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Fuel Costs: Hedge Your Bets

Accurately forecasting fuel costs for the year ahead could keep any airline CFO up at night, but the right fuel hedging programme could be better than any cup of cocoa, Mike Corley, president of Mercatus Energy Advisors, tells AFM.

Fuel prices can have a significant impact on an airline’s bottom line, not least when the state of the capital markets has left many airlines strapped for cash.

A report by Mercatus found that 82 per cent of airlines had opted to hedge against fuel costs. However, 43 per cent had hedged less than forty per cent of their total fuel costs, meaning they are still very much exposed to spot market prices.

The majority (36 per cent) said they would prefer to use hedging strategies that better reflect the company’s risk tolerance, while the second largest proportion (22 per cent) said a more regular and consistent approach would work better.

The survey also found that the majority of airlines (38.5 per cent) had hedged for a period of up to six months. While airlines typically take hedges on a short-term basis, this figure reflects a trend for airlines to counteract current volatility with shorter tenors, giving them more control of their spending.

 

TAGS: Operations
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