The latest trading updates out of Virgin Australia and Qantas have brought the importance of oil prices, but also oil hedging, back into sharp focus. Airlines are not the only companies that engage in the practice, but few rely on it more.
The Middle East conflict has pushed jet fuel margins from roughly US$20/bbl to around US$120/bbl, and because Qantas is heavily hedged on crude but largely unhedged on refining margins, the impact has flowed straight into its cost base – at least for now. Virgin Australia also released an update, but with a more balanced hedge book its expected fuel cost increase is a comparatively modest A$30–40m.
We saw Virgin’s update yesterday morning and Qantas’ the day prior, and thought that the contrast between the two carriers sets the stage for a deeper look at how airline fuel hedging actually works, and why the mechanics matter so much for earnings, strategy and long‑haul economics.
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Oil Hedging Is More Complicated Than Many Think
Fuel hedging is one of the most misunderstood levers in global aviation. Investors often assume airlines hedge “oil”, but the reality is more complicated. Airlines consume jet fuel, not crude, and the spread between the two — the jet refining margin — can be more volatile than oil itself. The USD/AUD exchange rate adds a further layer of complexity.
These three variables (both in their own right and standalone factors) can shift an airline’s earnings profile by hundreds of millions of dollars in a matter of weeks.
Case in Point: Qantas’ and Virgin’s Trading Updates
The recent trading updates from Qantas and Virgin Australia illustrate this dynamic with unusual clarity. Both carriers entered 2H26 with substantial hedging programs, yet both are now facing materially higher fuel bills due to the Middle East conflict and the extraordinary spike in refining margins. Jet fuel prices have more than doubled since February.
For Qantas, the impact is severe enough that its 2H26 fuel bill is now expected to be between A$3.1bn and A$3.3bn, implying an increase of more than A$800m versus prior expectations. Virgin Australia, with a smaller network and a more balanced hedging mix, expects a far more modest A$30–40m increase.
Understanding why the outcomes diverge requires understanding how hedging actually works. Airlines typically hedge crude oil because it is liquid and hedgeable at scale. They hedge jet fuel margins to the extent that the derivatives market allows, but this is always partial. And they hedge USD exposure only selectively, because full currency hedging would distort their balance sheets. When refining margins spike, as they did from roughly US$20/bbl to around US$120/bbl, even a well‑hedged crude position offers limited protection. That is precisely what Qantas is experiencing.
Qantas’ April 2026 update makes this explicit. The airline is roughly 90% hedged on crude but largely unhedged on refining margins. The result is a fuel bill that has blown out by more than A$800m in a single half. The Group has responded by trimming domestic capacity, redeploying wide‑body aircraft to Europe where demand is strong due to Middle East avoidance, increasing fares and delaying its planned A$150m buyback.
Airlines’ specific hedging assumptions and the impact of oil prices would be commercial secrets; we could only speculate on the exact figures. But the airlines have given us a general idea in the sense that hegdging has to an extent mitigated the impact.
Longer-Term Implications For Overseas Flights
In our view, the most interesting strategic implication for Qantas relates to Project Sunrise – its ambitions for non-stop flights between Sydney and New York and London. Ultra‑long‑haul flights are fuel‑intensive, and their economics depend on premium yields. Yet geopolitical instability may strengthen the business case rather than weaken it.
Passengers are willing to pay more to avoid Middle Eastern hubs – just as the Perth-Europe flights depict; and Qantas is uniquely positioned to monetise that preference. The new A350 fleet remains central to this strategy, although higher fuel costs narrow the margin for error and have already prompted Qantas to cap FY26 capex at A$4.1bn.
Virgin Australia’s update tells a different story. The airline is 92% hedged on crude and, crucially, 71% hedged on refining margins. This broader hedge profile has insulated Virgin from the worst of the spike. The expected A$30–40m increase in fuel costs is manageable, and the airline has maintained its EBIT guidance.
Virgin has also moved quickly on fare increases and selective capacity adjustments, while preserving liquidity of A$1.5bn and keeping leverage at 0.8×, below its target range. Its limited exposure to long‑haul flying, and the fact that its Doha service is operated under a wet‑lease arrangement with Qatar Airways, means the Middle East disruption is operationally inconvenient but not financially material. Of course, this does put to bed hopes it will resume its own international operation any time soon.
Conclusion
The divergence between Qantas and Virgin highlights three truths about airline hedging. First, crude hedging alone is never enough; refining margins can overwhelm even the most carefully constructed hedge book. Second, USD exposure is a structural risk that cannot be fully neutralised without creating new ones. Third, network mix matters; long‑haul carriers feel fuel volatility more acutely than domestic‑focused operators.
For Qantas, the near‑term earnings hit is real, but the strategic upside from Europe‑bound demand and Project Sunrise remains intact. For Virgin, the hedging program has done exactly what it was designed to do: smooth volatility and protect margins. Fuel hedging will never eliminate risk, but when executed well, it can be the difference between a manageable headwind and an A$800m problem.
