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NOT HEDGING IS SPECULATING THAT OIL PRICES WOULD GO LOWER.


Therefore why do some airlines refuse to hedge their fuel exposure? One of the main reasons is because they are reluctant to have their fuel price locked in case the market price starts to go lower. Those airlines would generally argue that hedging is speculating that fuel prices will go higher. A risk analyst would likely tell you the opposite, that an airline that is not hedging is an airline that speculates that oil prices would go lower.


Some airlines believe that the additional cost of higher oil prices can be passed down to customers via increased ticket prices and some are already doing so through fuel surcharges. In that case, the airline that is not hedging would have a competitive disadvantage against the airline that is hedging. Also, this strategy would only be profitable when demand is inelastic.


On the other side, airlines that are hedging are rarely covering one hundred percent of their fuel exposure leaving them exposed to volume risk as a part of their future exposure remains unhedged. This ratio usually decreases with time. For example, Ryanair hedge 90% of their jet fuel exposure for the 12 month period ending in March 2020, but only 37% for the following year.


Another way to protect the company for higher jet fuel prices is actually to produce it itself. In 2012, the American airline Delta Air Lines acquired a refinery in order to produce and meet the large part of its oil demand. This strategy does not fully protect the airline for rises in oil prices as it still needs to buy crude oil at market prices. Initially, Delta Air Lines signed an agreement with BP to lock the crude oil supply for the first three years. In the long term, this strategy could be profitable if the crack spread rises above the operating cost of running the refineries to produce one unit of jet fuel.


Recently, airlines has been criticised for ‘fuel tankering’. A legal but not ethic strategy which consists of loading their planes with extra fuel from airports selling cheaper jet fuel but at high environment cost. This practise is saving millions of dollars to the aviation industry but produce more CO2 emissions as planes carry more weight hence use extra fuel to fly.


Mickael Soussant E: mickael.soussant@admisi.com T: +44(0) 20 7716 8073


11 | ADMISI - The Ghost In The Machine | Q1 Edition


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