How Airlines Actually Hedge Higher Fuel Prices

Fuel is a huge expense for airlines, and even on a good day, jet fuel prices are pretty volatile. Throw in two major wars now effecting energy infrastructure, and fuel prices across the board are higher and higher. Airlines have long tried to manage this expense through fuel hedging, using things like swaps and options to hedge against future increases in the price of jet fuel. David Kang, former group treasurer at Qatar Airways, has firsthand experience hedging for a large carrier, and he tells us exactly how it all works. He also explains why airlines use heating oil as a proxy for jet fuel, how much they can make by raising ticket prices and fuel surcharges, and why airlines and oil refineries aren't so different. Read more: War Exposes the Cost of the West’s Retreat From Oil Refining https://www.bloomberg.com/news/articles/2026-09-30/war-exposes-the-cost-of-the-west-s-retreat-from-oil-refining?utm_medium=referral&utm_source=podcast&utm_campaign=odd_lots&utm_content=article JPMorgan and Goldman See Mideast Oil Flows Near Pre-War Levels https://www.bloomberg.com/news/articles/2026-09-30/mideast-crude-oil-flows-hit-98-of-pre-war-level-jpmorgan-says?utm_medium=referral&utm_source=podcast&utm_campaign=odd_lots&utm_content=article Only http://Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlots https://www.bloomberg.com/subscriptions/oddlots?in_source=oddlotspodcast Subscribe to the Odd Lots Newsletter http://bloomberg.com/subscriptions/oddlots Join the conversation: discord.gg/oddlots https://discord.gg/oddlots See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

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• 0:00Tracy Alloway?

  There are some market stories where you want every detail. Joe and I have made quite a few podcasts on that basis. But sometimes you've only got 10 minutes and just want to know what's moving markets fast. That's the Barclays Brief Podcast. Every week, experts from Barclays Markets and Research get you up to speed on what's happening and what to watch next. Concise, focused, and brief. Search Barclays Brief wherever you get your podcasts.

• 0:25Speaker 01

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• 1:44Joe Weisenthal?

  Hey, Odd Lots listeners, the Odd Lots tour continues and our next stop is in Chicago.

• 1:49Tracy Alloway?

  That's right. Joe and I will be at the City Winery Chicago on October 15th for a live Odd Lots recording. Tickets are on sale now at Bloomberg dot com forward slash Odd Lots.

• 1:59Joe Weisenthal?

  And of course, a special thank you to Barclays for supporting Odd Lots Live.

• 2:03Tracy Alloway?

  So that's October 15th at City Winery in Chicago. Get your tickets now.

• 2:11Speaker 04

  Bloomberg Audio Studios, podcasts, radio, news.

• 2:27Tracy Alloway?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

• 2:31Joe Weisenthal?

  And I'm Joe Weisenthal.

• 2:32Tracy Alloway?

  Joe, there's a topic that we've been wanting to do for a while.

• 2:35Joe Weisenthal?

  Yes, yes.

• 2:37Tracy Alloway?

  And you would think it's kind of simple, but actually it's been really, really hard finding a perfect guest for this particular topic because it involves airlines, it involves a particular airline strategy. And airlines, having been a transportation correspondent for like a couple of years, way back in the day, airlines, they're weird about things. They're kind of secretive and they often don't want to talk about stuff.

• 2:59Joe Weisenthal?

  I actually didn't know this.

• 3:00Tracy Alloway?

  Yes.

• 3:01Joe Weisenthal?

  This is a industry thing that I didn't know, that they have a reputation or a pattern of.

• 3:07Tracy Alloway?

  There's like two things in the airline world that I always wanted to know or see. And we're going to talk about one of them today, which is fuel hedging and the sort of inner workings of airline fuel hedging. But the second one, I always wanted to see a completed aircraft contract, like an actual aircraft order that included the discounts that airlines would get because when you see the announcement, like Virgin Atlantic orders, I don't know, a certain number of planes from Boeing or Airbus, it's always at the list prices. So you never actually get a good feel for what they're actually paying for it. So I always wanted to see that, never did in my transportation career. But at least I'm going to satisfy the fuel hedging urge right now.

• 3:47Joe Weisenthal?

  I'm very excited about this episode because fuel hedging by airlines, you know, you hear about it all the time. Or you hear, you know, every time there's a big price, they're usually jumping oil. There's something people talk about the airlines. And we've all said it, right? This is what I'm fascinated by. All of these things that we talk about all of the time. So did they hedge their fuel? And then the conversation stops there and they're like, oh, they did hedge their fuel. So, okay. Or they're, they didn't hedge their fuel. So their stock is going down, whatever. But we all talk about it and have no idea actually what it means. And I'm very fascinated too by, okay, they have traders, right? And when we think of traders, we think of trading floors and all this stuff.

• 4:29Joe Weisenthal?

  But there's so much capital T trading activity happening on the corporate side that almost gets no coverage.

• 4:36Tracy Alloway?

  The other thing about fuel and airline costs, so fuel is, I think, the second biggest cost for airlines after labor, which makes sense, but it's also the most volatile cost. But people always imagine hedging as like, okay, airlines are worried about the price of oil going up. Or to be more specific, the price of jet fuel going up. And so they want to lock in a certain cost so that they don't get caught out, you know, suddenly when prices spike, as they have been doing for jet fuel recently. But at the same time, there's always another lever that airlines pull when you see higher prices, higher oil prices, which is they raise fares or they raise fuel surcharges. So you can get this weird environment where you both lock in a certain price

• 5:19Tracy Alloway?

  and oil starts to spike and maybe the price you locked in is is lower. And you can institute a fuel surcharge as well because as we all know from doing these inflation episodes, if oil shortages, jet fuel shortages, everything else are in the news, customers aren't really going to complain that much if they see a big fuel surcharge on their bill.

• 5:39Joe Weisenthal?

  Airline prices are very expensive these days.

• 5:42Tracy Alloway?

  Yeah, they are.

• 5:42Joe Weisenthal?

  But bookings are really high too. People are flying and I keep seeing all these things. New TSA records, new global records. We are flying a lot in this world. Of course, you know, if you're, if you hedged your oil and your competitor didn't, right? They're going to have to raise prices or if they're not going to lose money. And then it's like, okay, well, here's my opportunity, et cetera. So I'm very curious about how it all works, how it feeds through. And I'm just to a little bit of context, we're recording this September 29th. Back in February or March, when the Iran war broke out, we were all staring at that Singapore jet fuel chart.

• 6:19Tracy Alloway?

  Well, one of us was.

• 6:21Joe Weisenthal?

  One of us was looking.

• 6:22Tracy Alloway?

  I was staring at the Europe jet fuel versus Brent crack spread.

• 6:26Joe Weisenthal?

  Okay.

• 6:26Tracy Alloway?

  You know, that's the difference. Sorry. No, but it is true. Like this has been in the news. And of course, with oil prices spiking again with the shortage of diesel, this has suddenly become a very relevant topic. And you're absolutely right that a smart hedging strategy can be a competitive advantage for airlines. Disclosure, my dad flew for Southwest for a long time. A lot of my inheritance is somewhat unfortunately still in Southwest stock.

• 6:53Joe Weisenthal?

  Pull up a ticker for you right now.

• 6:55Tracy Alloway?

  I don't want to see it, but Southwest famously pioneered a certain hedging strategy that then got copied by everyone else with varying degrees of success. So it can be an enormously important factor for airlines. And I am so, don't show it to me, Joe. I don't want to, don't zoom out. It looks pretty good over like the past couple of years. Just don't zoom out.

• 7:13Joe Weisenthal?

  Tracy, wait a second. It's not that bad. Look, look. It's actually like, I was expecting worse. For those who are just listening, I tilted my computer screen so Tracy could see the chart. It's not as bad as I expected, the way you, the way you led into that.

• 7:27Tracy Alloway?

  Yeah. So I'm very happy to say that we finally found the perfect guest to talk about all of this. Someone who did actual fuel hedging strategy at a major carrier and also did it in an extremely interesting way. We're going to be speaking with David Kang. He is former group treasurer over at Qatar Airways and also an all round oil expert. So David, thank you so much for coming on Odd Lots.

• 7:50Speaker 05

  Happy to be here.

• 7:51Tracy Alloway?

  We are so glad to have finally found you. Thank you so much for staying up late from Singapore. Why don't you just go ahead and tell us who you are and why I just described you as a general oil market expert in addition to being the former group treasurer of Qatar?

• 8:08Speaker 05

  That is a long story. And I'm going to pretty much put into a synopsis where I traded FX in Toronto. I traded interest rates in New York. 425 Lexington was the building I was in for a Canadian bank, which is just down the road from you.

• 8:26Joe Weisenthal?

  Yeah.

• 8:26Speaker 05

  And came back to Singapore, joined NatWest, sent to London to sell government bonds. And then became a bond trader with a Japanese trading house and lost my job in the 1998 Asian financial crisis. So then became an oil broker and they did that for about six, seven years. And 2006, my buddy, who was the MD of JP Morgan for Asia, the head of commodities for them, basically asked me to join him on the desk. And so then I moved from becoming an oil broker to a structure. And then I went to Sumitomo, the Japanese trading house, and became the head of trading for Asian products. And it's just gone from there.

• 9:11Speaker 05

  And I worked in the coal industry. I worked in the LNG industry. So I'm pretty much an energy man, all in. But I think working for Qatar Airways, I learned a lot about the aviation industry and how technical it gets and how interesting it can get as well. It's a very interesting sector.

• 9:31Joe Weisenthal?

  We love airline episodes. Our listeners love airline episodes. So extremely excited about that. Just real quickly, what were the years you were at Qatar?

• 9:39Speaker 05

  2011 to 2013, well, two and a half to nearly three years.

• 9:44Joe Weisenthal?

  Got it. So former group treasurer, what is the basic expectation of that role within the airline? What is, what is the obligation of the treasurer to do for the company?

• 9:56Speaker 05

  My actual title is Vice President, Treasury and Risk Management.

• 10:01Joe Weisenthal?

  Okay.

• 10:02Speaker 05

  So basically I do the treasury and I do the risk management for all financial products, right, of the airline. So I protect the airline financially. That's what a treasurer does.

• 10:13Tracy Alloway?

  So who actually hedges? Because my understanding is that some of the US carriers weren't as prevalent when it comes to hedging as they had been in the past.

• 10:22Speaker 05

  I think the US carrier is not as prevalent is because, right, they got smacked in 2014 and 2015. So they realized, right, Delta recently, 2020, right, lost nearly over a billion dollars. So they were still hedging as well. But most of the marine carriers, especially the small ones, especially the smaller airlines, they just put everything into the surcharge, into the surcharge, just to pass all the cost on to the customer. And that's built into the ticket. Now you will never see a ticket that tells you the percentage of your surcharge. It will just tell you it's a fuel surcharge and then that's it. And some of them even have done away with that. They say that's a ticket price, you pay it and you fly. Then that's it. Don't worry about the fuel.

• 11:07Speaker 05

  You want to get somewhere, we'll take you. So in that aspect, that's when some of the US carriers actually dropped out, right? Because they don't have a hedge book big enough, or rather, they don't have a balance sheet big enough to maybe take on these risks of hedging. And that's what the international carriers do have, is they have a balance sheet. And they have a hedge book that's big enough. Plus, you have a revenue book that's big enough as well. And that's why they can charge the surcharge at the same time as they're hedging the fuel on the consumption side. So think of an airline, very similar to an oil refinery. Okay, so what's an oil refinery do?

• 11:48Speaker 05

  It takes in crude, sends it to this crude distillation unit, the CDU, and all of that comes out on the other side of the products, right? So you've got LPG at the top, then you've got gasoline, and then you've got NAFTA. And then after that, you've got your mill this is jet kerosene, and then your gas oil, and then after the fuel residue. So all these are products that come out from crude. So what, what does a refinery do? They sell the crack. That's the difference between the product and the underlying crude. That's a spread. So they sell the crack, so they sell the product, right? Which is basically, right, producer hedging, because it's called revenue hedging. They've got revenue here, because they're selling the product. They're also buying, right?

• 12:29Speaker 05

  So they're at risk, so they need to buy the, you know, the crude. So the same thing happens with airlines. And airlines, what we do is, I mean, I, I got, I had to get creative for a number of reasons, which I won't go into, but because of those reasons, we had to sit down and really think about how hedging is going to be, because we had a 6.6 bit in balance sheet, and we were consuming, the first year of consumption was something like anywhere from 24 to 27 million barrels, the next year was added one or three more million barrels, and then added a, so we hedged, we look at, we look, we forecast out the three years.

• 13:10Speaker 05

  One of the reasons why we did that was because we were accepting 1.5 aircraft a month. And basically, we were planning new routes, probably once every two months, we'd begin a new route, so we could schedule all this. We, we knew what was coming in, we knew the planes that were coming in. So our consumption was going up at a steady rate now. So we understood what we were doing, and so we also saw that the world was, you know, was looking good, people were trying to fly again. And so, you know, we started buying at the bottom and hedging. But sometimes you have to look at the price freely and start to, start to think about it, and what's your probability when oil was a triple digit?

• 13:54Speaker 05

  Because you use Brent as your proxy, because jet fuel market is too thin. Or the American carriers use heating oil as their proxy, not jet, because jet, like I said, the jet market is too thin, Northwest Europe, SIF jet. Yeah, it's a very thin market now. So, you know, you, you can't, you cannot use these instruments to help you hedge, right? You have to go and use Brent as your proxy, where it's liquid, and there are people at both sides of the table for Brent. I mean, if you go to a table or a hit where there are airlines, they're, they're the only buyers of jet fuel. So you've got a ton of like refineries saying, yeah, I've got their fuel for you. I've been Glencore, Mercury, the list goes on, right?

• 14:39Speaker 05

  VTOL, they'll also jet fuel for the airline. Morgan Stanley, we do as well. I've dealt with Morgan Stanley, Goldman Sachs, I bought physical jet from them at certain locations around the planet.

• 15:05Tracy Alloway?

  There are some market stories where you want every detail. Joe and I have made quite a few podcasts on that basis. But sometimes you've only got 10 minutes and just want to know what's moving markets fast. That's the Barclays Brief Podcast. Every week, experts from Barclays Markets and Research get you up to speed on what's happening and what to watch next. Concise, focused, and brief. Search Barclays Brief wherever you get your podcasts.

• 15:30Speaker 01

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• 17:36Joe Weisenthal?

  Okay, so there's these various entities that you can trade with. Let's start with, what is the most plain vanilla thing, the, the sort of modal trade, perhaps, so to speak, of how, I imagine there are all sorts of complex way, complexifiers, et cetera. But what is the sort of core, most common trade that one would do? How does it, walk us through the steps of it?

• 18:00Speaker 05

  Well, there's a swap. And the swap is actually a derivative of your futures market. So from your futures market, you can tell what the swap rate is, right? Two months out. So this is your swap rate for April, it takes into account May and June for the futures. And that's your April swap rate. So you would buy swaps. And when you buy swaps, it's symmetric. So, I mean, it could go up, or it could go down, and you could, you know, and if the price of oil goes up, you're looking good, because you've locked in your exposure, and you've locked in your cost. But if it goes down, you bleed. So it's best to do swaps when I think oil is low, and it's, you know, in the low double

• 18:43Speaker 05

  digits, somewhere around $25, $35.

• 18:46Joe Weisenthal?

  Yeah.

• 18:47Speaker 05

  Not an issue to buy swaps. But as it gets, it moves further up, around $70 to $80. And I think everybody starts to think about that risk going up, because how long will oil stay elevated? So they'll try and do options. So they'll buy call options. But the thing is, you have to pay, for that insurance, you have to pay a fee, you have to pay a premium. So some airlines are, for lack of a better term, too cheap to pay for their calls. So they fund it, all right, by selling puts. So that's how they can afford a zero-cost caller. And they can use that, so you can buy options, you can do zero-cost callers, and you can do swaps.

• 19:30Speaker 05

  These are pretty much plain vanilla. But the stuff that I used to structure for JPMorgan was a target redemption note. And then you have a vanilla side on the option, and you have the exotic side. So that's where it gets a little bit more complicated.

• 19:46Tracy Alloway?

  So the idea is that we have banks that are actually selling target redemption notes for the purposes of fuel hedging to airlines?

• 19:54Speaker 05

  Okay, on the vanilla side, you do a zero-cost caller with the airline, if on the back. But on the back of it, I structure the note as in a target redemption note. That means it's basically going to redeem in five months, redeem in one year, or redeem in two years. So off the back of that, on the exotic side, I can get you a better rate where you can buy the oil. And I could get you better rate for your options, your call options. That means I can basically pull the call options, but they're actually inside the money, it's like they're in the money, call options, that I can sell to you, but with this exotic behind that.

• 20:39Speaker 05

  And so you, a lot of these exotics, they're called extendables. Some of them are just like selling, like what I did, right? A strangle. That means basically, I sold both wings. I sold calls at the top, you know, above 120 bucks. I sold puts below 80 bucks, right? And wherever oil stayed in between, I would profit from that, because the banks would be paying me the premium.

• 21:06Tracy Alloway?

  It's so funny, because I'm so used to thinking about those sorts of notes and structured products in Asia as being sold to like, yeah, to, you know, mom and pop, someone betting on like a big move or lack thereof in the COSPI, something like that. I hadn't even thought for a second that, that it could be related to fuel hedging. David, can I just ask, you said something really interesting earlier, which is that most of the fuel hedging is done via Brent trades as opposed to jet fuel, because the actual jet fuel trading market is so thin. Does that mean that airlines end up being exposed to big differences between, I guess, the direction of the price of jet fuel and the price of Brent?

• 21:49Tracy Alloway?

  Because sometimes, you know, that difference does change very fast and very quickly, as we saw earlier this year.

• 21:56Speaker 05

  Fair comment, right? I would say yes and no. So yes to the fact, right, that we, as an airline, what do we burn? We've been jet A1. So basically, we're exposed to the jet fuel market. We should hedge with jet, but the jet market's too thin. So that's why we use the Brent market. Now, for lack of a better term, again, it's better to have a hedge on than no hedge at all. If you cannot hedge in jet,

• 22:25Tracy Alloway?

  Right.

• 22:25Speaker 05

  then you're totally exposed, right? So for lack of a better proxy, right? People use Brent because it's the international carrier. Some airlines use, like in the United States, some of them use WTI, West Texas Intermediate. Some of them, almost of them, use heating oil because it's very close. So the heating oil spread between the jet and heating oil in the United States is tighter than what you would get. I mean, just recently, you had heating oil versus TI go through $100 for the crack. It was at like $107, right? That's like insane amounts of money, right?

• 23:06Speaker 05

  It's 230 bucks per barrel, while crude is trading at 110. And then Brent's trading at nearly 120. And, you know, in metric tons, you've got, you've got probably like a $74 to $75 crack of gas oil in Europe. I'm not sure where the jet market is in Europe, because it's so hard to pin down. There's no real open market for it. There are agencies like Argus or Platts, and they will print a number. But, you know, the numbers that they print sometimes have no offer on the back of that. And there's a bid, and then they just up it, and they assume that there's a, there's an offer.

• 23:50Speaker 05

  But sometimes the market's offered and there's no bid, and then they just pick a number. So it's very arbitrary. So that's the reason why most people don't trust these agencies, right? With their jet forecasts. So they move either something they understand better, and it's more liquid, like London Gas Oil, heating oil in the United States.

• 24:10Joe Weisenthal?

  It's, I just pulled up a chart, speaking of charts, on the terminal. And it's very interesting, because if I go back, normalize it to early February, so before the war started, in March, basically Brent crude rose 50%. Singapore jet fuel rose over 100%, or more than doubled during that time. I could imagine just start there, like at least for that period, from, say, March to the middle of May, you could have been a well hedged carrier hedging Brent and still bleeding a lot if what you're buying is Singapore jet fuel.

• 24:48Speaker 05

  That's true, but airline buying Singapore jet fuel except to the incumbent.

• 24:54Joe Weisenthal?

  Wait, say that again. Wait, can you explain? What is, when I look at, tell me about this chart that we always pull up. Is it not that meaningful?

• 25:01Tracy Alloway?

  Stop saying "we," Joe.

• 25:03Joe Weisenthal?

  Sorry, that "I." When I say "we," I mean like all the people I talk with on the internet, not me and Tracy. Tell me about this chart that I've been looking at in ignorance.

• 25:13Speaker 05

  Singapore jet is a different animal, because there are certain trading houses with certain oil majors that control that market very heavily, because they know that the only buyers of this market are the airlines.

• 25:28Joe Weisenthal?

  Right.

• 25:29Speaker 05

  And how would I put this nicely? Sometimes people talk to each other,

• 25:34Joe Weisenthal?

  Okay.

• 25:34Speaker 05

  and they agree on something. And then what they agreed on happens because all of them are looking the same way and are trading the same way. So it's not a very objective market, it's a very subjective market. And that's why, like I said, only the incumbent in Singapore actually does some jet fuel hedging. All right? Everybody else does not.

• 25:59Tracy Alloway?

  How much money can airlines actually make from raising just the fares and the fuel surcharges? Like, why even bother to hedge if, in theory, I mean, I'm sure you have thoughts on the price elasticity of air travel, but if in theory I could just fully pass on the additional fuel cost to the customer, why do I need to hedge at all?

• 26:21Speaker 05

  Hedging helps, like I said, when oil prices are low, because when oil prices are low, your fuel surcharge can't do anything. You cannot charge the person on the fuel, right? And your ticket price has to be low, because oil is low. And usually, when oil is low, usually, the global economy is not doing well. It wasn't the case in 2014 and 2015, but most of the time in 1998, in 2008, in 2020, and right now, what we're seeing with the, you know, with the 2026 war between Iran and the US and Israel, a lot of times, right, it's something to do with the global economy and geopolitics.

• 27:02Speaker 05

  So what I would say is that hedging has its uses, because it can protect you from a low as it moves up. So you're making money and you've locked in your cost. So that's where using swaps and calls and zero cost calls work. Now, at the same time, because oil is going up and it's part of what is, what makes up an airline, you can charge the surcharge as well. So the airlines that want to make money can actually do that, right? The surcharge doesn't go through P and L, but the hedge goes through P and L.

• 27:43Speaker 05

  So then, right, if the hedge goes up, right, nobody sees the surcharge coming in. Nobody sees the revenue from there, but they see the revenue coming in from the hedge. So if you've done it well, and you've bought, and the market's still going up, economy's improving, everybody wants to travel, people are paying up, they don't really care right now how much the surcharge is, you can make twice as much money while you can. But at the same time, right, you've got to be very aware, and situationally aware, right, that, like I said, it's like a refinery, right? Your ticket is the product. In that product, right, you have the ticket price. Now, nobody tells you what the ticket price is, but right now, I'll tell you, right,

• 28:27Speaker 05

  because of the fuel surcharge, the ticket price is probably 25% of the ticket charge.

• 28:31Joe Weisenthal?

  And that's true, that would, you would say that would just be generally true globally, on average, right now.

• 28:37Speaker 05

  Pretty much.

• 28:38Joe Weisenthal?

  Buys a ticket is 25%. Actually, you talked a little bit about the cost. So overall, when you say, we talk about the cost of a flight or the cost of running an airline, is fuel basically 25% of the cost? Tracy mentioned that it was number two after labor. But for Qatar Airways, how significant was this one component for them?

• 29:00Speaker 05

  24%.

• 29:01Joe Weisenthal?

  Did you say 44%?

• 29:03Speaker 05

  Yes, I said 44%. That's the reason why I had to get creative.

• 29:06Joe Weisenthal?

  Wow.

• 29:07Speaker 05

  It was huge for us. I mean, you know, if, if you're like the rest of the world's airlines, right, you still anywhere from 25, 30% of your cost is jet fuel. And then labor is a big cost.

• 29:17Joe Weisenthal?

  Yeah.

• 29:18Speaker 05

  But labor for us was a low cost, very low cost, right? Because we were getting a lot of crew. And we were paying them decently, but not, you know, but prices would be better in Doha than it was back in their home country. So we had a lot of crew and, you know, cabin crew and flight deck as well from Eastern Europe, from Asia, and, you know, we kept the cost low on the, on the labor side. But our cost, our exposure to the, you know, to the barrel, to jet fuel, right, was 44%. That's nearly half your expenses.

• 29:54Tracy Alloway?

  Wow. So you mentioned having to get creative, and this is actually the way you came to this particular program. But you published a paper all about a particular hedging strategy that you undertook while you were at Qatar. Why don't you, just to begin with, explain to us the problem that you were trying to solve for your employer here?

• 30:17Speaker 05

  I'll just run this anecdote for you, just a little story. I'll keep it very short, right? But basically, our hedge book was down a very decent amount of money, something like $280 million. So that's, that's when I came on board, and I, and I had this hedge book, and we were down $280 million. And as I was learning about the airline, because I come from a trading background, you know, I don't, I'm not a corporate guy. So I have to learn how to be a corporate person, and I have to learn about what the treasury's about and what the hedge book has and how I can add value. And in that time that I was trying to learn and add value, we were down to, we were at one point down $360 million.

• 31:03Speaker 05

  And so the CEO calls CFO and I up to his office to chat with us. And basically, he says to the CFO, Daniel Ho, when he says, damn, why are we down $360 million? And I just come on board, right? And I'm the group treasurer and he, you know, do you know what a hospital pass is? Basically, you pass the ball and, you know, everybody's running for it. Everybody can see you're going to get the ball and you get smacked. So that was me. So I got the hospital pass from Daniel and I talked to the CEO and I said, look, right, you know, chief, when oil goes up, right, we make money on swaps, right? You know, we lose money in the physical because we don't pay more, but we're floating in our exposure.

• 31:47Speaker 05

  And then when oil comes down, yes, we're losing on the hedge book, but jet fuel comes down as well. And when jet fuel comes down, we're making on the physical. And he said, look, you are losing on the hedge book. You're also losing on revenue management because, right? If oil is coming down, that means the probability is at that time when I was at Qatar Airways, the probability is that the global economy is not doing too hot. So if it's not doing too hot, right? We will not be able to have people sitting in their seats. We cannot fill up the plane. So the aircraft is not going to take off. If the aircraft doesn't take off, we're, we have fuel that we haven't burned. So we're losing money. We're losing money on revenue,

• 32:32Speaker 05

  on the ticket, and we're losing money in the hedge book. And that was a double whammy. So the CEO was very, it's tough. He said, David, you're the group treasurer. I do not want to see red anymore on the balance sheet. Do you understand? So that's when I came away from that meeting with him, right? With this now awareness that I actually had to do something where it's either become a flat or make some money, but no red. So that's one of the reasons why, right? I did what I had to do and get creative.

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• 36:35Tracy Alloway?

  So this actually reminds me, one of the first things that I learned as an airline correspondent, which was someone who had been in the business for a very long time as a airline consultant, basically told me that it's very much like running a grocery business in the sense that you have these fixed perishable costs. And if you don't sell everything right away or fill up the capacity of the airplane, all those costs, you eat them, right? It's like, you know, I don't know, you have like 10 bags of lettuce. If you don't sell it on that day, you lose all that money. And so I always thought of airlines and air travel as this very perishable industry, even though one big part of the expense is very, I guess, fixed cost in the form of aircraft.

• 37:20Tracy Alloway?

  But yeah, you have to get people in the plane at a particular price on a certain day. Otherwise, you just lose money.

• 37:28Joe Weisenthal?

  Right. I guess the idea is airline capacity is not something that you can hold in inventory.

• 37:35Tracy Alloway?

  Right, exactly.

• 37:36Joe Weisenthal?

  Yeah, it's super interesting and I hadn't really thought about it that way. So, okay, your boss comes to you and says, stop losing money. It's like, I guess every boss of every trader everywhere would like to say that.

• 37:48Tracy Alloway?

  Do better.

• 37:49Joe Weisenthal?

  Yeah, now you have your suddenly do, stop losing money mandate in this environment. What do you do after that?

• 37:57Speaker 05

  I sat down with my deputy treasurer and, you know, talked about it and looked at it from many different angles. And, you know, then of course, me coming from an oil trading background, I look at a refinery and I see that they're a consumer and they're a producer. And so I said, look, as an airline, we have to produce something. We're producing a seat for you to sit on to get you from point A to point B. So we're producing that seat. But what's in that seat? What goes on? So we kept on extrapolating until the point where we got the ticket. And then in the ticket, you have your fuel surcharge. And we ran correlations between the fuel surcharge and Brent.

• 38:39Speaker 05

  And the correlations came back around 75%, which is significant.

• 38:44Joe Weisenthal?

  Yeah.

• 38:44Speaker 05

  And of course, for our hedge, when we buy the swap, right? We're 88% hedged, about 88% correlated with jet. So the fuel surcharge is 75% correlated with jet and our Brent is 87% or 85% correlated with Brent. So we use Brent as a proxy. And in the surcharge, right, we now knew there was a correlation there. So that we can hedge. That is a product. That is something we sell. So in that ticket, we have a product and we have revenue. And that's where you do revenue hedging. So you have consumption hedging and you have revenue hedging.

• 39:29Speaker 05

  So that's how we came, you know, we really extrapolated out the curve. We, you know, we sat down for a couple of weeks and really brainstormed and we came up with this. And from there, we went to the revenue management department, talked to Anko Vandervoorff, who was the senior VP at that time of revenue management and his right-hand man, Sven Larsson. And we talked about this and even they didn't realize, right, that they were actually, they actually were long oil. I, I, I actually said, you know, you're long oil. That's how you get your revenue, right? Because you've built that long oil.

• 40:06Tracy Alloway?

  Through the surcharge, right?

• 40:07Speaker 05

  Yes.

• 40:09Tracy Alloway?

  Wait, so the basic idea was that because the airline was in fact long oil, because you could charge higher prices when oil prices went up, that you could use that to buy a certain option strategy that would have been riskier without the extra operating revenue? Is that what you mean?

• 40:31Speaker 05

  Absolutely. All right. So.

• 40:33Tracy Alloway?

  Okay.

• 40:33Speaker 05

  What happens is now we're long fuel on one side on the ticket. We're short fuel because to fly the plane or to fly the aircraft, you need jet fuel to take off. So we're short fuel on one side, but long fuel on the other side. So now, what do we think about? We think about doing like a producer hedge. And that's one of the reasons why we did the strangle where we sold calls. Now, uh, when we sold calls, they were not naked. Because, right, they had the surcharge in there, protecting that call. So yes, if we got, if the calls got taken out or, you know, they were exercised, yes, a surcharge would take care of that call, of those calls that you sold.

• 41:18Speaker 05

  So we're protected there. Now, on the downside, we've sold puts. Now, if the oil goes down and we're selling puts, right? It's good for us anyway, right? So yes, we'll eat some loss on the, on the puts, but the thing is we're going to be buying cheaper jet. Cause it's going down in price.

• 41:37Tracy Alloway?

  Right.

• 41:38Speaker 05

  So this whole strangle or this, this strategy, there was no, for lack of a better word, nudity to it. And there were no naked parts to it. And we covered all bases. We looked only at direction, not so much. We didn't take a view of where oil was going to go. What we did was, right, we understood that there would be a price mean reversion. It was holding at a hundred bucks. It would do that for five months and we would come away either flat, slightly losing a little bit of money or making a decent amount. And we kind of got lucky.

• 42:18Tracy Alloway?

  It had to stay within a, a certain band.

• 42:20Speaker 05

  Yes.

• 42:20Tracy Alloway?

  Right?

• 42:21Speaker 05

  Correct.

• 42:21Tracy Alloway?

  Okay, okay.

• 42:22Joe Weisenthal?

  So this is very interesting. I guess from the perspective of any, you know, when, again, I think in our heads, someone hears the word trader.

• 42:33Tracy Alloway?

  Yeah.

• 42:34Joe Weisenthal?

  And they think someone at their computer trying to make money, right? And every day you're trying to get more cash, et cetera, however you want to do it. How much then of the job of the trader at any corporation, not the speculator, but the someone who's using the markets for their own business needs? How much then is the job to actually identify the natural trade of the corporation? So what you discovered or what you were able to clarify is that because of the ticket charge, Qatar Airlines was structurally long branded. So that allowed you to create this sort of position without a view.

• 43:18Joe Weisenthal?

  So how much is the job of anyone in your seat either today or at a different airline or maybe even a different company who is in a trading capacity to truly understand the business so that they understand, you know, what is the company's sort of, I guess, natural exposure or natural direction to any given market?

• 43:40Speaker 05

  I've only worked for an airline in a corporate sense, so I can only talk about that. But what I can say is that the word hedging is a bit of a misnomer.

• 43:51Joe Weisenthal?

  Okay.

• 43:51Speaker 05

  It's actually a view, right? It's actually a trade. And it's a good word that you said that, you know, these traders in the corporate, they don't call themselves traders because, right, that sends compliance into a fit. Because they believe that hedging is good for them. So compliance goes ballistic and, you know, they'll say, no, no, we're not trading, we're hedging. So what do we hedge? We're a consumer. We have to buy whatever we're consuming in order to lock that price in. If we're a producer, we've got to sell, right? To make sure, right, we lock in, right, our revenue that we made at the top.

• 44:30Speaker 05

  So the word trading is not very well accepted at corporates.

• 44:35Joe Weisenthal?

  Okay.

• 44:35Speaker 05

  They don't believe in it and auditors don't like it either. But I think if I can find that little bit of a tweak where I can get something as a product and the product is linked, right, to the underlying risk that I have, which is exposure to jet fuel, I'm sure in another company, you can find links like that. And then you can put on hedges, right? They'll protect you, just like the food market, right? You know, it's like it's perishable, right? It's got to be within one day. I'm sure, right, that somebody's going to be able to find out, right, that with certain techniques, they can prolong that. And by prolonging that, right, now they're, they're long vegetables. They're not short. Something in that vein.

• 45:19Tracy Alloway?

  I just want to hear the sort of stories of how much money you made from this particular hedge and what happened at Qatar Airways when, you know, when this was, was unveiled to your management.

• 45:33Speaker 05

  Okay, it was a hundred and thirty million dollars. And actually that year, our revenue side lost sixty-five. So if not for my hedge, we would have lost money. But on top of that, because of my hedge, right, going out the curve, we may have lost that money at that time, but because of that hedge and making money, I was able to give the revenue department the ability to cut fares. So Qatar Airways used to be a follower. They'd follow EK, sometimes even EY, right? So EK is Emirates, EY is Etihad. So they were always a follower. And when Emirates cut, then they cut fares, right? When Emirates put up the fares, they put up their fares.

• 46:17Speaker 05

  But I worked with Uncle and I gave him advantage, first mover advantage, and he took, he took advantage of that. And he cut fares by twenty percent and then we led the market, right? And sorry to say, bums on seats. We sold. I mean, you know, we had every plane that was nearly eighty to ninety percent full. So we were, I helped give them that ability and they were able to make use of it. So I think as with anything that you do in life, you always try to add value to that food chain.

• 47:05Speaker 01

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• 47:47Speaker 06

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• 48:29Speaker 06

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• 48:40Speaker 07

  This is Robert Smith from Business History. If you're listening to this, there's a good chance you're a small business owner. And like every small business owner, you started with a dream to do what you love and watch it grow. What you probably didn't dream about, keeping up with cyber threats. That's where Mastercard can help with access to tools that help identify cyber threats to better protect your business. Building your dream business, priceless. For cybersecurity in a changing world, there's Mastercard.

• 49:06Joe Weisenthal?

  Learn more at mastercard.com/smallbusiness.

• 49:10Speaker 08

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• 50:18Tracy Alloway?

  Since you brought up the other Middle Eastern airlines, I'm going to ask what is a potentially sensitive question, but I'm sure a lot of people will be wondering about this. There are many sensitive questions I could ask when it comes to the Middle Eastern airlines, but this one in particular, the UAE, Qatar, a lot of those regions are supposedly not drowning in oil, but they have a lot of oil. Why the need to source jet fuel externally in the first place? Why couldn't, you know, these countries subsidize? Subsidize? I'm using air quotes here for those watching on video. Why couldn't they subsidize their airlines with, I don't know, exchanging Brent with

• 51:00Tracy Alloway?

  a refinery down in wherever for a lower-priced jet fuel for their airlines?

• 51:06Speaker 05

  I think with the airline industry because you have a hub and then you have your spokes, right? So you fly all over the world, but everybody flies through the Middle East. Now, we can only take so much jet fuel on one aircraft and we go long haul, we've got to fill up on the other side. So, I mean, it's the other side who basically commands the price. So it's not us, right?

• 51:32Tracy Alloway?

  I see.

• 51:33Speaker 05

  So yes, I mean, you know, with Qatar Petroleum, all right? Okay, just, it's not the most pleasant of experiences dealing with QP because they had a subsidiary named Wokod, W-O-K-Q-O-D, Wokod. And they used to sell us jet fuel at 3.65 a gallon. And when we fly to Dubai and lift jet from Dubai, Chevron's selling it at 295 a gallon. So we were getting screwed 70% by our own national petroleum company.

• 52:09Tracy Alloway?

  That's amazing.

• 52:10Speaker 05

  So, you know, when we took delivery of the 787s, the Dreamliners, we told the world that we were using them for training by going to Dubai and back, right, to train the crew. But actually, we were going there, literally, we flew there on fumes, probably like, you know, we had like five tons or less, maybe four, three or four. We're flying there on fumes and literally we cannot circle Dubai Airport once. We have to land straight away. And when we land, we can lift 100 tons of fuel.

• 52:47Tracy Alloway?

  You were tankering fuel from Dubai?

• 52:49Speaker 05

  Yes, yes. And we were putting it in our own tanks at Doha International Airport. And we had about, storage capacity of about nine, 10 million gallons. So, you know, that's pretty decent. It will be a day's cover for the airlines should we not get any jet fuel from anywhere else, right? We can still fly for a day.

• 53:12Joe Weisenthal?

  Interesting. Give us your sense right now, the people who are in your seat or equivalent seats elsewhere in the industry, give us an update of what they are dealing with right now, September 29th, between the ticket revenue side, which I assume is booming, and then the price of, you know, the surging price of oil and refined products.

• 53:33Speaker 05

  I think with respect to airlines or respect to...

• 53:37Joe Weisenthal?

  Yeah, with respect to airlines. What is the, what is the, how are, how are they doing on the sort of fuel side these days?

• 53:43Speaker 05

  I think they're very, the consumption hedging, and they're mainly passing it through to the customer right now because they don't know what to do. Because, you know, a lot of airlines in 2020 lost a lot of money. Fuel hedging, Delta dropped over $1 billion. Let's just say a very highly ranked Asian airline basically lost nearly $2 billion. And, um, yeah, so, you know, it's not easy to work or to see what the geopolitics are bringing you, but what you can do is look, right? At the end of the day, it's a pass-through to the customer. So you use your ticket, right, as your weapon of choice.

• 54:29Speaker 05

  So, and that's pretty much what I did as well, right? This pricing mechanism that I, you know, kind of thought up, I basically weaponized the revenue.

• 54:39Tracy Alloway?

  Has anyone else used that structure since?

• 54:43Speaker 05

  You know, something I have no idea, but I was going to, I was going to attend a Treasury Conference in Singapore to talk about what I had done. And my CEO said, no go, you're not talking at that Treasury Conference, right? Because we do not want to give our secrets away. Because nobody else is doing it. And one of the reasons why they're not doing it is because, again, it's the auditors, it's the sovereign wealth funds that probably own some of the airlines that are not, they don't feel it's kosher to sell oil because you're a consumer. I think it's a lack of understanding for most people and a lack of understanding for

• 55:26Speaker 05

  most treasurers in their roles there, that they cannot think like a horse with blinders. They cannot only see that basically by hedging, you're hedging the airline and keeping it safe. All you see is buying fuel.

• 55:40Joe Weisenthal?

  Right.

• 55:41Speaker 05

  There's other aspects of the airline as well, and you've got to take all that into account and then cook up a strategy of your own and, you know, create something so that you can benefit from it.

• 55:53Joe Weisenthal?

  So I realize that this isn't strictly an airline question right now, but it's in the news. It is a refined products topic. There's all this talk and it could happen, this idea of, you know, we have this diesel crisis in the United States, diesel prices are surging, it's possible that the US is going to implement a ban on diesel exports. When you hear this, what do you think about?

• 56:20Speaker 05

  Okay, maybe it's not right for me to say this, but I think of Taco. You know, Trump...

• 56:25Joe Weisenthal?

  Yeah, yeah, yeah. Yeah. But specifically on this question of whether a country will ban the export of a refined product and how it ripples through markets.

• 56:36Speaker 05

  Well, Russia's done that and China's done that somewhat, all right? But Russia is the second biggest diesel exporter on the planet. So a lot of diesel has been taken out of the whole complex. And honestly, right now, Europe's pretty short and that's one of the reasons why London Gasol has just gone through the roof. Also, this export ban, a lot of it was rhetoric. So because of that rhetoric, right, you had diesel or heating oil in the US come down instead of go up. Because a lot of the Gulf or Pad 3 in the United States is the kitchen. That's where all the refineries are. And so that's where all the product comes out of.

• 57:21Speaker 05

  New York Harbor, right, it's, you know, they don't have any access. They maybe have a small pipeline, but that's about it. For them, it's a seaborne trade for the Gulf to sell internally, right, to New York for their jet fuel or their diesel or their heating oil. So a lot of times what the East Coast does is they buy diesel from Europe in order to make sure that they don't have, you know, a shortage at any one time. And so it now adds to the point, right, that you've got the East Coast of the United States buying diesel and London Gasol, of course, is benefiting from that and heating oil is now taking a hit.

• 58:05Speaker 05

  And most of the heating oil, right, is going to Latin America anyway. So not very much is going to Europe, probably like 500,000 barrels per day. It's going to the ERA, 100,000 barrels a day to the UK and maybe 150,000 to the rest of... Oh, sorry, ERA is Europe. So, yeah, it's not, it's not super significant there from the Gulf, but I think there's a US Gulf Coast trade where, you know, they'll run an Aframax or they'll run a, you know, long-range two or maybe even a Panamax through Panama Canal and they'll transport, right, that product, right, to Asia.

• 58:47Speaker 05

  So it's going from like, you know, the US Gulf Coast to Chubu in Tokyo or in Japan.

• 58:53Tracy Alloway?

  Can't wait to heat my house in Connecticut this winter. Um, David Kang, thank you so much for coming on Odd Lots. I should mention the paper if anyone wants further details. It's available on SSRN. It is Fuel Hedging in the 21st Century: What Every Airline Can Learn About Proactively Shaping Revenue. Thanks so much, David.

• 59:15Speaker 05

  Thank you very much for having me. Appreciate it.

• 59:30Tracy Alloway?

  Joe, I'm so glad we finally got someone to talk about fuel hedging in detail. I have to say, the story about Qatar Airways tankering oil from Dubai back to Doha is one of my now all time favorite airline fuel stories. My top story, I've told this on the podcast before, but I think it's been years, was when Silverjet, the business class only carrier, sort of luxury airline carrier, when they were about to go out of business, their creditors cut credit lines for fuel spending. And so the CEO of the company was putting the entire fuel bill on his personal credit card.

• 1:00:09Joe Weisenthal?

  You hear about stories like this.

• 1:00:10Tracy Alloway?

  And the personal credit card, the rewards points were for British Airways miles.

• 1:00:16Joe Weisenthal?

  Oh.

• 1:00:17Tracy Alloway?

  So he ended up with a bunch of BA miles.

• 1:00:20Joe Weisenthal?

  That's amazing. That's great. That's FedEx got its start too, because with a bunch of like the founder putting a bunch of the debt on his personal credit card. It's a pretty wild to think about. I thought that was great. I think the really interesting thing from that episode to me was, I know, I guess it's interesting, and I'm not surprised, they don't like the term traitors in the corporate context, but that's what they are.

• 1:00:45Tracy Alloway?

  Right. You have to have a directional view.

• 1:00:47Joe Weisenthal?

  Selling calls and buying puts and all this stuff. But the idea is, again, like, you know, a trader in the typical environment is just seeking to max out P and L. And this idea that it's like, you don't have to take a directional view if you really understand the core, I guess, structural position of the company already on the market. And the job is to balance that out. And you can understand how complex it gets because, you know, this idea that like, okay, the revenue could go up during times of higher oil prices. Figuring out that sensitivity, how much you can pass through, you think of like, well, an airline, of course, they're short oil, right? Of course, they're implicitly short oil.

• 1:01:29Joe Weisenthal?

  And that in certain environments, they could actually be implicitly long oil and you have to like really identify that exposure. I think that's really interesting.

• 1:01:36Tracy Alloway?

  No, totally. I think this is an underappreciated aspect of the airline business, which is there is that other lever to pull. And it's sort of, it reminds me of the bakery episode.

• 1:01:46Joe Weisenthal?

  Yeah.

• 1:01:46Tracy Alloway?

  Remember where we were talking about how a baker in Chicago increases his prices when the cost of eggs goes up because everyone sees it in the news? There's a lot of elasticity, I guess, baked in to prices for airfares when you're having a big oil shock. But on the other hand, if we, you know, evolve into actual physical shortages, which is a possibility.

• 1:02:09Joe Weisenthal?

  Yeah.

• 1:02:10Tracy Alloway?

  I guess we'll see what happens then.

• 1:02:11Joe Weisenthal?

  When I, just right now, thinking about the airline industry seems to encapsulate so many things with the economy right now, which is that like, the cost of everything is going up. And also people are flying like crazy. I mean, the numbers are really huge. And so it's like, at least if you were to only look at the airline industry, you're like, this, the global economy, the economy is hot. People are, the people look at these sticker prices, they complain about how they know prices are going up, and yet total travel just keeps going up. It does not seem to have dented activity at all. This is a hot economy.

• 1:02:48Tracy Alloway?

  All right. Shall we leave it there?

• 1:02:50Joe Weisenthal?

  Let's leave it there.

• 1:02:50Tracy Alloway?

  This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

• 1:02:56Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at the Stalwart. Follow our producers, Kermit Rodriguez at Kermit, Arma Dashel Bennett at Dashbot, Kale Brooks at Kale Brooks, and Kevin Lozano at Kevin Lloyd Lozano. And for more Odd Lots content, go to Bloomberg.com/oddlots, where we have a daily newsletter and all of our episodes. And you can chat about all these topics 24/7 in our Discord, discord.gg/oddlots.

• 1:03:20Tracy Alloway?

  And if you enjoyed this conversation, if you want Joe and I to do more episodes on the airlines, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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