Slip in oil prices offers short-term respite to airlines

Aramco’s decision to flood the market causes worldwide economic concern but could help airlines reduce costs in the short-term
Crude oil, Fuel price
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Airlines embroiled in a desperate battle to cut costs amid the coronavirus crisis have been offered a small respite in the short-term in the form of plunging oil prices, which will lead to lower fuel spend.

The price of crude oil slipped by more than 20% in a day – the largest drop since the first Gulf War – because of a shock decision by Saudi Arabia to increase production and flood the market.

Brent crude futures fell by 30% to $31.02 a barrel on Monday after Aramco announced its decision in response to Russia’s refusal to cut supplies as per a deal with Opec.

While the greatest expense of any airline is fuel, usually accounting for around a quarter of costs, the price drop will not offset the long-term impact of the collapse in demand that carriers are facing.

And if oil prices drop below hedged values, airlines will have to pay the hedged amount meaning they will not benefit from cheaper prices.

There are concerns that some airlines could face a fuel hedging loss of hundreds of millions of pounds.

A report by Forbes claimed that Air France-KLM Group is facing a fuel hedging loss of up to $1 billion at current prices. But it added that if fuel rebounds to pre-coronavirus prices, hedges will become gains for airlines.

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