By Lisa Barrington
LONDON, Sept 22 (Reuters) - European airlines are exploitinga collapse in oil prices by hedging more of their fuel needsfurther into the future, but those that kept their powder drybefore the rout are emerging as clear winners, industry sourcessay.
At a time of heightened price volatility, carriers are alsoconsidering using more options contracts to access lower pricesshould they fall further.
Many airlines, however, lack the manoeuvrability to benefit;before oil slumped they locked themselves into much highercosts, with some approaching $1,000 per tonne of jet fuel,roughly double current rates on the spot market.
Global crude prices have fallen around 60percent over the last 15 months and European jet fuel
This seems great news for cost-conscious travellers andprofit-hungry airlines, which burnt through 5.4 million barrelsper day (bpd) of jet fuel - 6 percent of all oil productsglobally - in 2012, the most recent U.S. government data shows.
With fuel accounting for 46 percent of Ryanair's 2014 operating costs, 33 percent of British Airways' and 21.5 percent of Lufthansa's, price fluctuationscan seriously impact company profits.
To reduce price-fluctuation risk on projected operatingcosts, many airlines hedge a proportion of their future fuelneeds six to 24 months in advance by buying jet fuel or crudeoil contracts from banks or on an oil futures market.
But hedging strategies differ and not all airlines - andtherefore consumers - will profit from today's low prices.
Budget carrier Norwegian Air Shuttle stands tobenefit. Many European airlines were 70-90 percent hedged goinginto 2015, but Norwegian was largely unhedged.
"Typically we have not done much hedging," Norwegian Air'schief financial officer, Frode Foss, told Reuters. "But in thelast month we have started accumulating, relatively speaking, alot of hedging to lock in fuel at very favourable levels."
The airline has hedged 23 percent of its fuel needs for therest of this year, and 28 percent for 2016, with the potentialto increase and extend hedges out to 2017, Foss said.
"You might see us at 50 percent or more, depending on theforward curve," Foss said.
Norwegian has one of the lowest hedge coverings of the majorEuropean airlines, and can buy around three quarters of its fuelfor this year and next on the spot market; good news if pricesfall further.
But airlines that entered the current price decline heavilyhedged cannot benefit in the same way.
With 93 percent of its 2015 fuel needs hedged, according toan analyst note from HSBC, Air Berlin, Germany'ssecond-largest airline, has been stung by falling prices.
"Our hedges come from a time when fuel was at $900 a tonne.Now it's at $500-$600. So it's a negative impact," the carrier'sfinance chief, Arnd Schwierholz, said in August.
Large hedges at prices significantly higher than the spotmarket can make airfares less competitive by forcing carriers topass on the extra cost to passengers.
In March, British low-cost airline Flybe had 70percent of the next 12 months' fuel hedged at $919 per tonne.
September's European jet fuel spot price has so far beenaround $500 per tonne.
"Some airlines that cannot afford to be as well hedged asFlybe have been reducing their prices," Flybe said in itsresults for the year to March.
QUEST FOR CERTAINTY
Ryanair has the largest publicly declared hedgingpercentage among European airlines. It is 90 percent hedged forthe year to March 2016 at $910 per tonne, and 70 percent hedgedat $657 per tonne for the next year.
Ryanair's chief executive said that while low prices arebeneficial, price certainty is as important a reason to hedge.
"We don't need to be the best in the world at buying fuel,we don't need to be the one that gets the lowest price at thebottom of the cycle. We just want certainty for the next 12months," Michael O'Leary said at a travel conference in Germany.
To achieve this, most major European airlines hedgeregularly throughout the year.
Large airlines do not significantly add hedges on falling orrising prices and hedging managers commonly have little leewayto increase hedges, Commerzbank analyst Johannes Braun said.
Nevertheless, third-quarter results for this year areexpected to show carriers hedging larger amounts of fuel andfurther out into the future than usual, industry sources say.
Hedging strategy is also in flux.
"The tendency is to go more into an options-based hedgingprogramme when there is market uncertainty and huge volatility,"said Hans Erik Christensen, managing director at fuel riskcompany Global Risk Management.
Options contracts give the purchaser the right, but not theobligation, to buy or sell fuel in the future at a certainprice.
Unlike simple forward purchases or swaps, options have acharge attached and most airlines - with the exception ofLufthansa, which has preferred options for many years - see themas a disadvantage.
"However, when the oil price is falling, options are anadvantage. It is cheaper to hedge forwards and get protection ifprices go up, but if you pay a premium for options you alsoretain the potential to benefit from lower oil prices moreimmediately," Commerzbank's Braun said. (Additional reporting by Victoria Bryan in Germany; Editing byChristopher Johnson and Dale Hudson)
