1st Mar 2022 17:58
(Alliance News) - European airlines, still reeling from Covid-19's hit, now face the tricky prospect of no-fly zones, rising fuel prices and conflict, analysts at Scope Ratings said on Tuesday.
"The sector faces a double blow, ensuring the sector's credit outlook remains negative," Scope analyst Azza Chammem commented.
Fuel prices are a worry, as they currently sit at highs not seen since 2014. It is particularly worrying for airlines that are not well hedged. Among that group is Wizz Air Holdings PLC.
"Worries about the future supply of Russian crude have pushed oil prices back toward USD 100 a barrel in response to Russia’s invasion of Ukraine which has triggered wide-ranging international sanctions against President Vladimir Putin and his government," Chammem explained.
Brent prices topped the USD106 a barrel mark for the first time since August 2014. The North Sea benchmark traded at USD106.10 a barrel at the time of the London equity market close on Tuesday, up sharply from USD97.65 on Monday.
Scope analyst Chammem noted that jet fuel is the second largest cost item for airlines, representing between 15% and up 35% of operating costs over the past 10 years.
Over the past decade, periods of hefty jet fuel costs have coincided with years of smaller margins for airlines. In 2014, when jet kerosene prices topped USD100 a barrel, airline operating profit margins were roughly at 40%, according to figures outlined by Scope.
The margin figure stood at roughly 80% in 2016, when jet kerosene prices were below USD60 a barrel.
On hedging, the Scope analyst explained: "Carriers have over the years actively hedged their fuel bills by purchasing a certain amount of kerosene at predetermined prices using swaps, futures and call options with a one- to two-year horizon. The experience of the pandemic when airlines had to ground fleets and fuel prices proved highly volatile, leaving airlines locked into buying fuel they didn't need at above-market prices, has led some carriers to adjust their strategies, with more quarterly than annual hedging and greater use of options.
"Latest data show that, for Europe's carriers which disclose hedging, they have significant proportions of fuel costs hedged near-term but much less for later this year and 2023 for some. Some abandoned hedging such as Wizz Air or Norwegian, leaving them potentially exposed to much higher fuel costs if oil prices don't fall back soon."
Scope noted that according to latest figures, easyJet PLC is 60% hedged for its financial year ending September. Ryanair Holdings PLC is also 60% hedged for the full year, though its financial year ends this month. For the first half of financial 2023, it is 80% hedged.
International Consolidated Airlines Group SA is 70% hedged for the first quarter of 2022, though this figure drops to 65% for the second quarter, 56% for the third and 45% for the final three months of the year.
Away from fuel costs, no-fly zones "represent potentially significant extra disruption", Scope added.
"In Europe, the EU, UK and Scandinavian countries have banned Russian flights from their skies. Russia has threatened to retaliate which could create significant problems for carriers reliant on serving Russian airports and using Russian air space such as Finland's Finnair. Airlines forced to choose longer routes to avoid flying over the huge Russian land mass would also push up fuel consumption," Chammem added.
By Eric Cunha; [email protected]
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