the state of airline fuel hedging & risk management
TRANSCRIPT
The State of Airline Fuel Hedging & Risk Management in
2012
The study reveals the current fuel hedging and risk management practices of twenty-four commercial airlines across the globe.
Executive Summary
The State of Airline Fuel Hedging & Risk Management is the result of a study conducted to reveal the current state of fuel hedging and risk management among commercial airlines. The most noteworthy finding of the study is that, while the majority of air-lines are hedging their fuel price risk, nearly half stated that their hedging programs should be utilizing hedging strategies which better reflect their tol-erance for risk and corporate objectives. 81% stated they are or, have previously, hedged their jet fuel price risk Of those who are or have engaged in jet fuel hedging, 76% stated that
they have an official fuel hedging policy When asked about the primary purpose of their fuel hedging program,
44% stated that it is to protect against short term price increases Swaps and call options are the most popular hedging instruments utilized
among study participants 82% stated that they currently have fuel hedges in place When asked how they could most improve their fuel hedging program,
39% stated that they could do so by utilizing hedging strategies which better reflect the company’s risk tolerance and hedging goals
Over the course of the past few years, volatile oil prices have wreaked havoc on the airline industry, a trend which doesn’t appear to be ripe for change anytime in the foreseeable future. Between crude oil rising to nearly $150/BBL in 2008, subsequently collapsing to below $40, and recently rising to above $125, the past five years have proven to be a very challenging time for the airline industry. Adding insult to injury, the state of the capital markets has left many airlines without access to much needed capital. In these times of significant change and uncertainty, it is essential that commercial airlines employ a sound fuel hedging and risk management program. These programs will not only allow the airlines to survive the most challenging times, but should also allow them to excel in the best of times as well. The primary focus of energy risk management as it relates to commercial airlines is the hedging and risk management of jet fuel price risk. Consequently, this subject forms the basis of this study, which strives to analyze the current fuel hedging and risk management practices of commercial airlines across the globe.
Introduction
52% of participants indicated that their company’s shares are publicly traded, 33% indicated that they are privately held, 10% indicated that they are government owned, while 5% answered other. When asked where the majority of their flights originate, 48% stated that their flights originate in Europe, 24% in North America, 14 % in the Asia-Pacific region, 10% in Africa, and 4% answered common wealth of independent states. 57% of participants indicated that the majority of their flights are international, while the remaining 43% indicated that they majority of their flights are domestic. The participants stated that the number of aircraft in their fleet are as follows:
Demographics
33.33%
38.10%
4.76%
23.81%
0%
10%
20%
30%
40%
1 - 24 25 - 75 76 - 150 > 150
Number of Aircraft in Fleet
76% of participants stated that they have an official fuel hedging and risk management policy while the remainder stated that they do not have such a policy. 63% stated that they do employ hedge accounting, 25% said they do not, while the remainder indicated that hedge accounting is not applicable to their fuel hedging program. When asked who is responsible for making their company’s hedging decisions, participants indicated the following:
Fuel Hedging Policy & Governance
22%
39%
11%
22%
6%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Responsibility for Hedging Decisions
Board of Directors
Hedge Committee
CEO/President/MD
CFO/VP of Finance
Other
When asked if they are currently hedging and/or whether they have previously engaged in hedging, 81% answered in the affirmative. Of those who indicated that they are currently hedging or have previously engaged in hedging, 82% indicated that they currently have fuel hedges in place. When asked what is the primary purpose of their fuel hedging and
risk management program, participant stated the following:
State of Industry Hedging Practices
32%
52%
16%
0%
10%
20%
30%
40%
50%
60%
Primary Goal of Fuel Hedging Program
Mitigate cash flowvolatility
Protect againstshort-term fuel
price increases
Protect againstlong-term fuel price
increases
Participants stated that they are currently and/or have previously
utilized various hedging instruments and structures as indicated in the
chart shown below. As we would have assumed, the majority of
participants are utilizing fixed price swaps and call options, which
tend to be the favored hedging instruments of the industry.
Most Utilized Hedging Instruments
3.23% 3.23%
38.71%
29.03%
12.90% 12.90%
Futures Forwards(Physical)
Swaps CallOptions
CostlessCollars
Three-WayCollars
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
Hedging Instruments Utilized
When asked, at any given time, what is the average duration of their
fuel hedges, participants stated the following, as indicated in the
chart shown below. While it shouldn’t come as a surprise that the
majority stated that their hedge positions average less than one year,
it is interesting to note the low percentage of longer dated hedging.
When compared to historical financial statements of numerous
airlines, it appears that highly volatile oil prices are driving most
airlines towards hedges of shorter tenors than would be the case in a
lower volatility environment.
Average Tenor of Hedge Positions
38.46%
30.77%
23.08%
7.69%
0%
10%
20%
30%
40%
50%
0-6 Months 7-12 Months 13-18 Months 19-24 Months
Average Duration of Hedge Positions
When asked, at any given time, what percentage of their anticipated
fuel consumption is hedged for the upcoming year, participants
stated the following, as indicated in the chart shown below. While
some participants are clearly very well hedged for the coming year,
just shy of half of the participants are less than forty percent hedged,
indicating that they are quite comfortable having very significant
exposure to spot market prices. This is interesting as many airlines
have recently stated that they are fearful of oil prices rising above the
current forward curve.
Current Hedge Positions
7%
43%
29%
14%
7%
0%
10%
20%
30%
40%
50%
0-20% 21-40% 41-60% 61-80% 81-100%
Average Percentage of Fuel Hedged for Next 12 Months
When asked how their company determines whether their fuel
hedging program is and/or has been successful:
36% stated that avoiding exposure to short-term fuel price increases is
their definition of success.
An additional 36% stated that their fuel hedging program is deemed to
be a success if they are ability to mitigate cash flow volatility.
Interestingly, 14% stated they believe their hedging program is
successful if said program provides them with a competitive
advantage in the industry.
The remainder of the participants equally stated that their fuel
hedging program is considered a success if they are able to avoid
exposure to long-term fuel price increases or if it improves their
profitability.
Fuel Hedging Success
When asked how they could most improve their fuel hedging and risk management program: 39% said utilizing hedging strategies that better reflect the company's risk tolerance and corporate goals. 22% stated that establishing a consistent approach of hedging on a regular basis would most improve their hedging program. 17% indicated that their hedging program would be most improved by developing better processes to execute and implement their hedging strategies. 13% of respondents stated that they are content with their hedging program. 9% of participants indicated that optimizing or monetizing their existing hedge positions would be the best way to improve their fuel hedging program.
Improving Fuel Hedging & Risk Management Programs
When participants were asked if and whom they receive hedging advice, data or information they indicated the following: The fact that the vast majority of the participants stated that they are relying on financial institutions and fuel suppliers, most likely their counter-parties, to provide them with hedging advice, data and information, implies that many in the airline industry have yet to adopt energy hedging and risk management best practices.
Sources of Fuel Hedging Advice, Data & Information
68.42%
15.79%10.53%
5.26%
0%
10%
20%
30%
40%
50%
60%
70%
80%
FinancialInstitution
Fuel Supplier Consultant InternalResources
Primary Source of Hedging Advice, Data & Information
The State of Airline Fuel Hedging & Risk Management provides an overview of the current fuel hedging and risk management practices of the commercial airline industry. The twenty-four participants of the study were invited to participate via email and telephone. The study was conducted online during the winter of 2011-2012.
Methodology
Mercatus Energy Advisors is the leading, independent energy hedging & risk management advisory firm. Our client base includes energy consumers, marketers, producers, refiners, and traders as well as financial institutions, institutional investors and professional services firms. For more information, please visit our website at www.mercatusenergy.com or contact us by phone: Houston: +1.713.970.1003. London: +44.20.3608.1277
Mercatus Energy Advisors
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