Insufficient FX strategies will continue to hit profits at airlines

Airlines could make their results more predictable in the currency they are reporting in by hedging their foreign exchange exposure. That’s the message from one foreign exchange (FX) expert as British Airways owner International Airlines Group (IAG) and Emirates both report slumps in profits in part due to currency costs.

The airlines have blamed rising fuel costs as well as currency fluctuations for their declines in profit. IAG has reported a 60% fall in operating profits in the first quarter of the year, with currency fluctuations costing the organisation €61m. Emirates reported a 69% drop in its annual profits, with the impact of a strong dollar estimated to have cost the airline $156m.

Paul Langley, managing director at Swansea-based Godi Financial, claims a rise in foreign exchange volatility can distort the performance of airlines. However, making better use of hedging for foreign exchange risk could ease such distorting effects from companies’ profit and loss accounts.

Organisations like airlines that gather earnings in foreign currencies need to convert that money back into the currency they are reporting their results in. Airlines should hedge their exposure based on statistical figures, Langley suggests. They should know statistically how much they are looking to earn quarterly or annually and aim to hedge a share of that income.

Langley said:

“While airlines may not benefit from such currency movements in the future if they hedge part of the income, this would, at the same time, enable their results to better reflect their true operating performance and make the results more transparent.

“If you are working on a certain margin, you want to know that it’s not being worn away by currency fluctuations. It can be enhanced or eroded, but if you know what you are good at, what your margin is, you should always hedge that position.

“It is about the creation of some certainty for organisations with a solid FX strategy, which can subsequently produce transparent and favourable financial reports.”