Airline losses from hedging against oil price fluctuations amount to over $4.7 billion

Air France was less affected, with a loss of roughly $708 million as it relied less on fuel hedging.

Getty Images / Isabelle Chauvel / Contributor

• Four European airlines have lost over $4 billion to fuel hedging in 2020, La Información reported.
• Protecting themselves against oil price fluctuations failed due to COVID-19, with IAG most affected.
• The International Air Travel Association's said 2020-21 had been the worst year in aviation history.
• Visit the Business section of Insider for more stories.

European airlines have lost more than $4.7 billion as a result of fuel hedging, almost a year after the International Air Travel Association (IATA) warned the practice could bring down profits.

The affected airlines are Lufthansa, IAG, Ryanair, and Air France, according to La Información.

The airlines had protected themselves to varying degrees against future fluctuations in oil costs and suffered proportional losses.

IAG was the most affected airline, losing over $2 billion.

Meanwhile, Air France was less affected with a loss of almost $708 million as it relied less on fuel hedging.

Lufthansa lost almost $1.4 billion - the loss comes after reports last year revealed the German airline was losing $1 million a minute due to the pandemic and was given a $10 billion bailout from the German government.

Meanwhile, Ryanair announced it would cut 3,000 jobs in May 2020.

The losses have been largely related to the coronavirus pandemic as airlines have been unable to use their fuel due to travel restrictions and so excess fuel has piled up even further.

To manage how much they are affected by oil price fluctuations, airlines with long-term contracts of up to 24 months purchase fuel at low prices on the futures market.

In this way, they manage to guarantee their fuel needs for a large part of the year.

They then agree with the insurers on a price range for the rest of the fuel they will need that year, with the insurers covering the difference in price should the cost of fuel exceed that threshold.

In November, IATA said a total of $157 billion in losses could be expected across the airline industry in 2020 and 2021, marking the worst year in aviation history.

As travel restrictions continue in 2021, IATA announced in January that the outlook for airlines was not good as demand and traffic continued to fall.

"To say that 2021 has not gotten off to a good start is an understatement. The financial outlook for the year is worsening as governments tighten travel restrictions," IATA Director General and CEO Alexandre de Juniac warned.

Europa Press reported that international demand fell 85.6% in January 2021 compared to January 2020, a worse drop than December 2019 to December 2020.

However, losses related to fuel hedging are not a new phenomenon - even back in 2015, Delta Airlines announced it had lost $700 million over just one quarter.

Read the original article on Business Insider

from Business Insider https://ift.tt/3l3VL5R