Airlines hedging to deal with fuel cost burden, JFIN report finds
Globally, about half of airlines are using hedging as a strategy to deal with the increased burden of fuel costs, according to the new 2020 Jet Fuel Innovation Review report published by Jet Fuel Innovation News.
Of the surveyed airlines who make use of hedging to counter short- to medium-term fuel price fluctuations for a portion of their forward fuel consumption, they’d hedged amounts between 5% and 24% with a median value of 10% for the coming 12 months.
Some airlines are developing fuel price hedging plans to avoid fluctuations that have affected their financial performance in recent years, including competition in the market, declining airfares and a rise in fuel prices.
The report, based on a Cargo Facts Consulting industry survey which was conducted between November 2019 and January 2020 and received approximately 220 responses from a range of passenger and cargo airlines, as well as other industry participants, observed that operators that choose to participate in hedging strategies also utilize several financial derivative instruments on long- and short-term basis as a form of insurance against potential fuel price increases.
“For an airline like Southwest, a change in 1 cent per gallon can impact the fuel expense by over $20 million in 2020, excluding impacts related to the fuel derivative instruments held at the time,” according to the report.
Additionally, the report touched on fuel surcharges, which are charged to passengers or freight customers to partially cover the rise in cost associated with increases in the price of fuel—a practice that began around in the early 2000s when world oil prices spiked.
“About 40% of airlines surveyed said they levied fuel surcharges on their customers. Those airlines that did levy fuel surcharges agreed that surcharges were an effective means of recovering increased fuel costs, effectively dispensing for the need to hedge against fuel price fluctuations.”
To download the complete report, including an analysis of how the airline industry is handling the topic of fuel and related issues, and the findings from an industry survey of passenger and cargo airlines, visit https://www.jetfuelinnovation.com/report.