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Bloomberg
IAG SA, owner of British Airways, said it is conducting a review of hedging policy after the coronavirus pandemic sparked a mammoth loss on oil derivatives contracts.
The company uses such contracts to try and limit its fuel bill — usually the single biggest expense for airlines — but lost 1.6 billion euros ($1.9 billion) as a result of the strategy in the nine months through September 30, it said.
“We are actually doing a sort of fundamental review of that policy to see whether we need to learn from 2020 and take a different tack,†Chief Financial Officer Steve Gunning said on a call with analysts.
Airlines globally have been hit hard by a pandemic-induced collapse in demand. After making hefty schedule cuts earlier in the year, the resurgence in the coronavirus in Europe prompted IAG to cut its demand outlook for the fourth quarter of this year, with the group now expecting only to fly 30% of its 2019 schedule in the period, down from a previous forecast of 54%.
As the demand for flights and fuel has declined, hedging has become a costly proposition for Europe’s biggest airlines. Because airlines often hedge years in advance for the fuel they will consume, the collapse has left carriers with more oil derivatives than they need to cover their fuel bills. As a result, they’ve been forced to mark them as financial losses.
Gunning said it would be “reckless†for the company to undertake further hedging for 2021 at the moment given the weak outlook for flying.