IAG shakes up hedging policy after left holding high priced swaps

London (Quantum Commodity Intelligence) - International Airlines Group (IAG), the owner of British Airways, Vueling and Aer Lingus, will hedge far less of its jet fuel demand in the future, after it was left holding a surplus of expensive and unwanted derivatives following the Covid-19 crash that grounded fleets of planes, it revealed Friday as the group posted a $1.2 billion pre-tax loss in the first quarter.

Even the oil price rally recently has failed to propel jet fuel prices high enough to match the price of these swaps.

“In aggregate there is a net loss on these derivate contracts, as whilst the commodity fuel price has risen in recent months it is still below levels seen before COVID-19, when these derivative contracts were taken out,” the first quarter report states.

In a recently approved decision, the board will allow each operating company more flexibility in how they hedge their fuel buying, matching the nature of their business.

They will also allow greater use of call options, which means airlines will pay for the right to buy the hedge, but without the obligation.

IAG will limit hedging to a two-year rolling basis, with hedging up to 60 per cent of anticipated jet fuel buying in the first twelve months and up to 30 per cent in the following twelve months.

However, its low cost airlines, such as Vueling, have more leeway to hedge up to 75 per cent in the first twelve months.

IAG will also only allow its airlines to hedge fuel buying 25 to 36 months ahead in ‘exceptional circumstances’.

Jet cargo prices in north Europe were assessed at $573.75/mt by Quantum on Wednesday, while first quarter swaps in 2022 were $584/mt.

Ther airline group said passenger capacity slumped to less than a fifth of pre-pandemic levels in the first three months of 2021, and it expects only a slight improvement in the second quarter to 25% of 2019 levels.

But the cargo business was a bright spot.

IAG operated 1,306 cargo-only flights in the first three months, which generated €350m in revenue, a 42% year-on-year increase and a record for the first quarter.

In the final three months of last year, IAG operated 969 cargo-only flights.