Airlines rein in hedging despite oil price crash

By John Bowker - Analysis

LONDON (Reuters) - Europe's major airlines are deciding against striking new fuel hedging agreements for next year despite the plummeting oil price, as the global credit crisis and the collapse of Lehman Brothers hikes the cost of securing deals.

British Airways (BAY.L), Ryanair (RYA.I) and Lufthansa (LHAG.DE) have all said their hedging deals will be significantly reduced in the new year, snubbing the opportunity to lock in fuel bills despite oil falling to 22 month lows.

Oil has come down from highs of $147 a barrel in June to $55 today, leaving current airline hedging policies at around $90 or more looking well out of date.

But analysts and airlines have argued that it is far harder and more expensive to secure new hedging deals from banks in the wake of the credit crisis, especially after the collapse of Lehman Brothers -- a big player in the market.

"The hedging market is very illiquid at the moment -- its hard to find a counter-party in the deal," said Mark Thompson, airlines analyst at Morgan Stanley.

Germany's Lufthansa (LHAG.DE) said at its third quarter results late last month that its hedging for the current year had been cut to 72 percent from 85 percent of its total bill as a result of the loss of a contract with Lehman Brothers.

Its hedging for 2009 is down at 57 percent, at an average of $91 a barrel.

Lehman became the biggest investment banking casualty of the credit crisis in September when it filed for bankruptcy, meaning many airline hedging deals collapsed.