As the largest variable cost in airline operating expenses, jet fuel needs to be properly accounted for and cost-optimized. This is where an airline fuel cost accounting outsourcing service can provide an easy solution.
Keep in mind that jet fuel represents 20–30% of total airline operating costs. In the last year alone, global airlines spent $291 billion just for jet fuel. Such percentages and numbers make this aviation gasoline an important key in managing airline expenses.
However, tracking aircraft fuel cost is easier said than done, considering its complexity and its price volatility, which is a reason why resorting to outsourced bookkeeping experts could be a good idea. Let’s talk about the difficulties of this accounting process.
Aviation fuel expense tracking is an important step before accounting. Knowing how much fuel costs, how much is used, when it is used, and so on. But, there are factors that make doing this becomes complex:
If these factors don’t make fuel cost accounting seem complex enough, then remember that when accounting, airlines need to do these while taking all the factors into account:
To put it simply, it is a process of identifying the costs for the specific or all things correctly. So how does this even play out into a fuel cost? The answer is fuel uplift tracking.
Fuel uplift, by definition, is a process of transporting jet fuel from one place to another. By tracking it, airlines can allocate fuel costs correctly. This fuel uplift can be tracked by identifying how much jet fuel is used for specific flights, for each aircraft, for each flight route, and for operating business units.
What if jet fuel has already been consumed but not yet invoiced? Then, airlines need to do something called period-end accruals, which are mandatory to be recorded under IFRS and US GAAP’s regulatory rules.
In this context, airlines need to account for accrued expenses, since they have already consumed jet fuel that has not yet been invoiced. To do this properly, they need to report the jet fuel expense in a period when the fuel was used.
As previously stated, jet fuels that have been procured from global sources involve multi-currency transactions. This allows airlines to optimize their cost and prevent risks from relying on only one jet fuel supplier.
However, this also puts airlines at risk of FX (foreign exchange) impact (or FX exposure), which can fluctuate jet fuel costs. So when accounting, airlines need to specify the costs based on the exchange during the purchase time.
To combat price volatility and FX impact from multi-currency transactions, airlines are often using fuel hedging as a risk management. Basically, fuel hedging is buying jet fuel at a fixed price to prevent buying it at a raised price later (if it does rise).
While a study from Lim, S.H. (2014) shows it is statistically negligible, fuel hedging can still be a good strategy for airline fuel cost management. Here are some strategies for both fuel hedging and its accounting process:
First, airlines can use known instruments for jet fuel hedging. There are at least three popular instruments that can be used for hedging:
There’s no hedging without a good strategy, so what’s the strategy here? Based on AirTrav Inc.'s 2024 survey from airline investor relations, airlines are often hedged between 20% and 80% of projected fuel consumption.
The reason behind these ratios is because 20% ensures good protection against spikes, while 80% protects airlines from over-hedging. Then, this projection is made for 12–24 months to match planning cycles.
When it comes to fuel hedging accounting, airlines need to follow IFRS 9 or US GAAP compliance, particularly for hedge effectiveness. This is an extent to determine a fair value between hedging instruments that changes a fair value for the hedging item for a hedged risk.
Basically, both regulatory systems teach airlines how to measure the hedge effectiveness while doing fuel hedging accounting.
Due to the complexity of fuel hedging and accounting, outsourcing the aviation fuel expense tracking might be the best option. For example, an airline fuel cost accounting outsourcing service like Global Virtuoso can provide a solution for this because:
Global Virtuoso has been dealing with various finances and accounting in the aviation industry, including airline fuel cost management. As a result, experts from Global Virtuoso have no issues helping airlines to manage fuel accounting and hedging.
Afraid of the risks? No problem. Global Virtuoso can perform mark-to-market (MtM) accounting, which can create accurate financial statements. Plus, they can also provide P&L impact analysis, offering insight for airlines about jet fuel costs and expenses.
The ultimate reason for outsourcing services is because of the cheaper option. This stays true with Global Virtuoso, where airlines can cut 60–70% of accounting costs as opposed to having internal teams to manage airline fuel costs.
In conclusion, airline fuel cost accounting outsourcing like Global Virtuoso helps airlines manage the complexity of fuel cost and hedging. Contact us today for more information about Global Virtuoso’s accounting outsourcing services!
