Hedging strategies propelled by oil price volatility

There is a rise in airfreight costs for shippers due to the surge in oil prices as it is increasing carrier fuel surcharges. Airlines themselves puzzled over fuel price hedging.

The rate of oil was over $75-a-barrel mark in mid July after two and a half years. This year it has been skyrocketing this year and so far has shot up by about 43%.

Unavoidably, this has not only led to increase in the airlines’ fuel costs, but also the rate that customers pay, as the carriers have kept fuel surcharge mechanisms  in play throughout the pandemic.

A spokesperson from a North American Cargo airline stated that surcharge went up several times in recent months, whereas the fuel surcharge of one large European carrier slipped in April, however climbed in May and July.

The carriers are not keen in talking about aspects of pricing, after the bitter experiences of price – fixing charges and convictions, however forwarders report elevated fuel surcharges – and not from isolated carriers.This phenomena is not limited to few carriers alone, but it is across the board, as informed by a forwarding company spokesperson. A senior executive of a US-based forwarder anticipate’s that it will become more widespread and the increases can be pretty significant in the near future.

Is it time to review fuel hedging strategy? That’s the question for the airlines now.

Another blow to carrier balance sheets last year was the slump in oil prices and in their passenger business, especially if they had hedged to a significant extent at elevated levels. About $4.6bn was lost by European airlines in the first half of 2020, whereas Asia-Pacific counterparts suffered hedging losses of $3.2bn.

These punches convinced airlines to review their hedging programmes. This has reduced their average hedging exposure by 24%, as per an estimate.

There is also a reduction in length of hedging for airlines. There is a signal by IAG that it’s broadly looking at a range of two years out, down from three years, besides Air France-KLM says it only hedges 12 months forward. However, some of the airlines are doing away with fuel hedges completely. As per sources, a major European Cargo has not used a fuel hedge for years and this has not changed.

Until recently, predictions were for an inexorable continuation of the upward trend in oil prices, but in late July it abruptly dropped below $70 a barrel, owing to worries related to the spread of Covid and the agreement by OPEC states to increase output.

Thereby giving airline finance chiefs, who were contemplating stronger hedging pause for thought. Among the airlines that got hit by hedges in 2020 were Cathay Pacific, however the carrier’s management eschews short-term action.

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