The high price of oil will have a negative impact on the finances of airlines that are unable to cover their fuel bills in the face of low passenger demand, said Ryanair Holdings Plc. director, Michael O’Leary, on Monday January 31st.
According to Bloomberg, Brent crude was valued at close to USD 91 per barrel, due to the high global demand that caused prices to rise to a seven-year maximum. Ryanair announced that it has 100% hedged for the current quarter and 80% into Easter, which is in mid-April, as well as for summer.
This represents an uncomfortable situation for airlines, as they cannot afford the cost of fuel. When this happens, companies use oil swaps and options to cap their losses, however, hundreds of carriers have already recorded losses when the market came to a near standstill in the midst of the Covid-19 pandemic.
We have seen some spectacular deflections by some of our so-called competitors, arguing that they will now have no hedging because they have never made money on hedging.
Michael O’Leary, Ryanair CEO
Most airlines have already passed the worst of the pandemic after 21 months of ups and downs of contagions, border closures and new variants that have impacted the tourism sector.
Despite the arrival of Omicron that hit most parts of the world the past couple of months, the major players in the tourism sector consider that this will only be a “bump” in the recovery process that has been taking place since last May in the sector and that it will not set them back to the square one.
This slow but steady recovery is also reflected in jet fuel consumption: kerosene shot up 154% in December compared to December 2020 and did so at a record cost since 2014.
Airlines are about to lose a shedload of money by not hedging, particularly with spot prices up to $91 a barrel.
Michael O’Leary, Ryanair CEO
Kerosene is a hydrocarbon blend obtained from the distillation of natural oil and its price is partly conditioned by the crude oil market. According to the consumption preview published by the Strategic Reserves Corporation, December saw this large year-on-year rise in kerosene compared to other fuels such as gasoline (up 17.5%) or fuel oil (8.2%).
Throughout 2021, kerosene consumption grew by 38.8% compared to 2020 to reach 3.35 million tons, although it is still far from pre-pandemic levels when it was more than double.
This upturn in consumption has gone hand in hand with the increase in the price of kerosene. According to data from the International Energy Agency reported by the same media, the price of fuel on the US Gulf Coast currently stands at 2.467 dollars (around 2.17 euros) per gallon (i.e. per 3.8 liters).
