Airlines prepare to hedge fuel costs as oil prices plummet

Global airlines, looking to lock in huge savings, are preparing to hedge more jet fuel to fix prices as they bet a slide in crude oil to six-year lows may peter out near $40 a barrel.

Some airlines have already stepped up hedging, especially after benchmark Brent crude slipped below $50 a barrel earlier this month, fuel traders and brokers said.

Aer Lingus and Ryanair are both aiming to take advantage of the low oil prices to lock in fuel costs into 2016 and beyond.

“If you a sensible hedger, you have to look at this as an excellent opportunity,” said Robert Campbell, head of oil products research at Energy Aspects.

Current crude output can’t be sustained at these prices, Mr Campbell said, and with “some increase in demand and some reduction in supply ultimately the price will be forced higher”.

Jet fuel can account for between 20 and 50 per cent of an airline’s operating costs, and swings in oil prices can mean a huge boost or hit to profits.

In December, the International Air Transport Association (IATA) said lower fuel prices could mean that airlines globally will report their strongest profit margins in more than five years in 2015.

Still, Brent crude slipping 60 per cent since June has caught many by surprise.

US airlines that hedged based on higher oil prices, such as United Airlines, have had to dump losing bets and are now reviewing their strategies for protecting themselves from oil market volatility.

“Over the last six months of 2014, very few airlines were brave enough to go into the market and if they did, it was in very small volumes,” said Shukor Yusof, founder of aviation research firm Endau Analytics.

At least one Asian carrier, South Korea’s Asiana Airlines , has stopped hedging since November due to recent price volatility, while Germany’s Air Berlin has said it is considering reducing its hedging rate.

Ryanair, Aer Lingus and Thai Airways are also among those looking to use the low oil price to extend their hedges.

Aer Lingus said last week it had increased its hedging, with 90 per cent of its requirements for 2015 now hedged at an average jet fuel price of $830 per tonne (about $104 a barrel), compared with $954 a tonne for 2014.

Ryanair said in December, that in addition to current hedges, it was hedging 20 per cent of its fuel purchases in the first half of the year to March 2017 at about $810 per tonne.

Other carriers - including Korean Airlines along with Europe's biggest airlines Lufthansa, British Airways owner IAG and Air France-KLM Group - have said they are not planning major changes to their hedging strategies in response to oil price falls.

Reuters