(Bloomberg) -- Airlines have been snapping up oil derivatives contracts to protect against higher prices in recent weeks as the Israel-Hamas war raises the specter of a surge in fuel bills.

Traders and brokers active in the oil market say consumer hedging activity has increased since the conflict broke out, and industry executives have confirmed those moves in earnings calls in the last few days. The flurry of activity is showing up in surging volumes of call options that help buyers protect against significantly higher prices.

While oil has fallen back to prewar levels as the conflict remains contained away from major crude-producing regions, airlines still see the risk of a spike in the price of the commodity that’s typically their largest single expense. 

“We will build it up very quickly,” Air France-KLM Chief Financial Officer Steven Zaat said on an earnings call last week, referring to how soon his company would reach its desired hedging volume of 70% of fuel consumption for early next year. “We are close to that 70% to make sure there’s no spike increase coming from what’s happening in Israel.”

Airlines generally hedge their fuel bills using a variety of derivatives instruments, including options contracts and swaps. 

The strategy isn’t without its risks. Airlines lost billions of dollars on the practice during the pandemic, when the collapse in global travel left them with huge loss-making derivatives positions but no offsetting lower fuel bills as flights were grounded. 

The losses made many airlines, particularly those in Europe, slow to return to the market and prompted them to shrink their hedge positions. Even before the pandemic, losses had caused some in the US to abandon the practice.   

More recently, airlines have gotten a profit boost from their fuel-price protection measures, with Norwegian Air Shuttle ASA and Air Canada both flagging gains from hedging in their latest earnings reports.

In addition to Air France, other major carriers have also reported bigger positions lately. Deutsche Lufthansa AG said Thursday that it’s already more than 70% hedged for next year. That’s about about 20% more than it had in place at the same time a year ago. Similarly, British Airways owner IAG SA also reported higher hedging coverage for the end of this year and all of next year than it held a year ago.  

The generally higher oil-price environment — with Brent crude approaching $100 a barrel earlier this quarter — has also coaxed some players back into hedging after years away from the market. In August, Air Canada disclosed that it locked in about 30% of its jet-fuel cost for the first time since 2019. The company said this week that it has boosted those volumes to 45% for the fourth quarter. 

“Our hedging positions in the second half of the year reflect a prudent approach to managing the current volatility in fuel prices,” Air Canada Chief Financial Officer John Di Bert said on an earnings call this week. 

©2023 Bloomberg L.P.