Ryanair will continue to hedge fuel costs with the same swap instruments that prompted heavy mark-to-market losses for the industry in 2008/09, despite taking an apparent hit on its fuel risk management strategy in the first quarter, says chief financial officer Howard Millar.
The airline's average fuel price increased by 21% year-on-year during the first quarter, rising from $820 per metric tonne (pmt) last year to $998pmt in Q1 2012/13.
This came despite a 6% reduction in average jet fuel prices across all benchmarks over the corresponding period, according to global energy information provider Platts. Average global prices between April and June stood at $994pmt, data from Platts shows, compared with $1,057pmt during the same months last year.
Rising fuel expenditure in a declining jet fuel environment typically indicates that a company's hedges have become less price competitive.
Asked whether the $998pmt figure amounted to a hedging loss, Millar says: "Some years it's a plus, and some years a minus. You generally get it wrong with hedging. When the price is rising very quickly, your weighted average price moves up slowly, and when prices are falling very quickly you're on the other side of that curve. Your weighted average is falling slowly.
"But over a period of time it should balance out. Whether it's plus or minus, really at the end of the day it doesn't make any difference to us."
Ryanair hedges solely with swaps, Millar says, despite the reputation such instruments acquired following the global financial crisis. Ryanair was among numerous carriers to incur heavy losses on their hedging bets in 2008/09, after locking in prices through swaps only to see spot prices plummet.
Many airlines have since diversified their hedging strategies with collars and options, which offer greater flexibility across a range of price environments. "We never use them," Millar insists, however. "We do the boring, straightforward, plain vanilla swap contract."
The recent downturn in underlying oil prices has already seen several carriers write down the value of their Q1 fuel hedging contracts. Air France recorded paper hedging losses of €372 million this month, while Delta Air Lines put its mark-to-market hedging losses at $561 million.
Fuel costs accounted for 47% of Ryanair's cost base during the first quarter. That reflects a €117 million ($143 million) increase in fuel expenditure to €544 million - 27% higher than in Q1 2011/12 - which factors in greater volume consumption arising from a 4% increase in hours flown. The airline is 90% hedged for full-year 2012/13 at "approximately $1,000pmt".
First quarter profits fell 29% year-on-year to $98.8 million against a backdrop of higher fuel expenditure, the airline said in its Q1 results presentation today.