IAG is examining its policy of taking out fuel hedges following massive losses from the financial instruments.
“Given what we’ve experienced and endured this year we are actually doing a fundamental review of [our hedging] policy to see whether we need to learn from 2020 and take a different tack,” the airline group’s chief financial officer Steve Gunning said during its nine-month results call today.
IAG made a €352 million ($410 million) loss on its hedges in the third quarter, the majority of which relates to fuel. “This was driven by the fact that because we’ve reduced our capacity plans going forward, we are effectively more hedged or over-hedged than we were before,” says Gunning.
With the carrier’s jet-kerosene requirements being just a fraction of pre-Covid levels, it has already ceased hedging and has “de-designated” its existing fuel derivatives. “It would be reckless for us to take out more hedging at this point,” Gunning observes.
The price of jet fuel has fallen sharply though 2020, increasing IAG’s losses when the derivatives were marked to market.
IAG’s strategy in recent years has been to reduce fuel-price fluctuations by hedging a proportion of its future consumption up to three years ahead. In 2019, this resulted in a net gain of €106 million towards the group’s profits.
This year, however, the policy has resulted in vast losses.
In IAG’s results for the six months to 30 June, it said the value of its liabilities for fuel hedges was €2,047 million, representing a loss of €1,936 million since 1 January.
It added: “In addition… a significant proportion of the associated hedge relationships were no longer expected to occur and subsequently fuel hedges were de-recognised. As a result of this de-recognition, €1,372 million of the losses were reclassified to the income statement.”
While most airlines in Europe and Asia have traditionally hedged their fuel costs, carriers in the USA, Middle East and India tend to eschew the practice.