Risk Management

Page 1

Foreign Exchange Risk

monthly global foreign exchange turnover 2,079 billion USD

How are fare levels affected?

€ appreciated by 20% against USD between January 2003 and January 2004

for the AMS/NYC market, KLM kept fare levels ex-AMS in € unchanged, and for ex-NYC fares in $ only increased J class

airlines usually have higher USD expenses than revenues

Page 2

Fuel price risk

Fuel hedging

risk of large increase in jet fuel price

airline management choices:

use less fuel

hedge with derivatives

fuel surchagres

crude oil price vs jet fuel price

most airlines use price cap or collar

some airlines more successful than others, but investment analyst expect it and could avoid bankruptcy

Page 3

Conclusions

marked fluctuations continue, even between major currencies

airlines affected, often significantly, as international business

fluctuations have impact on both revenues and costs: profit implications depend on where revenues are earned or costs incurred

uncertainty can be reduced by using derivatives, at a cost

derivatives not available in 'soft' currencies, continued operations to countries with rapidly depreciating currencies may be impossible, unless supported by home country sales

need to examine hedged positions in both US$ fuel price and US$ to local currency exchange rate