European Airlines Cut Jet Fuel Hedging as Prices Fall

Air France-KLM, Europe’s biggest carrier, led cuts in fuel-cost hedging by the continent’s airlines in the third quarter as prices headed for the first annual decline in six years.

The airline reduced the value of the jet fuel it hedged by $338 million for the period compared with a year earlier, data from the company show. Three of the five largest carriers tracked by Bloomberg cut their protection against price increases for this year, while two kept it the same.

Jet fuel prices, which haven’t fallen on a yearly basis since 2008, have slid 7.4 percent in 2014, data compiled by Bloomberg show. Hedging can diminish the benefit of falling prices for airlines that have covered a large proportion of their fuel needs in advance. Air France-KLM’s hedges locked in fuel contracts at higher costs before oil prices collapsed in the second half of 2008, costing the company 418 million euros ($600 million) in the third quarter of 2009.

“The jet fuel price is coming down and is likely to drop, so airlines are belatedly benefiting from this due to their hedging strategies put in place last year,” said Olli Rouhiainen, an analyst at Standard & Poor’s in London, who rates the companies’ debts. The decline boosts airlines’ profits because fuel represents their single biggest variable cost, he said by phone Aug. 8.

The price of jet fuel cargoes for delivery into northwest Europe fell to $947.25 a metric ton yesterday from $1,023.25 on the last day of 2013. It has closely tracked the price of Brent crude, the European benchmark, for which the front-month contract on the ICE Futures Europe exchange in London fell 5.9 percent to $104.28 a barrel over the same period. September Brent traded at $103.20 a barrel at 2:19 p.m. London time.

‘Special Consideration’

Air France-KLM hedged 63 percent of its estimated $2.4 billion fuel bill for the third quarter, compared with 74 percent of its $2.5 billion consumption a year earlier, data from the company show. That was the biggest percentage decrease among the largest European carriers, and it was the only company to reduce hedging for all periods when it reported half-year earnings on July 25.

“Fuel accounts for a substantial portion of the Air France-KLM group’s fixed costs,” Maxime Patula, the airline’s spokesman, said by e-mail Aug. 4. While the company gives “special consideration” to managing its fuel-price risk, its strategy to hedge consumption over a rolling two-year period is in line with competitors, he said.

International Consolidated Airlines Group SA, which operates the carriers Iberia and British Airways, decreased hedges by 4 to 6 percentage points for the next three quarters, while increasing those for the second quarter of next year and for next 12 months, according to its second-quarter results presentation Aug. 1. The company declined to comment on its hedging.

Insurance Policy

EasyJet Plc (EZJ), the region’s second-largest discount airline, cut the percentage of fuel it has hedged for the third quarter and full year, while increasing coverage for next year, the airline said in its third-quarter results presentation July 24. The latest figures remain within established hedging policy, the company said.

Ryanair Holdings Plc (RYA), Europe’s biggest discount carrier, kept its coverage unchanged for this financial year at 90 percent, the company said in its first-quarter results July 28.

“We value the certainty, it’s an insurance policy on the business and we will continue to extend our hedging program,” Chief Financial Officer Howard Millar said in a telephone interview yesterday. “It would have to be an extraordinary, exceptional event for us to change our view on hedging.”

Deutsche Lufthansa AG, Europe’s second-largest carrier, left its hedging level for this year unchanged and slightly increased coverage for 2015, according to company’s first half 2014 results on July 31.

“Lufthansa has a structural policy that covers jet fuel buying for the next two years,” Christoph Meier, a Frankfurt-based spokesman for the airline, said by phone today. “We don’t adjust our hedging policy based on any short or mid-term price movements.”

Price Drop

Airlines caught out by the sharp oil-price drop in 2008 altered their approaches, according to London-based consultant Energy Aspects Ltd. Ryanair lost 169 million euros in 2009 after its hedging policy left the company paying $124 a barrel for oil when prices were as low as $32. Air France-KLM cut the time span over which it hedged fuel to two years from four in 2009 after losing money.

“The financial crisis was the trigger for airlines to scale back the tenure of their hedges, with them now tending to hedge one year to a maximum of 18 months in advance,” Amrita Sen, chief oil market analyst at Energy Aspects, said by phone Aug. 6. “This has now become a structural change.”

With the majority of European carriers scaling back their protection against a rise in jet fuel, there remains a risk of them losing money if prices were to increase in the second half of this year, according to Commerzbank AG.

“Now would be a bad time to cut back on hedging when prices are at their lowest,” Carsten Fritsch, a commodity analyst at Frankfurt-based Commerzbank, said by phone Aug. 12. “We expect a small price increase as currently Brent prices are unsustainably low.”

Markets currently face “mounting geopolitical risks spanning an unusually large swath of the oil-producing world,” including armed conflict in Libya, Iraq and Ukraine, the International Energy Agency said in its monthly report Aug. 12.

To contact the reporter on this story: Rupert Rowling in London at rrowling@bloomberg.net

To contact the editors responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net James Herron, Rachel Graham

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