This is EXCELLENT news that new clients are signing up for the fuel saving aspect of TFMI. Major airlines messed up on their fuel hedging this year. When oil hit $147 bbl. (totally manipulated) you had 'experts' predicting $200-250 by 2009 thus some got scared into locking in at too high a price. I even noticed that Alaska Airlines has a job posted for a new Director of Fuel Hedging as they got dinged last quarter. Better to purchase a product that actually saves fuel than gamble - I think we will see more activity soon. Thanks Bob and good on you AMA for coming up with a product that will serve a growing demand.
LONDON: Major European airlines are deciding not to seek new fuel hedging agreements for next year because the global credit crisis and the collapse of Lehman Brothers have raised the cost of such deals.
British Airways, Ryanair and Lufthansa have said their hedging deals will be significantly reduced in the new year, ceding the opportunity to lock in fuel prices that have fallen to 22-month lows.
Oil has come down from highs of $147 a barrel in June to around $55, leaving current airline hedging policies for the price of oil at around $90 looking well out of date.
Analysts and airlines have said that it is far harder and more expensive to make new hedging deals with banks during the credit crisis, especially after the collapse of Lehman Brothers, a big player in the market.
"The hedging market is very illiquid at the moment - it's hard to find a counterparty in the deal," said Mark Thompson, an airlines analyst at Morgan Stanley.
In releasing its third-quarter results late last month, Lufthansa said that its hedging for the current year had been cut to 72 percent from 85 percent of its total fuel bill as a result of the loss of a contract with Lehman Brothers.
Its hedging for 2009 is down to 57 percent, at an average of $91 a barrel.
Lehman became the biggest investment banking casualty of the credit crisis in September. Many airline hedging deals collapsed when the firm filed for bankruptcy.
Michael Cawley, deputy chief executive at Ryanair, confirmed the banking crisis had affected the type of deals the airlines could get.
"There is a far less liquid market for futures in all parts, including oil, so when we go to hedge it's not as easy as just making a phone call," Cawley said.
Neil Glynn, an analyst at the Dublin brokerage firm NCB, said jet fuel itself had become much more expensive in relation to the price of crude.
The spread between the two has in recent weeks widened from the historic norm of 27 percent to as much as 60 percent.
British Airways has had 35 percent of its fuel bill for next year hedged at $100 a barrel since the summer, but when it released its half-year results last week the airline said it remained hedged at less than 40 percent of its total fuel bill, despite the changing conditions.
British Airways' finance director, Keith Williams, said that if oil averaged $75 a barrel and the pound was worth an average $1.65, the carrier would lower its fuel bill to £2.8 billion in the 2009-2010 fiscal year, from around £3 billion this year. One pound is worth $1.47.
"The oil price is connected to economic downturn," said Andrew Fitchie, an analyst in London for Collins Stewart. "The airlines are mindful that the economic outlook is looking substantially weaker, and that takes the pressure off."
Air France-KLM uniquely hedges five years in advance, but at a recent informational sessions for investors, the finance director, Philippe Calavia, said he agreed with British Airways' policy of making no major changes to existing hedging policy.
"In spite of the recent drop in the oil price, a positive factor for the economy and the group," the company "will pursue its hedging policy," he said. He added that any future hedging contracts would reflect the recent fall in prices.
Ryanair was about a year too early with its strategy of not hedging fuel, losing millions of euros as oil reached new highs over the summer.
The company then hedged at triple figures a barrel for the current quarter, but is now switching back to an unhedged approach because of the sharp fall in oil's price.
The Irish airline has a hedge for 25 percent of its fuel needs for the first half of the 2009-10 fiscal year at an average $77 per barrel, but is willing to leave the rest to chance.
"The absence of fuel hedging, so long a handicap for profitability, is now proving to be an asset," Edward Stanford, an analyst for Cazenove, said in a note to investors of Ryanair.