IAG's Fuel Cost Playbook: Hedging, Absorbing, Passing It On

What IAG's Q1 numbers actually show

The headline figure is striking. Operating profit at IAG rose by more than 77 per cent over the first three months of 2026, according to the group's trading update published on 8 May. The carrier attributed the jump to revenue growth and what it called the "limited impact on cost from the Middle East conflict," which affected only the final 30 days of the reporting period.

That qualifier matters. The US–Iran conflict is now in its third month, but only a fraction of that window fell within Q1. The real test arrives in Q2 and beyond, when the full weight of elevated kerosene prices hits the profit and loss account.

Luis Gallego, chief executive of IAG, told investors the group saw "no issues with fuel availability" but acknowledged that higher input costs would eat into full-year profit expectations. The group now forecasts its total fuel bill for 2026 at €9bn (£7.7bn), according to the update.

"Whilst the impact of the higher fuel price will inevitably lead to lower profit this year than we originally anticipated, we are confident in our business model and strategy, which has made us one of the best-performing airline groups in the world, and which gives us the opportunity to prove our resilience."

The language is carefully calibrated. IAG is not issuing a profit warning in the formal sense; it is resetting expectations while pointing to structural defences.

The hedging cushion, and when it runs out

The most significant line in the update is this: 70 per cent of IAG's jet fuel requirement is hedged at prices set before the initial US strikes on Iran, with that cover running through to year-end. The remaining 30 per cent is exposed to spot kerosene, which has doubled since the conflict began.

For operators unfamiliar with commodity hedging, the mechanics are straightforward. Airlines typically enter into forward contracts or options that lock in fuel prices months or years ahead. When spot prices spike, a well-hedged carrier pays the lower, pre-agreed rate on the hedged portion. The unhedged slice bears the full market price.

The arithmetic is instructive. If IAG's €9bn fuel bill is split roughly 70/30, then approximately €6.3bn is locked in at pre-conflict rates and €2.7bn is at current spot levels. Had the entire book been unhedged, the total bill would be substantially higher. Hedging has not eliminated the cost shock, but it has contained it.

The critical question is what happens in 2027. Hedging programmes roll forward, and new contracts will be struck at prevailing market prices. If kerosene remains elevated when IAG next hedges a large tranche, the cushion disappears. Goldman Sachs analysts recently warned that UK jet fuel inventories could fall to "critically low levels" if the Strait of Hormuz, which carried roughly a fifth of global oil and gas traffic before the conflict, remains closed, as first reported by City AM. That scenario would keep prices high well into next year.

The UK is particularly exposed. As a net importer of refined kerosene, Britain depends on seaborne shipments that now face longer, costlier routing around the Cape of Good Hope. Goldman Sachs noted this could prompt airlines and governments to introduce rationing measures, according to the bank's recent research note.

Fare inflation and the knock-on for corporate travel

IAG stated it expects to recover around 60 per cent of higher fuel costs "through our revenue and cost management actions," according to the trading update. In plain terms, that means passengers will pay more.

The carrier cited the mix of markets in which it operates, the benefits of its transformation programme, and investment in modern, fuel-efficient aircraft as factors enabling it to absorb the remaining 40 per cent internally. But the 60 per cent pass-through is the figure that matters for the wider economy.

For corporate travel managers at UK firms, the implication is direct. Business-class fares on long-haul routes, already elevated after the post-pandemic recovery, face another leg higher. Companies budgeting for summer and autumn travel should expect surcharges or base-fare increases that reflect the new fuel economics.

Tourism-linked SMEs face a different version of the same problem. Higher airfares dampen inbound visitor numbers and reduce discretionary spending on domestic holidays. Hotels, restaurants, and experience operators in destinations served primarily by air, such as Edinburgh, the Scottish Highlands, and the Channel Islands, will feel the drag if fare inflation deters bookings.

The effect is not uniform. Low-cost carriers with thinner margins and less hedging cover may raise fares more aggressively than IAG's full-service brands. That could shift demand patterns, pushing price-sensitive leisure travellers toward rail or road alternatives for shorter trips.

Lessons in cost-shock management for operators

IAG is a €30bn-plus revenue aviation group. Most BF readers run businesses a fraction of that size. But the principles it is applying to the fuel shock are scale-agnostic.

Hedge what matters most

IAG's 70 per cent hedge ratio did not happen by accident. It is the product of a rolling programme that locks in prices well ahead of need. Any business with a material, volatile input cost, whether energy, raw materials, or foreign currency, can adopt a similar discipline. Forward contracts are available to SMEs through most commercial banks and specialist brokers. The goal is not to speculate on price direction but to buy certainty.

Know the pass-through ratio

IAG has quantified its pass-through at 60 per cent. That figure reflects competitive dynamics, customer price sensitivity, and the carrier's own cost-reduction levers. Operators in other sectors should run the same calculation. How much of a sudden input-cost rise can be recovered through pricing, and how quickly? The answer determines whether a cost shock is painful or existential.

Absorb through efficiency, not just margin sacrifice

The 40 per cent IAG cannot pass through is being managed partly through its fleet modernisation programme, which lowers fuel burn per seat-kilometre. For SMEs, the equivalent might be investing in energy-efficient equipment, renegotiating supplier terms, or automating processes that reduce per-unit cost. Absorbing a cost shock purely by accepting lower margins is a short-term fix that erodes the business over time.

Communicate early and clearly

Gallego's statement was notable for its candour. He did not hide behind vague language. He named the problem, quantified the impact, and explained the mitigation. Businesses that communicate cost pressures transparently to customers, staff, and lenders tend to retain trust and negotiating room. Those that stay silent until margins collapse do not.

The Middle East conflict shows no sign of a swift resolution. For UK businesses exposed to energy costs, travel spending, or global supply chains, IAG's update is less a news story than a case study in managing what cannot be controlled.