Wednesday, August 20, 2008

Hedging jet fuel prices at airlines

Airline hedging has been a topic of discussion on the FinanceProfessorblog since its inception. With volatile energy prices, it is now a hot topic within the airlines as well. Here is a look at the discussion from FlightGlobal.

Hedge your bets:
"A large part of deciding whether or not to hedge comes down to the way in which ­airlines view hedging. Those that see it as an insurance policy which enables them to ­foresee exactly what they will be paying for fuel, therefore avoiding any nasty shocks, are the most likely to implement long-term fuel hedging strategies.

'Airlines should look at hedging as a ­strategic device that keeps them on an even keel and avoids extremes,' says Leo Drollas, deputy executive director and chief ­economist at the London-based Centre for Global Energy Studies. But he adds that there is a tendency for airlines to hedge tactically rather than ­strategically, meaning they are 'either too heavily hedged or too light on hedging, so they lurch from one situation to another'."
The article also gives some real world examples. For instance from Lufthansa (who I recently flew to Barcelona)

"One airline that follows a strategic approach to fuel hedging and has done so since 1990 is Lufthansa. "Our hedging programme is designed to shield the airline from the adverse impact of the market," says Lufthansa vice-president corporate fuel management Helmut Fredrich. "Our strategy is that we are not ­speculating if there is a low [fuel] price environment. The aim is to mitigate the effects of changing oil prices to give Lufthansa time to adjust to different levels. We start 24 months out, building up our hedges by 5% a month so that after 18 months up to 85-90% of demand is hedged." This means 90% of Lufthansa's fuel is hedged for the coming six months, while 54% is so far hedged for 2009."
Good stuff. Well worth the read (it is fast).

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