American Airlines Faces 25% EPS Exposure to Fuel Costs as Hedging Gaps Expose Earnings to Jet Fuel Surge

The executives are sending a clear, unified signal: demand is holding firm, and they are moving quickly to pass on soaring costs. United CEO Scott Kirby framed the situation with striking confidence, stating that "Demand has not taken even a tiny step back". He pointed to concrete numbers, noting that "Booked revenue since Saturday is up over 20%" as the conflict escalated. This resilience, he argued, is underpinned by rerouting traffic and strong international bookings, particularly from Europe.

Yet even as they celebrate demand, the CEOs are preparing for a severe financial shock. United is testing a scenario where oil prices climb to $175 per barrel. That move underscores the unprecedented speed and scale of the fuel price surge. While oil has jumped over 30% in days, jet fuel has risen even faster, with the Argus U.S. Jet Fuel Index up 58% in a week to nearly $4 per gallon. The U.S. Energy Information Administration has sharply raised its outlook, projecting 2026 jet fuel prices to average $2.67 per gallon, a nearly 37% jump from last month's forecast.

This sets the stage for a critical test. The industry's playbook is shifting. Unlike past crises, most U.S. airlines have no fuel hedges to cushion the blow, forcing them to rely on immediate price hikes to protect margins. As Delta's CEO noted, this sudden shock will likely accelerate the industry's move to pass costs to consumers. The question now is whether the current demand strength can absorb these hikes without a slowdown, a dynamic that history may soon help to answer.

Historical Parallels: The 1970s Oil Shock vs. Today's Speed

The current fuel shock is a direct challenge to the industry's resilience, but its speed and structure are unlike any past crisis. In the 1970s, oil price spikes were often drawn out, giving airlines time to adjust. Today, the surge is brutal in its brevity. The Argus U.S. Jet Fuel Index has risen 72% over the last month. This rapid, asymmetric jump in the final product is a key differentiator.

The most critical vulnerability, however, is a structural shift. Unlike past cycles, most U.S. airlines do not hedge against fuel costs. Delta's CEO noted this will be the first time the industry faces a sudden shock with "no one with fuel hedges." This lack of protection means earnings are now directly exposed to every dollar of fuel price movement, increasing near-term volatility and pressure to pass costs to consumers immediately.

Jet fuel's position as the industry's second-largest expense makes this exposure acute. It typically accounts for about a quarter of operating costs. The recent price spike, with a gallon hitting $3.93, translates to hundreds of millions in new quarterly expenses. The test is whether today's demand strength can absorb these hikes without a slowdown, a dynamic that history may soon help to answer.

Market Reaction and the Hedging Gap

The market's initial reaction to the fuel shock was one of severe skepticism. Airline stocks were hammered, with the US Global Jets ETF (JETS) dropping from about $31.33 to a low of $23.81. This 24% plunge from its pre-conflict peak signals deep concern that soaring costs will overwhelm the sector's recent demand strength. The pain is not evenly distributed, however. The critical vulnerability created by absent fuel hedges is now a key risk factor, amplifying the near-term earnings impact.

American Airlines stands as a stark example of this heightened sensitivity. Analysts at Rothschild & Co Redburn have downgraded the stock, citing its exposure. The bank notes that American Airlines has the greatest sensitivity to fuel prices, with every 10-cent move per gallon equating to almost 25% in its earnings per share. This extreme exposure is a direct result of the industry-wide shift away from hedging. Unlike in past cycles, most major U.S. carriers have largely discontinued fuel hedging, leaving them directly exposed to every dollar of fuel price movement. This structural change means today's shock will likely hit earnings harder and faster than historical parallels.

Viewed another way, the lack of hedges removes a buffer that once smoothed out volatility. In the 1970s or even the 2000s, airlines with hedges could absorb price spikes without immediate margin collapse, buying time to adjust. Today, that cushion is gone. The result is a market that is pricing in substantial downside risk, as seen in American's forecast for negative earnings this year. For investors, this creates a clear divide: carriers like Delta, which has its own refinery and high margins, are seen as more resilient, while others face a direct and severe earnings hit from the fuel surge.

What's Next: Catalysts and Watchpoints

The coming weeks will test the industry's strategy of relying on strong demand to offset fuel costs. Three key catalysts will determine if this approach holds or if a broader earnings reassessment becomes necessary.

First, monitor the duration of air corridor closures and the resulting rerouting costs. The ongoing conflict has forced airlines to take longer, more fuel-intensive detours around the Middle East. This isn't just a temporary inconvenience; it directly increases fuel burn and operational expenses. As noted, U.S. carriers could face billions in additional costs if prices remain high. The recovery in Dubai, where traffic is back to about 40-45% of normal, suggests corridors are reopening but remain constrained. The longer these detours persist, the more pressure they will put on margins, testing the resilience of the demand offset.

Second, watch the first-quarter earnings reports for clear signs of margin compression and the effectiveness of capacity management. Executives have projected record bookings, but the real test is in the numbers. Delta's CEO cited roughly $400 million in additional costs so far from the fuel spike. The question is whether ticket sales can keep pace with these new expenses. Earnings will reveal if the industry's capacity cuts and fare hikes are sufficient to protect profitability, or if the initial optimism was premature.

Finally, track the trajectory of jet fuel prices against the EIA's revised forecasts. The agency now projects 2026 jet fuel prices to average $2.67 per gallon, a steep climb from last month. The market's ability to pass these costs to consumers hinges on fuel prices stabilizing near these elevated levels. If prices spike further, as they did to a more than three-year high near $4 per gallon, the pressure on margins will intensify, likely forcing more aggressive fare increases that could dampen demand. The path of fuel costs will be the ultimate determinant of the industry's financial health in the near term.