Air fares are set to rise sharply next year as airlines, including British Airways, have failed to insulate themselves sufficiently from rising oil prices.

Analysts cautioned yesterday that the recent surge in the oil price to record levels will force airlines to pass on cost increases to passengers.

Airlines have traditionally used hedging to limit the impact of price rises, but the recent rises have caught them by surprise and most large carriers have only limited protection in place for next year. Unless there is a dramatic fall in the price of oil, airlines will be stuck with the extra cost, which will either be passed on to passengers or erode profits.

British Airways has hedged only 45 per cent of its fuel for the first half of next year, at $76 a barrel. The remainder of its fuel requirement will be bought at market rates, presently $96 a barrel.

The airline, which reported record first-half profits of £593 million yesterday, has even less of its fuel hedged for the remainder of 2008-09. By comparison 90 per cent of BA’s current fuel consumption is hedged. Willie Walsh, chief executive, said that the oil price was now so high it prevented any further hedging. He also said that BA’s fuel bill will top £2 billion for the first time this year, having increased by £100 million in the first six months compared with last year.

Ryanair, Europe’s largest airline, has only 10 per cent of its fuel hedged in the third quarter of next year and would not reveal its total hedging ahead of a financial results announcement on Monday. Emirates, the Dubai-based carrier, is 40 per cent hedged for next year and 35 per cent the year after.

Gary Chapman, president of Emirates group services, said: “We are not as heavily hedged next year and it was a tough call not to increase the percentage covered. It does leave us exposed to the risk of high oil prices next year.”

Analysts said the most likely outcome of insufficient hedging would be an increase in air fares. Howard Wheeldon, senior strategist at BGC Partners, said: “The airlines will just pass on the fuel increases to passengers unless demand slows, in which case it could hit profits.”

Some carriers have already started to increase fares, with American Airlines putting a $20 return surcharge on all flights. Delta followed this week with its own $20 increase. BA and Virgin Atlantic, which got into trouble earlier this year for fixing their fuel surcharges, have said they will not increase fares yet but are keeping the situation under review.

Airlines are reporting record profits after a boom in air travel. However, an economic slowdown next year could make it harder to increase air fares and airlines may be forced to absorb unhedged fuel costs themselves.

BA announced yesterday it was reducing its growth forecast for next year from 4 per cent to 3 to 3.5 per cent because of the weak US dollar and uncertain economic environment.

However this year’s performance remains strong, with pretax profits in the six months to September 30 up 26 per cent to £593 million. The figures benefited from a weak half last year when Heathrow was forced to shut down after a terrorist threat.

The airline’s bottom line has also benefited from a reduction in pension costs and lower aircraft leasing costs.

Mr Walsh said: “We are on track to deliver an operating margin of 10 per cent by March 2008 and our recovery has benefited from being able to avoid the disruptions that affected us last year.”

–– Union leaders today warned of the first strike at Virgin Atlantic after cabin crew rejected a pay deal. Industrial action could disrupt Virgin services over Christmas and the new year.

Times Recommends

• Minister in talks with Saudis to protect creditors
• Premier Inn hits back in £29-a-room row
• Bankers hit back at 'populist' bonus supertax