European Airlines Reap Benefits of Oil Hedging

As United States airlines reel from soaring oil prices and a sinking domestic economy, most of their European rivals appear better placed to ride out the storm.

While no airline can avoid the oil price shock, analysts say, European operators are benefiting from the relatively strong euro, given that jet fuel is priced in dollars. European carriers also fly relatively newer models of Boeing and Airbus planes, which burn 30 percent less fuel than models from the 1970s and 1980s, many of which are still in use by United States airlines.


“Europeans have the benefit of fleets that are fuel-efficient,” said Howard Wheeldon, a senior strategist at BGC Partners, a brokerage firm in London. “Americans always wait till the last minute and come in to buy aircraft at the end of the cycle.”

The European airlines are also reaping the benefits of consolidation, and some of them serve more lucrative long-distance routes than United States carriers.

Every airline, of course, is suffering the consequences of oil prices that are above $130 a barrel. The airline industry’s biggest lobbying group, the International Air Transport Association, has said that every dollar increase in the price of oil costs a cumulative $1.6 billion for airlines.

The ability to lock into fixed fuel prices months ahead of time — called hedging — can help offset these rising prices. But with the exception of Southwest Airlines , most United States airlines are less hedged than European ones.

Air France-KLM has hedged 78 percent of its fuel consumption through March 2009, at $70 to $80 a barrel, Jean-Cyril Spinetta, the chairman and chief executive of the airline, said last month. Through a policy of hedging fuel four years in advance, the company saved about $35 a barrel when oil was at $120 a barrel.

But that does not mean that Air France-KLM has not felt a pinch. Pierre-Henri Gourgeon, finance director of the company, said that it could not pass the full cost of fuel price increases to its customers. Instead, it is investing about $1 billion a year in new, more fuel-efficient aircraft, to which savings from fuel-price hedging contribute significantly.

Demand has slowed on its trans-Atlantic routes, Mr. Gourgeon said, though its European routes have not suffered. “Rather than decrease capacity, we will adjust our growth plan slightly,” he said.

Other European airlines have also taken the hedging route. British Airways hedged 72 percent of its fuel needs for the first half of the financial year and 60 percent for the second half. Lufthansa has hedged 83 percent of its fuel requirements through the end of 2008 and said that it saved 109 million euros ($169 million), last year by doing so.

Even low-cost carriers like Air Berlin, EasyJet and Ryanair are hedging, with Ryanair recently reversing a longstanding avowal never to do so.

But some European airlines are less protected. According to the French bank BNP Paribas, the Spanish carrier Iberia has ensured 47 percent of its 2008 fuel requirements, while Aer Lingus of Ireland has hedged 36 percent. The troubled Austrian Airlines has hedged only 20 percent of its 2008 fuel needs and is reportedly under pressure to find a “strategic alliance” with a stronger carrier, most likely Lufthansa or Air France-KLM.

European airlines are also taking advantage of a wave of consolidation that is only now reaching the United States.

Air France acquired KLM, and Lufthansa purchased Swiss International Air Lines. The two acquiring airlines succeeded in increasing the number of passengers per plane — the “load factor” — on the airlines they absorbed.

Significantly, analysts say, both of those transformative deals took place after the 2001 terror attacks in the United States and amid the ensuing global downturn in air travel, while many United States airlines were forced into bankruptcy protection.

Most European carriers that were not part of the consolidation trend, like Alitalia Airlines, which is now surviving off Italian government support, are stuck in the same position as their American counterparts.

European Union rules outlawing certain types of state aid, established in 1997, prompted struggling airlines to combine or go out of business, as was the case with Sabena of Belgium in 2001. Meanwhile, the use of Chapter 11 bankruptcy protection in the United States prevented airlines from merging. Consolidation, as seen with the proposed merger of Delta Air Lines and Northwest Airlines, is only now getting under way and may be short-lived.

“The Europeans took the restructuring pain earlier and more sharply than the Americans,” said Lloyd Brown, an airline analyst at Ernst & Young in London. “They had more foresight and less support, so they had to make hard decisions.”

Finally, at least 50 percent of the business done by European airlines like Lufthansa and Air France-KLM consists of long-distance flights to regions like Africa and Asia, which are benefiting from a boom in commodities. Asian airlines are also doing better because demand is holding up in that region.

United States airlines have proportionally less international traffic — roughly 20 percent of their business — to counteract the slowing demand on national routes. Furthermore, on those shorter flights, American airlines often lack the mix of business and economy classes that enables European carriers to maximize costs by charging more at the front of the plane, said Mr. Wheeldon of BGC Partners.

Still, European airlines are striving to move quickly to limit their risks.

“We are looking at the cash contribution of every flight, on a flight-by-flight basis, not just routes,” the British Airways chief executive, William M. Walsh, said. “We are going to take flights out where it makes no sense, with oil at $130 a barrel, to continue them.”