British Airways Parent Reports Oil-Hedging Losses Widen to $1.9 Billion

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 Sept. 30, it said on Friday.

“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%.

British Airways Parent Reports Oil-Hedging Losses Widen to $1.9 Billion

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. It’s not currently adding to its derivatives positions for next year, he said.

Though the loss is large, IAG isn’t the only airline to have been hit in this way since the virus outbreak began. Others, including Deutsche Lufthansa AG and Air France KLM, have also been forced to take charges. In June, 10 of Europe’s largest airlines had amassed collective losses of $4.65 billion.

The retreat in airline hedging is also having a marked impact on the oil market. Some of the world’s biggest producer deals are often made cheaper by airlines effectively making the opposite side of the trade. Without that flow, the cost of hedging for oil producers has also spiked.

©2020 Bloomberg L.P.

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