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Industry roundup: 10 March

Airlines’ hedging offsets oil price hikes

Russia’s invasion of Ukraine has pushed oil prices to their highest point since the 2008 financial crisis, adding to airlines’ costs as the industry is attempting to recover from the prolonged slump in demand caused by the Covid-19 pandemic.

Oil prices were already strong last month due to tight global supplies but in the fortnight since Russian troops attached Ukraine the northwest European jet fuel price in the spot market has jumped by 85% to reach US$1,649 a tonne on 9 March.

Earlier this month Malaysia’s AirAsia introduced fuel surcharges on tickets for the first time since 2015. Chinese airlines, meanwhile, raised fuel surcharges on domestic routes and Emirates, Japan Airlines and ANA Holdings have also increased surcharges.

Many carriers are being further squeezed by the need to fly longer routes to avoid Russian and Ukrainian airspace.

Some airlines have oil hedges that will help to offset some of the price increase. Australia’s Qantas Airways confirmed this week that it has more than 90% of its fuel hedged for the first six months of 2022 and has also hedged 50% for the third quarter. Other carriers are fully unhedged, including US operators United Airlines, American Airlines and Delta Air Lines, though the latter does own an oil refinery.

According to a Reuters report, in addition to Qantas the following airlines also have hedges in place:

Air France KLM: In its 17 February results presentation, the airline announced that it hedged 72% of oil consumption for Q1 2022 and 63% for Q2 at US$90 a barrel, with smaller amounts hedged in the second half.

Air New Zealand: In its 24 February results presentation the airline said that it has hedged 1.34 million barrels of oil in the six months to 30 June and 707,500 barrels in the following half-year period. Air New Zealand has since raised international fares by about 5%, citing rising oil prices and general cost inflation.

Cathay Pacific Airways: The Hong Kong airline announced on 9 March that it has hedged its entire first-quarter consumption and about half of its expected second-quarter consumption. It has also hedged lower amounts through to the end of 2023.

easyJet: The low-cost European airline said on 27 January that it had 60% hedged for fuel in the financial year to 30 September at about US$504 per metric tonne.

International Airlines Group (IAG): Chief Executive Luis Gallego said on 25 February that the British Airways owner is hedged against volatile crude prices for two years and has covered about 60% for the whole of 2022.
Based on a fuel price scenario of US$900 a tonne, the company would be paying US$690 a tonne in Q1 after hedging 70% of its fuel and foreign exchange.
In the second quarter the price would rise to US$750 after hedging 65% of fuel and foreign exchange, to US$775 in Q3 with 56% of its fuel and foreign exchange hedged and US$795 in Q4 with just under half of its fuel and foreign exchange hedged.

Lufthansa: The German airline’s results presentation on 3 March showed it to be 63% hedged in 2022 at a break-even price of $74 a barrel.

Ryanair: The budget carrier is 80% hedged on fuel out to 2023, but rising prices will still cost the group about €50 million (US$54.2 million) over the next 12 months, Chief Executive Michael O’Leary reported on 2 March, adding that Ryanair would not introduce fuel charges for the summer.

Singapore Airlines: Last November, the airline reported that it hedged 30% of its oil requirements at an average Brent crude price of US$57 a barrel for the six months to the end of March 2022. It had also hedged 40% of its needs at an average price of US$60 for the following five quarters. This week it confirmed that the figures remained accurate.

Wizz Air: On 7 March the European budget airline reported that it has covered its fuel costs for the next four months with zero-cost hedges.
For March, it has covered half its needs with a price ceiling of $1,172 a tonne and 40% of its needs for the first quarter to end-June at $1,142 a tonne. Its financial year ends on 31 March 2023.

Fitch assesses US corporates’ exposure to Russia

Fitch Ratings says that Russia's invasion of Ukraine has not directly affected the credit profiles of its rated US corporates, as exposure to these countries is mostly limited. However, heightened geopolitical risk has broad implications for commodity prices and inflation, as well as the Federal Reserve’s policy and global economic growth. A lengthy war and its ramifications, including sanctions, have the potential to exacerbate cost pressures and dampen demand, which could lead to weaker than expected cash flow and leverage metrics.

Fitch says that latest baseline expectation is that US consumer price inflation peaks at about 8% in the first quarter of 2022 and declines across the second half, averaging 5.5% for the year. However, the conflict and the potential for global energy prices to remain very high for a sustained period raises the risk that consumer price inflation could remain elevated for longer.

The ratings agency believes that investment-grade corporates should be more resilient to potential macro risk scenarios given greater financial flexibility. However, high-yield issuers may be more vulnerable to potential indirect macroeconomic transmission feed throughs from the war, including sustained high inflation, more aggressive Fed tightening or slower economic growth.

Fitch notes that multinationals across numerous sectors, including retail, technology and auto, have exited Russia or are facing social pressure to do so. However, direct exposure to Russia and Ukraine is generally limited to the low-single-digit percent of total revenues for most of the agancy’s portfolio, although a few sectors, including natural resources and agribusiness, could have companies with somewhat higher exposure.

Additionally, spillover effects related to higher energy, grain and other commodity costs, as well as any secondary effects on the economy, could have ramifications across all sectors. Airlines are particularly exposed to higher oil prices, as jet fuel represents 20%-30% of their cost structure and travel demand has yet to recover from the coronavirus pandemic.

Credit risk for globally diverse agricultural processors with exposure to Russia and Ukraine is limited, as the companies' significant diversification geographically, logistically and across key commodities, along with effective risk management and abundant liquidity, has historically enabled them to shift production to other locations and navigate the effects of tariffs, trade restrictions and other geopolitical events.

Russia and Ukraine combined produced an estimated 14% of the world's supply of wheat and 6% of the world's supply of coarse grains, including corn and soybeans, during the 2020-21 crop season, according to the US Department of Agriculture. About 50% of these crops were exported, mostly to Asia, via shipments across the Black Sea where ports have been shut down due to fighting in the region. Wheat and corn prices are up significantly since the invasion.

Russia is not a key source of raw materials for the pharmaceutical sector, but some drug companies have disclosed low-single-digit sales exposure and conduct trials in Ukraine. Fitch doesn’t expect the credit profiles of globally diversified manufacturers to be negatively affected.

The secondary effect of the conflict on oil prices is the biggest risk for the building products sector, particularly for companies with oil-based raw materials such as coatings and plastics, comments Fitch. Travel companies are generally well diversified geographically, such that any direct effects are likely manageable, but secondary effects related to any material disruption in travel across Europe are a larger risk.

Meanwhile Amazon, Nestle, Sony and Caterpillar have joined the growing list of multinationals that have either exited or suspended their operations in Russia. Nestle, which has three factories in Russia and employs around 5,000 staff had already halted manufacturing two weeks ago and has now announced that it is withdrawing all capital investment in the country.

In a blog post, Amazon announced: “Given the ongoing situation in Russia and Ukraine, we’ve taken additional actions in the region. We’ve suspended shipment of retail products to customers based in Russia and Belarus.”

  • On 10 March Goldman Sachs announced that it would be closing its operations in Russia, becoming the first major Wall Street bank to exit the country since the invasion. “Goldman Sachs is winding down its business in Russia in compliance with regulatory and licensing requirements,” the bank confirmed in a statement to Reuters.

London-listed Russian companies aim to reassure investors

Polymetal International, Evraz and Petropavlovsk, three companies listed on the London stock market have attempted to reassure investors by distancing themselves from Russia and downplaying the impact of sanctions imposed in response to the invasion of Ukraine. Each company has seen their share price fall sharply in the past two weeks.

Goldminers Polymetal and Petropavlovsk both said that their mining operations were so far continuing unaffected, although Polymetal said that it was reviewing its logistics and procurement “with an aim to increase the supply chain resilience and potentially shift critical supplies to domestic or Chinese consumables and equipment”. The group said that last year, its Kazakhstan operations generated 48% of its net earnings. It also revealed that sanctions had impacted its sales of bullion in Russia.

In a separate statement, Polymetal claimed that no individuals with links to the Russian state held significant holdings in the group. “The Company confirms that it does not consider itself to be an entity owned by or acting on behalf or at the direction of a 'person connected with Russia as defined in Regulation 19A(2) of The Russia (Sanctions) (EU Exit) Regulations 2019 and thereby impacted by the current UK capital market sanctions,” read its statement.

“The scope and impact of any new potential sanctions (and any countersanctions) are yet unknown,” the group added. “With the significant free cash flows coming from the Company's Kazakhstan operations, Polymetal has enough buffer to continue to fulfil its obligations and capital commitments in the next 12 months even in the absence of new borrowings.”

Polymetal produces gold and silver from nine sites across Russia and Kazakhstan. It was founded in 1998 by Alexander Nesis, the billionaire Russian oligarch, who remains its biggest shareholder, and listed in London in 2011. Three days ago its chairman and six other independent board members resigned after pressure on directors to sever ties with Russian companies.

Petropavlovsk announced that there was a “significant risk” of “potential disruption to the supply chain” because of sanctions, countermeasures by Russia, and companies’ trading decisions. The group had “initiated contingency planning on day one of the crisis to mitigate this risk and ensure that operations continue uninterrupted” including by procuring additional supplies and identifying replacement suppliers. 

Shares in steel producer Evraz have staged a partial recovery after announcing that its operations have not yet been affected by sanctions. However, the company is almost a third owned by oligarch Roman Abramovich, one of seven individuals sanctioned by the UK government on 10 March as they are regarded as allies of President Vladimir Putin.

The sanction comes a day after Evraz’s statement noted: “The Company notes that in the event that it becomes an entity owned by, or acting on behalf or at the direction of, a person “connected with Russia” under the Regulations, any further share issuance may be subject to the UK sanctions regime and hence may result in a suspension of the Company’s listing on the London Stock Exchange’s Main Market for listed securities.”

Bitcoin buoyed as Biden announces study

Bitcoin’s price rose on Wednesday after President Biden announced an executive order to study digital currencies, a move that was welcomed by the industry but criticised by some analysts as delaying much needed regulation.

The order, entitled “Ensuring Responsible Development of Digital Assets,” calls on agencies across the US federal government to produce reports on digital currencies and consider new regulations. It outlined the risks that cryptocurrencies pose to the economy, including the creation of a central bank digital dollar, as well as national security and climate issues, while also noting their potential benefits.

US Treasury Secretary Janet Yellen said the effort would “promote a fairer, more inclusive, and more efficient financial system” while countering illicit finance and preventing risks to financial stability and national security.

Brian Deese and Jake Sullivan, President Biden's top economic and national security advisers, respectively, said that the order establishes the first comprehensive federal digital assets strategy for the US.

“That will help position the US to keep playing a leading role in the innovation and governance of the digital assets ecosystem at home and abroad, in a way that protects consumers, is consistent with our democratic values and advances U.S. global competitiveness,” they said in a joint statement.

Despite the risks, the government said, surveys show that roughly 16% of adult Americans — or 40 million people — have invested in cryptocurrencies, with the percentage rising to 43% of men in the 18-29 age bracket.

The action comes as lawmakers and administration officials are increasingly voicing concern that Russia may be using cryptocurrency to lessen the impact of sanctions imposed on its banks, oligarchs and oil industry in response to the invasion of Ukraine.

Report finds rewards in tackling ESG and reputational risk

Companies that implement environmental, social and governance (ESG) and reputational risk strategies have seen almost-immediate effects on their stock price, a study from US parametric insurance solutions provider Steel City Re.

The report from the Pittsburgh, Pennsylvania-based firm suggests that those implementing these strategies saw their stock prices go 5% above market value within two weeks, with the premium almost doubled for those that publicly shared their ESG and reputational risk management strategies.

According to Steel City Re, the stock prices of firms that managed, validated and publicised their strategies on average gained 9.3% over the subsequent seven months after a precipitating event, while firms in which such processes were assumed by shareholders to be in place gained 4.3%.

Nir Kossovsky, CEO of Steel City Re, said: “Investors appear to reward firms that actively manage reputational risks as operational strategies and not just potential PR problems. Our study makes the case for ESG-focused firms to take a more structured, substantive and comprehensive approach to risk governance and management.

“The data show that instituting, validating, and communicating risk management strategies can both fulfil the goals of stakeholder-centrism and meet shareholder expectations.”

Meanwhile, companies that failed to institute, validate, and communicate risk management strategies reportedly lost 13.2% of their stock value over the same period and underperformed their peers by an average of 23.3%.

Separately, the UK’s Institute of Chartered Accountants (ICAEW) has urged its members to review any connections with Russia among their clients and perform careful due diligence.

The ICAEW says that minimum legal requirements may not be enough when handling the implementation and impact of sanctions against Russia and “members are advised to think about not just the letter of the law but the spirit too.”

ICAEW’s Managing Director, Reputation and Influence, Iain Wright, believes that the reputation of the profession is at stake. “Sanctions are meant to bring home to the Kremlin the political and financial cost of their aggression in Ukraine,” he says. “Making that happen is a moral imperative and that must be our priority. 

“Acting in the public interest is not only the right thing to do, it will have consequences for reputations for decades to come. Most of the world is rightly on the side of the brave Ukrainian resistance.” In the case of the Russian invasion of Ukraine, the public is global. “Any individual or company seen to be abetting the Putin regime runs the risk of being viewed as a pariah [in the global economy].”

Fiserv-TAS Group partnership launches Aquarius liquidity management

US fintech and payments multinational Fiserv has formed a new partnership with TAS Group to offers the Aquarius liquidity management and payment flow monitoring solution, which it says will allow financial institutions to proactively monitor and manage their liquidity positions across all payment types.

“In combination with Enterprise Payments Platform from Fiserv, Aquarius provides a robust liquidity management and payment flow monitoring solution with unparalleled real-time visibility into end-of-day and intraday conditions across all currencies, legal entities, internal and external cash flow sources, and direct and indirect settlement relationships,” its release stated.

“With a real-time and 360-degree view across payments and liquid assets, financial institutions can improve funding, further compliance, and manage cash flow and risk; capabilities that are particularly timely given the increased volume of real-time payments and today’s inflationary environment.”

Dudley White, Head of Financial and Risk Management Solutions at Fiserv commented: “There is a growing focus on liquidity optimisation following the implementation of regulations and controls such as Basel III, BCBS 248, the move to instant payments, and the global migration of high value payments systems to ISO 20022.

“Siloed treasury and payments systems can result in inaccurate or conflicting data. With an effective liquidity management solution, financial institutions can efficiently allocate liquidity for targeted business models or compliance requests, and optimise their customers' and their own liquidity positions, thereby enhancing competitiveness.”

Mario Mendia, senior vice president at TAS Group added: “With more than 20 installations in six countries and many banks using it, Aquarius is a proven and successful solution. We provide a global reach and, thanks to the integration with Enterprise Payments Platform, an easier and faster implementation for financial institutions, particularly to those facing ISO 20022 migrations for real-time gross settlement (RTGS), instant or cross-border payments.”

Sila announces Corpay partnership

Sila, the fintech software platform that provides payment infrastructure as a service, announced that it has arranged a partnership with Corpay, which is a FLEETCOR brand that provides integrated cross-border payments and currency risk management solutions.

A release issued by the partnership stated that Sila’s customers will be able to access over 145 currencies across 100 countries in order to facilitate cross-border payments and access to global FX markets. In addition, there will be a seamless transition between domestic and international payment options for customers.

“Sila’s main goal has always been to provide entrepreneurs with the tools to realise their vision and build a successful business, more often than not with an international component,” said Shamir Karkal, the CEO and Co-Founder of Sila. “Corpay with its depth and reach in facilitating cross-border payments can be the perfect partner for our customers’ needs.

“We see a lot of innovation from companies, particularly the ones focusing on emerging markets, that rely on phones and online apps rather than bank accounts and ATMs to enable cross-border transactions. Through partnerships like this one, Sila feels well prepared to help those companies succeed.”

“As Sila has continued to grow, they have experienced increased demand from customers for the expanded global payment capabilities that Corpay provides,” added Andrew Howlett, Strategic Partnerships Manager, Corpay Cross-Border Solution. “Our reach in both geographies as well as currency pairs is expansive and will serve Sila’s customers well.”

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