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  • airlines
  • Hedging

European airlines gain €5bn from hedging as oil prices soar after invasion of Ukraine

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Top European airlines that locked in prices of fuel for 2022 now have $5bn in mark-to-market gains as sanctions on Russia drive the rally in oil prices

by Nicholas Dunbar and Anmol Karwal

Published: March 15th 2022

The price of oil has surged to its highest level in more than a decade after Russia’s invasion of Ukraine, adding to the operating costs of airlines. While carriers anticipate a ramp up to the pre-pandemic level of demand, fuel hedges amassed by European airlines throughout 2021 have gained €5 billion in value in 2022, analysis by EuroFinance shows.

Volatile times

The combination of pandemic lockdowns and plummeting oil prices led many European airlines to question whether they should hedge fuel costs at all. They now find themselves in an exactly opposite position. While ineffective fuel hedges meant $4.66 billion in losses during the covid-19 pandemic, the decision to continue hedging is expected to pay off in 2022 after Russia’s invasion of Ukraine has sent the price of oil rocketing to a 14-year high.

Consider International Airlines Group, whose fleet includes British Airways, Iberia and Vueling. Anticipating customer demand to reach 85% of pre-pandemic levels, IAG has a €1.04 billion in mark-to-market gain on derivatives used to hedge estimated fuel consumption in 2022, according to analysis of filings.

IAG already purchased contracts for 37 million barrels of jet fuel before the start of the year, representing 60% of its estimated fuel consumption for 2022. These contracts locked fuel prices at multiple levels from $87.5/ barrel to $100.8/barrel of jet fuel throughout the year, much lower than $139/ barrel, the current price of Jet fuel being traded in European markets.

Meanwhile IAG’s German rival, Lufthansa is expected to earn €733 million from derivatives positions at the start of the year. After recording losses from being in an over-hedged scenario during the pandemic, it suspended its fuel hedging activities in April 2020. However, acknowledging the rebound in oil prices, the airline resumed hedging a year later with a target hedging level of 65% of estimated fuel consumption, lower than 85% previously.

The company held swaps and options to purchase 28.7 million barrels of oil to be consumed in 2022 at $74/barrel, representing 64% of its estimated consumption while also hedging approximately 19.6% of its 2023 consumption at the starting of the year.

Despite recording one of the highest hedging losses in 2020, the Irish budget airline, Ryanair is enjoying an estimated €1.2 billion market-to-market gain on its fuel derivatives portfolio.

Although the company had reduced full year hedging from 90% to 60% in 2021, it locked in prices for 100% of fuel consumption in Q1 2022, 80% for the six months ending September 2022 and 70% for the subsequent six months at $73, $78 and $81/barrel, respectively. With more than 70% of the input prices locked in, the airline’s treasury team maintained a higher proportion of options in its portfolio in order to limit the downside in the event of a combined slump in oil prices and flights.

The British low-cost airline, Easyjet has an estimated €824 million mark-to-market gain on fuel derivatives. The company said that demand for flights in 2022 was running at about 80% of 2019 levels, when it purchased 3 million tons of notional jet fuel hedges. In a trading statement on 27 January, Easyjet said that it had purchased hedges on 60% of anticipated fuel demand for its financial year ending September 2022, at a price of $504 per metric tonne.

The Franco-Dutch airline, AirFrance KLM also followed suit with its 2022 hedge portfolio showing an estimated mark-to-market gain of €1 billion, based on the 15th March jet fuel forward curve. In a 17th February trading statement, the airline said it had already booked a €427 million gain on its hedges for the year. The company reduced its target hedge ratio to 51% of annual volume from 80% in 2019.

Mounting risks

Meanwhile, airlines that shun hedging face swingeing costs that they will have to pass on to passengers, particularly as sanctions against Russia start to encompass the country’s vast crude oil exports.

For example, the European budget airline, Wizzair stopped hedging completely in June 2021, while the largest US airlines, Delta, Continental and United have shunned fuel hedging for a number of years.

“Hedging gives you cost certainty for your shareholder and investor base for the next 12 months”, Ryanair CEO Michael O’Leary told investors on a 2 March earnings call. “We have seen some spectacular deviations by some of our so-called competitors, arguing that they now will be unhedged because they've never made money hedging. Well, they're about to lose a shedload of money by not hedging.”