Airlines cut back fuel hedging and warn of higher fares as the Iran war keeps jet fuel expensive

Airlines are reducing their fuel hedges and warning passengers of higher fares as the Iran war continues, The Japan Times reported. Jet fuel makes up 30% to 40% of an airline's costs. European and Asian carriers have historically hedged a larger share of their fuel needs than US carriers, so a retreat from hedging leaves them more exposed to spot prices as old contracts expire.

In the United States, carriers are passing costs to passengers. Frontier Airlines, the largest US budget carrier, reported a 71% increase in airfare for the third quarter and said customers continue to book, CNBC reported.

Two forces drive the fuel cost. Brent crude has traded between $113 and $117 this week. Jet fuel also depends on refining capacity, and damage to Gulf refineries during the war has reduced the supply of refined products. When volatility is this high, hedges cost more and protect less, so carriers buy less coverage and raise fares instead.

The fare data is relevant to the Federal Reserve's debate. A budget airline that raises fares by 71% and still fills seats shows that nominal demand is holding up, which is the kind of price pressure the two dissenting Fed officials cited when they voted to raise rates on Wednesday.