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Air industry mulls jet fuel hedging options

A world traveller cabin is seen in the British Airways Airbus A380 at Heathrow airport in London July 4, 2013. REUTERS/Paul Hackett
A world traveller cabin is seen in the British Airways Airbus A380 at Heathrow airport in London July 4, 2013. REUTERS/Paul Hackett

DUBLIN (Reuters) - Taking out complex call options or even buying a refinery are some of the measures airlines should consider as they try to combat volatile oil prices, air finance industry experts said.

Jet fuel can account for anywhere from between 20 and 50 percent of an airline's operating costs, and predicting oil prices is a headache.

"No one knows where oil prices will be in six months, let alone 10 years away," James Dempsey, Ryanair group treasurer, told a conference hosted by Airline Economics on Monday.

"Oil prices are one of the biggest risk factors in the business."

Delta Air Lines bought its own refinery in 2012 to address the risks from fuel prices.

Even though the refinery turned only a small profit for the first time in the third quarter of 2013, over 60 percent of air finance executives polled at the conference on Monday believed this was a good move.

Some airline executives took a more cautious stance to such a suggestion however.

"We'll keep an eye on how successful they are," Gerry Laderman, senior Vice President for Finance and Treasurer at United Airlines told Reuters on the sidelines of the conference.

Mike Corley, the chief executive of Mercatus Energy, an independent energy hedging, trading and risk management advisory firm, said airlines should take a more active approach to hedging fuel costs.

He gave the example of call options, which can be expensive but then protect airlines from rises in fuel prices, whilst also letting them track falls in the oil price.

"Airlines are very good at mitigating risk across the business but managing commodity price risk is often an area where they fall short," Corley said.

However, some airlines, badly burned from hedging losses in volatile oil markets, have scaled back hedging activities and more may follow.

US Airways, which stopped hedging, is in the process of a merger with American Airlines, leading some to question what American's future hedging strategy will be.

"The U.S. industry right now is interesting," United's Laderman said, pointing to American. "Are they now going to stop hedging?"

(Corrects quote in paragraph 4 to say oil prices are one of the biggest risks, not the biggest)

(Reporting by Victoria Bryan; editing by Keiron Henderson and Anthony Barker)

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