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To hedge or not to hedge
01 March 2005
With oil prices on the way down, what kind of hedging strategy should be used? Mike Halls reports.
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Airlines
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To gamble or not to gamble, that is the question the aviation industry is facing over its fuel bills this year. Should they hedge – even when oil prices seem to be firmly on their way down – and waste money, or lock into higher prices as a kind of insurance?
Given that a $1 increase in the price of jet fuel adds a further $1.6 billion to the annual fuel bill of aviation globally, this is a big decision to make.
Some airlines, such as Ryanair, have announced that they are totally unhedged, seeing last year's oil spike as a one-off. While others, such as
Iberia and Lufthansa (see table), are keen to try and lock in some certainty to their fuel bills.
The market view on lower prices has become deafening. Since late last year, equity analysts have been revising their stock estimation for airlines' profits upwards, based on a sustained fall in...
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