Fuel surcharges and slow-steaming making waves for shippers
The closure of the Strait of Hormuz appears to be changing the frequency at which ...
Photo: Thomas Zaidman
The recent escalation of geopolitical tensions in the Middle East has sent shockwaves through global energy markets, but perhaps nowhere is the impact more acutely felt – and more self-inflicted – than in the commercial aviation sector.
As jet fuel refining margins surge to 20-year highs, the US airline industry is facing a margin squeeze of historic proportions. Yet, the true crisis is not just the rising cost of fuel; it is the systematic dismantling of risk management frameworks that left these carriers entirely exposed to a predictable macro-economic shock.
My analysis of the current market dynamics reveals a stark reality: US jet fuel crack spreads – the difference in price between crude oil and refined jet fuel – have recently ranged from $85 to $95 per barrel.
This difference is now equal to or higher than the cost of the underlying crude oil itself. The last time the industry witnessed this phenomenon was in 2005, following the devastation of Hurricanes Katrina and Rita, events that pushed major carriers into Chapter 11 bankruptcy. Today, analysts estimate that airlines could face a fuel price headwind in the tens of billions of dollars on an annualised basis.
How did an industry so fundamentally dependent on a volatile commodity leave itself so vulnerable?
Over the past two decades, major US airlines gradually abandoned their fuel hedging programmes. Southwest Airlines, once the gold standard for strategic hedging – saving an estimated $3.5bn between 1998 and 2008 – formally ended its programme in 2025, citing the practice as “expensive and unreliable”. Other major carriers had already closed their hedge books years prior, often after recording significant paper losses when fuel prices fell.
This retreat from hedging represents a fundamental misunderstanding of risk management, encouraged by the airlines’ decision to treat their hedging desks as speculative profit centres rather than insurance policies.
When a hedge “lost money” because spot fuel prices dropped, executives viewed it as a failure, ignoring the fact that their actual operational fuel costs were lower. They opted for the short-term benefit of avoiding derivative premiums, betting that a prolonged period of relative stability would continue indefinitely.
In the dry bulk shipping industry, we operate under similar constraints. Bunker fuel is a massive component of our voyage expenses, and the freight market is notoriously volatile. However, seasoned operators understand that you cannot leave your largest variable cost entirely to the mercy of the spot market.
We utilise Forward Freight Agreements (FFAs) and bunker hedging not to speculate, but to lock-in margins and ensure structural resilience. We recognise that insurance is a sunk cost until the moment it saves your enterprise.
The consequences of the airlines’ complacency are now playing out in real-time. Reports indicate that airlines and other large fuel buyers are now panic-shopping for oil derivatives, driving call option volumes to their highest levels in over two decades.
They are attempting to lock-in prices after the surge has already occurred. This reactive strategy is the financial equivalent of buying fire insurance while the roof is burning; the premiums are vastly inflated, and the protective value is severely diminished.
Furthermore, the strategy of simply passing these elevated costs onto the consumer is fraught with peril. While airlines may attempt to implement rapid fare increases, they are doing so in an environment where inflation has already eroded margins for shippers.
In the passenger sector, the elasticity of passenger demand will be severely tested, and budget carriers – which operate on razor-thin margins and serve highly price-sensitive demographics – will find themselves particularly squeezed.
The broader lesson here extends far beyond aviation. As we navigate an era defined by geopolitical fragmentation, supply chain rerouting, and structural commodity deficits, volatility is not an anomaly; it is the baseline condition. Whether you are moving iron ore across the Pacific or passengers across the Atlantic, the failure to proactively manage your core exposures is a dereliction of strategic duty.
The current crisis in aviation serves as a stark reminder to the maritime and commodity trading sectors: risk management cannot be abandoned during times of calm. True market leadership requires the discipline to pay for the umbrella when the sun is shining, because in global trade, the storm is always gathering.
This is a guest post by Thomas Zaidman, CEO and co-founder of Sagitta Marine SA
Comment on this article