivative protection. Whether that risk justifies $150+ million in annual premiums — Southwest's implicit question and answer — remains the central tension in airline fuel cost management.

For airport finance professionals, the shift away from hedging introduces a subtle change in risk dynamics. When airlines hedged, fuel price spikes had a delayed and dampened effect on capacity decisions (the hedge bought time). Without hedging, the transmission from fuel prices to capacity reductions will be faster and more direct. This argues for airports to build more conservative fuel price assumptions into their own financial models, particularly for revenue bond coverage calculations.

Changelog

2026-02-24 — Initial publication.