The hedging strategy meets several objectives:

• the airline can plan for what is normally an unforeseeable expense by protecting itself against hikes in fuel prices.  These hedging policies act as insurance against soaring fuel prices.
• They smooth out the changes in the fuel expense item over time, and enable Air France to buy the time it takes to adapt its cost structure accordingly, for example by buying planes to modernize its fleet.
• They give airlines the competitive edge over rivals which are not as well hedged.

How does a hedging policy work?

Practically speaking, oil hedging schemes are financial instruments – totally disconnected from the physical purchase of fuel – which enable companies to cover their risks in terms of raw materials.

Air France pursues this policy over 48 sliding months, primarily with swaps.  This means  that the airline commits to paying financial intermediaries (banks, traders, etc.) a fixed price at a given time for the total volume of fuel used.

Hedging policies are, however, substantially limited.  As soon as oil prices become stable over the long term, they become less and less efficient and you end up paying current prices for oil. Furthermore, if prices drop, all the gains are wiped out and the hedges become losses.  Air France suffered from this in 1998, with lost opportunities of $87 million. However, as can be seen from the above illustration, the efficiency of these hedging policies has been proved in periods of high oil prices.