LONDON Reuters - European airlines are exploiting a collapse in oil prices by hedging more of their fuel needs further into the future, but those that kept their powder dry before the rout are emerging as clear winners, industry sources say.
At a time of heightened price volatility, carriers are also considering using more options contracts to access lower prices should they fall further.
This seems great news for cost-conscious travelers and profit-hungry airlines, which burnt through 5. DE , price fluctuations can seriously impact company profits. To reduce price-fluctuation risk on projected operating costs, many airlines hedge a proportion of their future fuel needs six to 24 months in advance by buying jet fuel or crude oil contracts from banks or on an oil futures market.
OL stands to benefit. Many European airlines were percent hedged going into , but Norwegian was largely unhedged. The airline has hedged 23 percent of its fuel needs for the rest of this year, and 28 percent for , with the potential to increase and extend hedges out to , Foss said.
Norwegian has one of the lowest hedge coverings of the major European airlines, and can buy around three quarters of its fuel for this year and next on the spot market; good news if prices fall further.
But airlines that entered the current price decline heavily hedged cannot benefit in the same way. Large hedges at prices significantly higher than the spot market can make airfares less competitive by forcing carriers to pass on the extra cost to passengers. I has the largest publicly declared hedging percentage among European airlines. To achieve this, most major European airlines hedge regularly throughout the year. Large airlines do not significantly add hedges on falling or rising prices and hedging managers commonly have little leeway to increase hedges, Commerzbank analyst Johannes Braun said.
Nevertheless, third-quarter results for this year are expected to show carriers hedging larger amounts of fuel and further out into the future than usual, industry sources say. Options contracts give the purchaser the right, but not the obligation, to buy or sell fuel in the future at a certain price. Unlike simple forward purchases or swaps, options have a charge attached and most airlines - with the exception of Lufthansa, which has preferred options for many years - see them as a disadvantage.
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