Airlines hedge to take advantage of low fuel prices

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 manoeuvrability to benefit; before oil slumped they locked themselves into much higher costs, with some approaching $1,000 (€898) per tonne of jet fuel, roughly double current rates on the spot market.

Global crude prices have fallen around 60% over the last 15 months and European jet fuel prices have halved.

This appears to be great news for cost-conscious travellers and profit-hungry airlines, which burnt through 5.4 m barrels per day of jet fuel, 6% of all oil products globally, in 2012, the most recent US government data shows.

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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 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 low prices. Budget carrier Norwegian Air Shuttle stands to benefit.

Many European airlines were 70% to 90% hedged going into 2015, but Norwegian was largely unhedged.

“Typically we have not done much hedging,” Norwegian Air’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,” Foss said.