Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Airlines Lose Billions of Dollars in the Oil-Market Casino

Published 03/06/2020, 16:45
Updated 03/06/2020, 17:09
© Bloomberg. The Deutsche Lufthansa aircraft on the tarmac at Munich airport. Photographer: Michaela Handrek-Rehle/Bloomberg

© Bloomberg. The Deutsche Lufthansa aircraft on the tarmac at Munich airport. Photographer: Michaela Handrek-Rehle/Bloomberg

(Bloomberg) -- Many of the world’s airlines already stung by the pandemic grounding flights are now finding out what a risky place the oil market can be.

Ten airlines in Europe and the Asia-Pacific -- where carriers tend to purchase oil derivatives to hedge against volatility in fuel prices -- have lost about $4.65 billion on those contracts this year, according to financial results compiled by Bloomberg through June 3. Deutsche Lufthansa AG (OTC:DLAKY) and International Consolidated Airlines Group (LON:ICAG) SA account for about half the total.

The hedging strategies that European airlines routinely employ are “not effective in a crisis such as the one at the moment,” Lufthansa Chief Executive Officer Carsten Spohr said on an earnings call Wednesday. “But obviously who could have expected this?”

To guard against oil-price volatility, airlines can buy call options to shield them from soaring fuel costs. To cheapen the transaction, they often simultaneously sell put options, which can become costly if prices fall. As the pandemic unfolded, demand for fuel collapsed, with crude at one point plummeting to its lowest level in almost two decades. Carriers were left holding positions in oil contracts that weren’t needed as fuel consumption tanked, and no way to offset those costs with fleets grounded.

Lufthansa reported 925 million euros ($1.03 billion) in expenses related to hedging in its quarterly results. British Airways parent IAG last month posted a charge of about $1.5 billion. Others that have seen hedging-related losses this year include Dubai-based Emirates, Air France-KLM, EasyJet Plc and Singapore Airlines (OTC:SINGY) Ltd.

The practice of hedging isn’t as common among U.S. airlines, following market gyrations in recent years. United Airlines Holdings (NASDAQ:UAL) Inc. hasn’t hedged in several years and American Airlines (NASDAQ:AAL) Group Inc. has also said it doesn’t see the market opportunities to do so as being attractive.

Despite the losses, there’s little prospect of a change in tack among some carriers.

“We are hedging first, not to make money, but to absorb and smooth the shock in the fuel price,” Air France-KLM Chief Financial Officer Frederic Gagey said on an earnings call last month.

©2020 Bloomberg L.P.

© Bloomberg. The Deutsche Lufthansa aircraft on the tarmac at Munich airport. Photographer: Michaela Handrek-Rehle/Bloomberg

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.