Ryan Air caught by hedging madness, Labour next?

Not often that a canny, if awful, company like Ryan Air get caught. However, in its annual results today Ryan Air has had to announce that the coming year will be a tough one. This is because it has bought the whole of 2015 and, er 2016, ahead of time in terms of fuel cost at a price of $95 per barrel. see below

"Hedging:

We have taken advantage of recent dips in oil prices to further extend our fuel hedges into FY17. We are 90% hedged for FY15 at $95 pbl and FY16 at $92 pbl and are 35% hedged in FY17 at approx. $68 pbl. Our US$ op-ex is 90% hedged at $1.33 in FY16, and 60% hedged at $1.21 in FY17. If current rates continue this would deliver an indicative reduction in our fuel cost per passenger of approx. 8% in FY16 and approx. 16% in FY17. Our capex programme is fully hedged to September 2017 at a rate of $1.35, which locks in significantly lower cost aircraft deliveries over the next 2 years."


So in effect, they have managed to miss the price drop entirely. Given 12 month contracts are the norm in the industry they must have signed a really good deal for 2 years just before prices started falling in the middle of last year. This would equate to say a 10% discount to the prices at the time, which sounds about right for such a large order. Why they quote the Brent price is a bit mystifying when they are buying jet fuel (where the price has fallen from around $115 to $80 in the same period).

Anyway, they won't be flying cheaply for long against any companies that have not hedged to such a crazy degree. Hedging at its core is a sensible risk management strategy, all Ryan Air have done is been caught out like most of the world by the rapid price collapse in commodities.

Which makes it even weirder that the Labour Party are about to campaign in an election period in 'freezing' energy prices that supply domestic households in the UK. Just at a time when the prices should be falling substantially. Now the companies have hedged the other way, to make sure they can be profitable for the future in a price frozen world. This is now locked in, whether Labour win the election or not, the Big Six energy companies will be unable to track the market in a more meaningful way. So Labour have achieved one aim, there will be no price rises for some time - unfortunately they have managed to lock in the highest prices we are likely to see for the next 3 or 4 years.

Remember when Labour thought they were so clever selling Gold at the bottom of the market - well, here we are, they have done it again and they are not even in Government this time!