‘Overhedging’ oil prices lands some coronavirus-battered global airlines in further trouble

As global airlines reel from the huge drop-off in business caused by the coronavirus, some face a second hit from this year’s historic plunge in oil prices. Some international airlines use financial instruments known as hedges to lock in years of fuel costs, a method aimed at smoothing out turbulence in the energy markets and providing guidance on one of the industry’s biggest expenses. However, the collapse in energy prices this year has left companies “over-hedged,” effectively meaning they have bought more insurance than they can now use. This is another trouble spot for airlines already slashing capacity to adjust to a new world of closed borders, empty planes and fearful travelers. Earlier this month, IAG took a E1.325b charge on overhedging. Air France-KLM, one of its main European rivals, has recorded a similar hit totaling E455m. And this week Singapore Airlines suffered the first annual loss in its near-48-year history, prompted in part by the equivalent of $638m in charges on oil hedges. The hits included nearly $500m in mark-to-market charges against what are now “surplus hedges” because it has slashed capacity for the financial year through March 2021. The rest stems from losses on hedge contracts that matured in the three months to end-March. The irony is cheaper oil should, in theory, be good news for airlines and other big consumers of energy. Jet-fuel prices are linked to crude oil. But when the energy markets break sharply from their expected ranges, as has happened this year, it can disrupt preconceived hedges. Story has explanation.<br/>