Successful hedgers have ideally hedged about 50% of their fuel needs but their advantage really lies in having managed risk proactively years ago compared with their counterparts, which are left with spot prices or minimal hedges ranging around 20%, an airlines analyst at UBS analyst said.
The toll on the airlines industry is significant; every $1/b increase in the price of oil costs Delta about $60 million.

Delta Airlines has hedged 29% of its 2008 fuel needs and only 10% and 5% of it 2009 and 2010 needs respectively, its first quarter SEC filing shows.

The airline relies heavily on crude oil call options for its risk management needs but also has exposure to jet fuel and heating oil swaps.

Northwest Airlines, which for the quarter ended March 31 recorded a net loss of $4.1 billion, hedged the price of approximately 30% of its projected fuel requirements for the remainder of 2008 through a combination of crude oil collars and three-way collars, but all its existing fuel derivative contracts expire on or before the year end (podcast: Nymex crude and heating oil contracts send jet fuel price soaring).

A fair amount of the rise in jet fuel prices are in tandem with firmness in crude oil prices. Platts' WTI prompt-month spot price assessments have risen by about 38% in the past twelve-months.

The toll on the airlines industry is significant; every $1/b increase in the price of oil costs Delta about $60 million (see chart: NYMEX sweet crude oil).

"The increase from $110/b to $115/b in the first two weeks of May alone will cost Delta over $300 million on an annual basis," Anderson said.

While last year, refineries' crude oil acquisition costs have risen by approximately 8%, end-users absorbed a jet fuel price hike of 17% as the pace of jet fuel outstripped that of crude to push crack spreads to levels only seen during after force-majeure events, EIA data implies.

Jet fuel crack spreads currently hover around $30/b, six times greater than the traditional $5/b crack spread. But despite the obviously profitable refining economics, the issue of whether refineries are able to turn cracks into yields is contentious, at least in the US.

Many US refineries are configured to produce light-end products, such as gasoline and naphtha, and initial refinery capital investment and upgrades generally pay off in the long term.

Hence due to infrastructure limitations, US refineries are not nimble enough to switch to jet fuel production even when the economics permits. This puts US airlines at a competitive disadvantage compared with their European counterparts (see chart: Chicago Jet Rack Price).

As diesel - a heavier grade product closer to jet fuel than gasoline is- dominates refinery outputs in Europe, it is relatively easier to switch to jet fuel production in Europe than it is in the US, sources say. This boosts the availability of products in Europe.

In addition, European and certain Asian end-users have advantage when purchasing dollar-denominated commodities such as jet fuel as they collect revenues in Euro, Pound Sterling, and Yen, which are at a premium to the US dollar, industry trade organizations say.

US dollar's weakness has created a $40/b, or a 37% price parity for US-based airlines purchasing jet fuel, the ATA says.

To illustrate, Northwest Airlines, with a hub in Japan, has significant revenue and expense exposure to exchange rate fluctuations.

Mindful of its delicate balance book since it emerged from bankruptcy last May, the company is keen to hedge its currency exposure with financial instruments such as collars or put options.

As of March 31 2008, the company had hedged approximately 48% of its anticipated yen-denominated sales for the remainder of the year with forward contracts.