Europe's airlines spruce up their jet fuel hedges

Tue Sep 22, 2015 2:10am EDT
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By Lisa Barrington

LONDON (Reuters) - European airlines are exploiting a collapse in oil prices by hedging more of their fuel needs further into the future, but those that kept their powder dry before the rout are emerging as clear winners, industry sources say.

At a time of heightened price volatility, carriers are also considering using more options contracts to access lower prices should they fall further.

Many airlines, however, lack the maneuverability to benefit; before oil slumped they locked themselves into much higher costs, with some approaching $1,000 per tonne of jet fuel, roughly double current rates on the spot market.

Global crude prices LCOc1CLc1 have fallen around 60 percent over the last 15 months and European jet fuel JET-C-NWE prices have halved.

This seems great news for cost-conscious travelers and profit-hungry airlines, which burnt through 5.4 million barrels per day (bpd) of jet fuel – 6 percent of all oil products globally – in 2012, the most recent U.S. government data shows.

With fuel accounting for 46 percent of Ryanair's (RYA.I: Quote) 2014 operating costs, 33 percent of British Airways' (ICAG.L: Quote) and 21.5 percent of Lufthansa's (LHAG.DE: Quote), price fluctuations can seriously impact company profits.

To reduce price-fluctuation risk on projected operating costs, many airlines hedge a proportion of their future fuel needs six to 24 months in advance by buying jet fuel or crude oil contracts from banks or on an oil futures market.

But hedging strategies differ and not all airlines – and therefore consumers - will profit from today's low prices. [O/R]   Continued...

An aircraft flies past the moon over Anterselva, northwest Italy, January 23, 2010. REUTERS/Alessandro Bianchi