Jet fuel hedging strategies for an airline company
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Situation
An Austrian budget airline has a significant exposure to commodity price and foreign exchange risks. It has several supply contracts in its portfolio and uses various hedging strategies to keep fuel costs under control.
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Complication Common commodity hedging instruments are dollar denominated and as such the EUR/USD risk hedging is dealt with independently from the commodity hedge. This yielded two issues: (i) higher hedging costs; and (ii) basis risk arising from the mismatch in size and timing between the hedge and the underlying exposure.
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Solution We designed a hedging strategy that minimized the basis risk by optimally choosing the right combination of hedging instruments. We also aligned the treasury and trading departments of the airline company to structure low cost Quanto hedges.
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