Airline Treasury & Risk Management Forum

Airline Fuel Hedging in 2016 & Beyond Mike Corley, Mercatus Energy Advisors The State of Airline Fuel Hedging in 2016 and Beyond

4 October 2016 How many aircraft are in your company’s fleet?

26%

37% 1-25 26-50 51-75 76-100 5% 100 or more

21% 11% Company Ownership

21%

42% Publicly Traded Privately Held Government Owned

37% Fuel as Percentage of Total Costs

21%

37%

1-25% 26-35% 36-45%

42% Does your company fuel price risk?

32%

Yes No

68% Does your company have a hedging/risk policy?

8%

Yes No

92% Primary purpose of your fuel hedging program?

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0% ManageManage cash flowexposure volatility toManage short-term exposure fuel to price long-term increases fuel priceOther increases Who makes company’s fuel hedging decisions?

8% Board of Directors 23%

Hedge or Risk Management Committee 8% Chief Financial Officer, VP of Finance, Treasurer Other 61% What fuel hedging instruments does your company utilize?

80.0%

70.0%

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0% Futures Forwards Swaps Call Collars Other (Physical) Options What is the maximum tenor of your fuel hedge positions?

8% 15% 8%

1-6 Months 8% 7-12 Months 15% 13-18 Months 19-24 Months 25 Months or More Other

46% % of fuel consumption hedged for coming 12 months

15%

8% 1-20% 46% 21-40% 41-60% 61-80%

31% Primary reference index

23% Brent Crude Oil

US Gulf Coast Jet Fuel 8% Rotterdam Jet Fuel 69% (NW Europe and ARA) Anticipate credit related issues may limit your ability to hedge your fuel price risk in coming year?

25%

Yes No

75% Do you utilize clearing for credit risk management?

0%

Yes No

100% What type of firm is your primary counterparty(s)

Global Financial Institution (i.e. BNP Paribas, , 8% Morgan Stanley, etc.)

Local Financial 15% Institution (i.e. Abu Dhabi Commercial Bank, 42% DBS, National Bank of Canada, Nordea, etc.) Major Oil Company (i.e. Shell, BP, etc.)

23%

Fuel Supplier (i.e. World 12% Fuel Services) What is fuel hedging success to your company?

When we minimize 8% exposure to short- 16% term fuel price increases. 17% When we minimize exposure to long- 17% term fuel price increases.

When our cash flow volatility, as it 42% relates to fuel prices, is minimized. How can company improve fuel hedging program?

Strategies which better reflect the company’s risk tolerance and goals. 12% A policy which requires hedging on a consistent 35% basis, regardless of our opinion of the market. 17% A methodology which consistently seeks to optimize the company's existing hedge positions. A decision making framework based on 12% sound, quantitative analysis of relevant data? 12% Better execution and 12% implementation of existing hedging policy and strategies. Does your company utilize hedge accounting treatment?

25%

Yes No

75% What system(s) do you use to manage fuel hedging?

Spreadsheets (i.e. 8% Microsoft Excel)

Treasury System 34% (i.e. VisualRisk, Sungard) Commodity Risk 33% Management System (i.e. Openlink) Financial Risk System (i.e. 8% SuperDerivatives) Enterprise Platform 17% (i.e. SAP) Do you expect regulations (i.e. EMIR, Dodd Frank, Basel III) to impact your fuel hedging practices?

33% 42% Yes No Unsure

25% What is your primary source of fuel market information?

15%

Financial Institution (i.e. Goldman Sachs) Data Provider (i.e. Reuters)

85% Most significant challenge regarding fuel hedging

• Lack of access to credit lines • Large negative mark-to-market losses • Board of directors doesn’t understand pros and cons of hedging • Improve cost/benefit of fuel hedging • Weak balance sheet • Lack of internal knowledge and skills • Oil price volatility • Management makes decisions based on gut not information Contact

Mike Corley | Mercatus Energy Advisors +65.3158.2705 | [email protected] Contact

Mike Corley | Mercatus Energy Advisors +65.3158.2705 | [email protected] Contact

Mike Corley | Mercatus Energy Advisors +65.3158.2705 | [email protected]