Scenario: Covid-19 and the Airline Industry

In the wake of the Covid-19 induced oil price collapse, many airlines faced severe financial distress.

---

The unprecedented collapse of air traffic put the survival of the airline industry at risk not only from substantial multi-million dollar margin calls as a result of their derivative fuel price hedges, but also from the additional peril that their jet fuel usage plummeted dramatically as worldwide travel ground to a halt. In effect, unwittingly, without any fault on their part, the airlines had colossally over-hedged their fuel exposure.

The complex financial derivative transactions that the airlines had entered into (e.g., swaps, zero cost collars), effectively committed them to buy fixed volumes of oil at a set price, thus further compounding their distress as fuel consumption ground to zero.

If the airlines could have taken out Paratus insurance policies, they could have avoided significant financial costs that potentially lead to bankruptcy risk. Instead, they would have paid for a price protection policy against a fuel price rise to a predetermined amount. The marginal cost of the premium paid for the Paratus insurance cover would be a minute fraction of the unpredictable costs incurred using traditional hedges.

With the Paratus insurance policy there would be no margin calls, so no unforeseen additional costs. The airlines would be free to benefit from the lower cost of purchasing physical fuel, or purchasing limited amounts of fuel, in periods of low or no demand for air travel.

The Paratus aviation insurance product is pending regulatory consent.