Ryanair reported profit after tax of 538 million euros for the three months to the end of June, down 34 percent from 820 million euros in the same quarter last year. Analysts had expected about 579 million euros.

The airline's shares fell on the results.

Two things went wrong at once

Ryanair's chief executive, Michael O'Leary, attributed the fall principally to fuel and fares.

The airline hedges most of its fuel, locking in prices in advance. It had covered 80 percent of its requirement, which left a fifth exposed to the market. O'Leary said the price of that unhedged portion more than doubled during the quarter as the US-Iran conflict pushed energy prices up. Operating costs rose 11 percent, to 3.81 billion euros.

At the same time, average fares fell 6 percent. The airline flew more passengers but earned less from each of them, and paid more to carry them.

Why fares are still expected to fall

The counterintuitive part of the results is the outlook. With fuel costs rising, one might expect an airline to raise prices. Ryanair says the opposite: it expects average fares this summer to be modestly down on last year.

Two things explain it.

The first is hedging. Ryanair has 80 percent of its fuel for the current financial year fixed at $67 a barrel, a price agreed before the recent escalation. For most of the year ahead, the market price of crude is not what Ryanair pays, so a rising oil price does not force an immediate fare increase in the way it would for a carrier buying at spot.

The second is demand. Fares are set by what passengers will pay, not by what fuel costs. The company said uncertainty around the conflict has made travelers slower to book, and pricing for the current quarter is trending modestly down year on year. An airline with seats to fill discounts them, whatever it paid for the kerosene.

Ryanair said the outcome for the first half will depend heavily on the strength of late bookings in August and September. That is a real caveat: it means the fare guidance rests on consumer behavior over the next two months, which the company cannot control and is not forecasting with confidence.

The wider point about hedging

Hedging is often described as a way of saving money. It is more accurately a way of buying certainty, and it cuts both ways.

A carrier that fixed its fuel at $67 a barrel while the market moved toward $90 looks astute this quarter. The same carrier would look poor had prices fallen to $50, having committed to pay more than the market. What hedging buys is a predictable cost base, which lets an airline set fares months ahead without guessing at the oil price.

This quarter it left Ryanair with a cost advantage over less-hedged competitors, and with a fifth of its fuel bill fully exposed to exactly the shock everyone was worried about. Both were true at once, and the results reflect it.