United Airlines (UAL) Unfazed by Fuel Shock as Natural Hedges Point to Bullish Skies
Amid rising geopolitical tensions, a recent 7% surge in West Texas Intermediate (WTI) crude has renewed focus on airline fuel hedging strategies. United Airlines (UAL), which has maintained a minimal hedging approach in recent years, is especially exposed. With fuel costs directly affecting profit margins, UAL's stock remains highly sensitive to swings in oil prices.
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Fortunately for United, encouraging trends in industry profitability and strong demand dynamics are a hedge in themselves, making me bullish on UAL in the second half of this year despite surging fuel prices.
For those unfamiliar, airline fuel hedging is a risk management strategy using financial instruments—such as futures or swaps—to lock in fuel prices for future delivery. Essentially, it acts as an insurance policy, providing cost stability amid volatile energy markets. Each airline adopts its own approach, adjusting based on broader economic and geopolitical conditions.
For example, Southwest Airlines (LUV) recently ended its once-active hedging program, reflecting a broader shift in the industry. United Airlines, meanwhile, has historically taken a minimal or opportunistic approach to hedging. This strategy is being tested as recent geopolitical tensions—particularly the missile exchanges between Iran and Israel—have pushed crude oil prices up by roughly 20% in the past month.
While oil remains about 8% cheaper year-over-year and has stabilized from its pandemic-era highs, any sharp spike in prices immediately impacts United's bottom line. Fuel typically accounts for around 25% of an airline's total operating costs, meaning price increases can significantly compress margins for carriers without substantial hedging in place.
It may come as a surprise to those who only interact with airlines as passengers, but the industry operates on razor-thin profit margins. In 2025, the average net profit margin across the sector was estimated at 3.7%, up slightly from 3.4% in 2024. United Airlines performed somewhat better than the industry average, posting a 5.5% profit margin in 2024—a relatively strong showing in such a margin-sensitive business.
Improving profit margins have given airlines like United the confidence to lean more heavily on 'natural hedges' against fuel price volatility—strategies that focus on efficiency and sustainability rather than financial instruments. These include operational improvements such as operating newer, more fuel-efficient aircraft, eliminating physical magazines to reduce onboard weight, and utilizing single-engine taxiing to reduce fuel consumption on the ground.
United has been especially proactive in this area, aggressively modernizing its fleet and taking a leadership role in the Sustainable Aviation Fuel (SAF) initiative to lower emissions and enhance long-term fuel efficiency.
These efforts are beginning to pay off. In its Q1 2025 earnings report, United posted record revenue of $13.2 billion, a 5.4% year-over-year increase, and generated over $2 billion in free cash flow, a testament to the strength of its operational strategy.
Reflecting stronger net profit margins across the airline industry in 2025, the International Air Transport Association (IATA) is also forecasting record-high industry revenues. This outlook is supported by projected declines in fuel prices and continued improvements in operational efficiency. In April, global revenue passenger kilometers (RPK)—a key measure of air travel demand—rose 8% year-over-year, signaling robust consumer interest.
While fuel prices have spiked recently, IATA expects conditions to stabilize, projecting an average of $86 per barrel in 2025, down from $99 per barrel last year. With rising demand, falling fuel costs, and ongoing efficiency gains, United Airlines (UAL) may be well-positioned for a strong performance in the second half of the year.
On Wall Street, UAL earns a Strong Buy consensus rating based on 14 Buy, one Hold, and zero Sell ratings in the past three months. Its average price target of $100.14 implies 33% upside potential over the next twelve months.
Thomas Wadewitz from UBS is particularly bullish on UAL, having upgraded the stock to Buy and raised its price target from $67 to $105. The analyst cited tariff relief following the 90-day agreement with China.
Moreover, 'a more stable economic backdrop and the recent rebound in the U.S. equity market give it increased confidence in the resilience of international and premium revenue, which had been its primary cyclical concern for both Delta and United.'
While United remains exposed to short-term oil price spikes due to its limited fuel hedging, it has several mitigating strategies in place. If fuel prices ease as expected, United stands to benefit meaningfully. With air travel demand on the rise and strong operational performance—reflected in above-average profit margins and record revenue—United appears well-positioned for further improvement.
That said, investors should closely watch oil price trends, particularly amid ongoing geopolitical uncertainty. Short-term volatility is likely, and those with lower risk tolerance may prefer airlines with more extensive hedging programs. Still, over the long run, strong fundamentals tend to win out. That's why, despite potential turbulence ahead, I remain bullish on UAL.
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