6 Ways to Mitigate FX Exposure in Aviation Fuel Procurement

The aviation industry faces significant financial challenges from foreign exchange (FX) exposure in fuel procurement. Airlines and private jet operators must purchase fuel in various currencies while generating revenue primarily in their home currency. This mismatch creates substantial FX risk that directly impacts profit margins and operational costs, significantly influencing the airline industry.

A typical commercial airline spends 28.7% of its operating costs on fuel. For private jet operators, this percentage can reach 40-60% due to smaller economies of scale. When fuel prices combine with unfavourable exchange rates, operators can experience severe margin compression. For example, an operator generating revenue in EUR but purchasing fuel in USD faces additional costs when the EUR weakens against the USD. The complexities of aviation fuels, including procurement issues like price volatility and regulatory compliance, further impact these strategies.

The volatility of both fuel prices and currency markets compounds this challenge. Fluctuations in crude oil prices, driven by geopolitical events, supply-demand dynamics, and market speculation, significantly impact fuel costs and budgeting. Currency values shift with interest rates, economic indicators, and political developments. This double exposure to commodity and currency risks requires sophisticated risk management strategies.

FX exposure is a critical aspect of aviation fuel procurement, as fluctuations in currency exchange rates can significantly impact fuel costs. Airlines and fuel suppliers must understand and manage FX exposure to mitigate potential losses. Here are some key points to consider:

FX exposure arises from the difference between the currency in which aviation fuel is purchased and the currency in which it is sold or used. This discrepancy can lead to significant financial risks if not properly managed.

Airlines and fuel suppliers can be exposed to FX risk through various channels, including fuel purchases, sales, and hedging activities. For instance, an airline buying fuel in USD but generating revenue in EUR faces FX exposure.

FX exposure can be managed through various strategies, including hedging, diversification, and risk management. Hedging instruments like forward contracts and options can lock in exchange rates, while diversification across multiple currencies can spread the risk.

Airlines and fuel suppliers must monitor FX market trends and adjust their strategies accordingly to minimise potential losses. Staying informed about market trends and geopolitical events can help in making timely adjustments to FX risk management strategies.

The first step in managing FX risk involves identifying all points where currency exposure occurs in fuel procurement. This process requires a detailed analysis of fuel purchasing patterns, payment currencies, and revenue streams. Airlines and operators must carefully examine their exposure across different operational aspects:

Regular fuel purchases at international destinations require tracking transaction volumes and frequencies in each currency, while considering how seasonal route changes affect currency exposure patterns

Bulk fuel contracts with global suppliers need evaluation of long-term currency commitments and potential rate fluctuations that could impact contract values and the complexities within the supply chain involving refineries, fuel suppliers, and transportation providers

Emergency fuel purchases during disruptions demand special attention to spot market currency risks and higher transaction costs in unfamiliar currencies

Airlines must track both direct and indirect currency exposures. Direct exposure occurs through immediate fuel purchases, while indirect exposure emerges from fuel-related services and contracts. Recording transaction volumes, frequencies, and currencies at each point creates a clear picture of total FX risk. Additionally, understanding how FX exposure impacts the total cost of fuel procurement is crucial for effective budgeting and procurement strategies.

Strategic hedging forms the foundation of effective FX risk management in aviation fuel procurement, emphasising the importance of securing the best price through strategic hedging. Organisations can use various financial instruments to protect against adverse currency movements while maintaining flexibility in their operations. Forward contracts offer a straightforward approach to locking in exchange rates for future fuel purchases. These contracts specify the amount of currency to be exchanged at a predetermined rate on a future date. For example, an airline expecting to purchase USD 1 million worth of fuel in three months can enter into a forward contract to buy USD at today’s rate, eliminating uncertainty about future exchange rates.

Aviation fuel distributors play a crucial role in providing competitive pricing options, collaborating with both major brands and independent suppliers to offer various choices for purchasing fuel.

Currency swaps provide another useful tool, particularly for longer-term hedging strategies. These instruments allow airlines to exchange a set amount of one currency for another at regular intervals, matching their fuel purchasing patterns. Swaps can help create more predictable cash flows and reduce the impact of currency fluctuations on fuel costs.

Options contracts give operators the right, but not the obligation, to exchange currencies at a specified rate. This flexibility comes at a premium cost but can protect against adverse currency movements while allowing operators to benefit from favourable ones. Airlines often use a combination of these instruments to create a balanced hedging strategy that aligns with their risk tolerance and operational needs.

Effective cash management across multiple currencies requires sophisticated systems and processes. Airlines must balance the need for liquidity in various currencies with the cost of holding cash and the risks of currency fluctuations. A multi-currency cash management system should support both regular fuel purchases and unexpected requirements. For instance, an operator might maintain minimum balances in frequently used currencies while setting up automatic conversion triggers when balances fall below specified levels. In the SAF industry, procurement processes must be adaptable to changing regulations and costs as the industry evolves.

These systems should facilitate efficient netting of currency positions across different locations and subsidiaries. This approach reduces the number of currency conversions needed and minimises transaction costs. The implementation of real-time monitoring and automated alerts helps treasury teams respond quickly to changing market conditions and maintain optimal currency positions. Managing cash effectively is crucial for both conventional and sustainable aviation fuel purchases, as airlines must navigate complex procurement processes and varying pricing structures.

Strategic negotiation of supplier contracts can significantly reduce FX exposure in fuel procurement. Unlike conventional jet fuel, Sustainable Aviation Fuel (SAF) requires different procurement processes due to its unique financial implications. Airlines should review and optimise payment terms, currency denominations, and pricing structures in their fuel supply agreements. Suppliers often prefer payments in major currencies like USD or EUR, but many will accept alternative arrangements that benefit both parties. For example, an airline might negotiate better prices in exchange for paying in the supplier’s local currency, reducing currency conversion costs for both parties.

Key contract elements that affect FX exposure include:

Payment timing flexibility allows airlines to match payment schedules with expected currency inflows or choose payment dates based on favourable exchange rate forecasts

Currency adjustment clauses protect both parties from extreme exchange rate fluctuations while maintaining fair pricing mechanisms

Volume-based incentives tied to specific currencies can help offset potential exchange rate losses through improved pricing tiers

Fuel costs represent a significant portion of an airline's operating expenses, making effective procurement strategies essential for financial stability and competitive advantage.

Airlines need clear protocols for managing jet fuel procurement and FX exposure during unexpected events or market disruptions. These protocols should outline specific actions and responsibilities for different scenarios. The protocols must specify decision-making authority, communication channels, and escalation procedures. For example, they might authorise certain personnel to execute emergency currency trades up to specified limits or outline procedures for accessing emergency credit lines in different currencies.

Regular testing and updates of these protocols ensure their effectiveness when needed. This includes conducting simulations and reviewing outcomes to identify potential improvements. Organisations should also maintain relationships with multiple currency providers to ensure access to necessary liquidity during emergencies.

Regular performance measurement helps organisations evaluate the effectiveness of their aviation fuel procurement and FX risk management strategies, identifying areas for improvement. This process requires clear metrics and consistent monitoring procedures. Monthly or quarterly reviews allow organisations to assess their performance and make necessary adjustments. These reviews should examine both financial outcomes and operational efficiency, considering factors such as processing times, error rates, and staff productivity.

Regular reporting to stakeholders helps maintain transparency and support decision-making. Reports should present data in clear, actionable formats that highlight both successes and areas needing attention. Performance monitoring also helps organisations adjust their strategies as market conditions and organisational needs change.

Managing FX exposure in aviation fuel procurement requires a comprehensive approach that combines strategic planning, robust systems, and regular monitoring. As the aviation industry continues to face currency volatility and complex operational challenges, organisations need sophisticated solutions to protect their bottom line.

Fyorin provides a powerful solution for aviation companies to streamline FX risk management. With a singular platform giving access to a global network of financial institutions it provides consolidated management of treasury and cash operations. The platform processes fast B2B cross-border payments and offers comprehensive card management, making it ideal for aviation fuel procurement. Through Fyorin's global wallet, operators can manage funds across 100+ currencies while maintaining local banking efficiency. By automating accounts payable and receivable, Fyorin helps aviation companies cut costs and boost their bottom line in a complex global market. Get in touch.