Kenya Airlines Back to Price Hedging After Costly Gamble

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Kenya Airways has announced plans to restart fuel price hedging by the end of the year, two years after a wrong gamble played a big part in wrecking its bottom lines and forcing it to seek taxpayer bailout.

The airline’s executives say they are already in talks with banks and other firms in the energy sector to finalise on the technical aspects of the process.

KQ, as the airline is known by its international code, spent Sh25 billion ($ 250 million), or about 30 per cent of its operating costs on fuel last year. The executives say the rising fuel budget presents a significant challenge to the airline’s recovery.

“The volatility of the oil price has been really tremendous. Addressing this is of utmost concern, Kenya Airways Chief Executive Officer, Sebastian Mikosz said on Friday after the firms annual general meeting.

Upward swing

The decision to go back to hedging imply that the airline’s executives have every reason to believe that fuel prices will continue to rise in the foreseeable future.

Under the hedging contract, a firm generally undertakes to pay the current market prices throughout the period of agreement, making profits with every upward swing.

Two years ago, when the airline tried such a bet – which is regarded as an international best practice in the airline industry – prices took a downward trend, contributing immensely to a monumental Sh26 billion loss that the national carrier booked.

It has never recovered from that dent, which saw it lease aircraft and sell its prime landing space at Heathrow Airport, London for Sh7.6 billion in 2016, in efforts to raise revenue. Last year, it posted a Sh6.1 billion net loss for the nine months to December.

Fuel prices have risen by about 12 per cent since April to a current Sh7,000 per barrel yesterday, from Sh5,000 last year.

The national carrier is expected to spend more on fuel as a result of the increased price, which hit a four-year high of Sh8,000 per barrel last month and analysts have raised concerns that it may hit Sh10,000 for the same quantity in coming months.

Huge losses

Mr Mikosz said hedging should be considered as a cost, which, however, guarantees them stable prices based on the persistently rising fuel prices.

Most of the global airlines adopt fuel hedging to cushion themselves against increased costs on fuel but incur huge losses if the prices fall.

Generally, hedging is a contractual tool used by airlines and other fuel consumers to cushion themselves against increased fuels costs arising from volatility in the global market.

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