Fuel hedging deal is just the ticket for Uno

08/08/2011

A Hertfordshire based bus operator has mapped a clear route through costly fuel price increases thanks to a deal with Clydesdale Bank.

Hatfield-based Uno’s buses are a familiar sight on the roads around the county and further afield on routes to London, Watford, Stansted airport and many other destinations. Founded in 1992 as UniversityBus to provide affordable transport for students at the University of Hertfordshire, it now has a fleet of almost 100 vehicles which serve many public routes.

However, in common with all transport operators, the rising cost of diesel has become a major source of concern for the company.

“After the costs of employing our drivers, fuel is our second most expensive outlay, costing us something in the region of £2 million a year, with the prospect of continued increases,” said Group Finance Director Alistair Moffat.

“When I arrived at the company two years ago, there was no hedging against fuel price increases at all. My background was in aviation where hedging is standard practice and I felt it was something we needed to do. The board agreed and we set about looking for counterparties.”

After discussions with three banks, Uno opted to work with Clydesdale Bank through its St Albans Financial Solutions Centre (FSC), who Alistair said came up with a competitive solution.

“We set up the facility 15 months ago and it provides us with a far greater degree of certainty over our outgoings and cash flow” he said. “Hedging against the rising cost of fuel does not guarantee you a cheap price, but it does guarantee you a fixed price, in our case for up to 12 months.

“That is an incredibly important facility to have for any company with high fuel usage at a time of volatile prices. We are delighted with the way Clydesdale Bank has managed this service and we will certainly be looking at other ways we can work with them.”

Many existing fuel hedge contracts are set up for users with annual consumption of a minimum of hundreds of thousands of litres of fuel each month. However, Amy Collins, Treasury Partner at Clydesdale Bank’s St Albans FSC, said local businesses that use even 50,000 litres a month should look at the security hedging provides.

Amy said, “Now is a good time for businesses to review their fuel purchasing strategy and budgets given the day-to-day price changes. SME’s in particular can take advantage of this solution by committing to hedging smaller quantities of fuel than have traditionally been possible. Businesses can take out contracts with a minimum length of six months with a fuel consumption of 50,000 litres per month hedged.

“The obvious advantages for these fuel hedging strategies are the benefits of taking the guess work out of budgeting and relieving worries about possible sharp increases in fuel prices affecting cash flow. For businesses where fuel is a significant proportion of costs any increase in price could have a highly detrimental effect on its profit margin.”

The risk with fuel hedging is that there is the possibility that fuel prices could drop below the pre-arranged price set out in the contract, but with the cost of petrol around 40% higher than it was a year ago, treasury specialists at Clydesdale Bank believe it is an opportune moment for businesses to look at the options open to them.

The hedged fuel prices relate to the daily rates quoted by the Platt’s index, which is a source of benchmark price assessments for commodities like fuel and metal. This hedged price is agreed at the start of the partnership between the company and the bank and will not deviate with any changes in the market price over the term of the contract.

Amy concludes: “The reason fuel is such a volatile commodity is due to the exceptional economic circumstances the world finds itself in today. The raw material price is dependent on supply as well as the recovery of a number of high consumption countries.

“The raw material price is set in US dollars which can add an additional element of volatility as the UK prices in sterling. These effects combined with the increase in VAT to 20% and increased duty explains why fuel prices are so high in the UK.

“Ultimately SME’s could stabilise their fuel purchases and be in a more secure position to manage their business.”