Airlines hedge to take advantage of low fuel prices

Airlines hedge to take advantage of low fuel prices

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A collapse in oil prices is being exploited by airline hedging more of their fuel needs further into the future.

But many carriers lack flexibility by locking themselves into much higher costs, with some approaching $1,000 per tonne of jet fuel, roughly double current rates on the spot market, Reuters reported.

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

Budget carrier Norwegian stands to benefit. Many European airlines were 70%-90% hedged going into 2015, but Norwegian was largely unhedged.

"Typically we have not done much hedging," Norwegian's chief financial officer, Frode Foss, told Reuters. "But in the last month we have started accumulating, relatively speaking, a lot of hedging to lock in fuel at very favourable levels."

The airline has hedged 23% of its fuel needs for the rest of this year, and 28% for 2016, with the potential to increase and extend hedges out to 2017, Foss said.

"You might see us at 50% or more, depending on the forward curve," he said.

Norwegian has one of the lowest hedge coverings of the major European airlines, and can buy around three quarters of its fuel for this year and next on the spot market.

But airlines that entered the current price decline heavily hedged cannot benefit in the same way.

Air Berlin, Germany's second-largest airline, has been hit by falling prices with 93% of its 2015 fuel needs hedged, according to an analyst note from HSBC, the news agency reported.

With fuel accounting for 46% of Ryanair's 2014 operating costs, 33% of British Airways' and 21.5% of Lufthansa's, price fluctuations can seriously impact company profits.


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