Generally, airlines cover only a certain portion of their fuel needs for a period of time. Often, contracts overlap for parts of an airline`s fuel requirements, with different levels of coverage over time. In addition, Ryanair`s futures contract price for fiscal 2021 is $632 per tonne, indicating that the market expects jet fuel prices to remain relatively stable next year. As this example shows, buying a jet-fuel swap allows an airline to guarantee its exposure to unpredictable fuel prices. If an airline buys a swap and the price of jet fuel increases, the benefit of the swap will offset the increase in its actual fuel costs. Conversely, if the price of jet fuel decreases, the decrease in the actual fuel load will offset the decrease in their actual fuel costs. Therefore, when an airline is covered by a fixed-price swap, the airline « blocks » its fuel costs for aircraft, whether fuel prices are higher or lower for jets when their swap expires. On February 22, 2019, crude oil and kerosene hedges were $66.41 per barrel for about 76% of the group`s planned fuel requirements for 2019 in the form of futures and options. In 2020, approximately 29% of the planned fuel requirements were covered for $70.09 per barrel.
The current price per barrel is $79, so Lufthansa Group hedges remain very profitable for the group. As mentioned in the previous article on term fuel safety, swaps are often a more ideal fuel guarantee instrument, unlike a futures contract, since futures contracts generally mature each month on a given day, while swaps based on the average price of the month are billed. The swap settlement style is clearly better suited to the way the vast majority of commercial and industrial consumers buy fuel. During the period 2009-2010, studies in the aviation sector showed that the average coverage rate was 64%. It is especially in the peak voltage phases that the ratio tends to increase. The main operating point for airlines is, on average, the cost of fuel for businesses and the expenses associated with the purchase of oil. In this coverage scenario, an airline should believe that prices will rise in the future. In order to mitigate this price increase, the airline purchases large quantities of existing oil contracts for its future needs. The Irish LCC covered 90% of its estimated fuel requirements for the year ended 31 March 2020 and 37% of the needs for the next fiscal year. Ryanair futures for fiscal year 2020 is US$709 per tonne. This means that Ryanair currently overpays for about $80 per tonne of kerosene (as indicated by the IATA fuel price monitor for December at a price of USD 630/mt).
According to IFRS, as a result of its hedging activities, Ryanair recorded a negative adjustment in fair value of EUR 185.2 million in 2019, as it insured itself at a higher price than the market.