Not a holder but I followed the Ansett collapse with...

Not a holder but I followed the Ansett collapse with interest.

There is an old adage which is sell forward/hedge forward. It means a possible hedging policy is to hedge forward to the extent that you need to hedge to in order to hedge the fuel component of your forward sales. Airlines might have fuel at 25% of operating costs. So sell $1m of forward ticket sales you might hedge 250k of forward fuel prices.

if you under or over hedge then the gains or losses on the excess/under hedging goes straight to the profit and loss.

At 31 Dec 2019 VAH has hedged 100 % of the remainder of 2019 20 and 75% of 2021 estimated fuel use. This equals hedging 13 months worth of forward estimated fuel use at $1.1 billion per year.

Lets say that the fuel hedge book was $1billion when Virgin grounded most of its flights. Since the hedges were put in place crude has halved. That’s a potential $500 million unrealised derivative loss in the 2019-20.

Hedging long forwards helps certainty in forward pricing, tour operator sales etc, but if you can’t sell the seats, or in this case, are not flying, closing out the hedge book can be potentially catastrophic.

Funny thing is, Virgin, as a domestic carrier, may have had a few months of forward ticket sales when it grounded its planes, but less than 13 months.


Good luck to all.