Asia-Pacific Airlines Await Further Oil Price Decline Before Hedging

By Jessica Jaganathan & Anshuman Daga on 08:33 pm Dec 01, 2014
Category Business, Economy
A Garuda Indonesia airplane takes off at Soekarno-Hatta International Airport, Jakarta. (JG Photo/Jurnasyanto Sukarno)

A Garuda Indonesia airplane takes off at Soekarno-Hatta International Airport, Jakarta. (JG Photo/Jurnasyanto Sukarno)

Singapore. Airlines in Asia-Pacific are holding off from hedging their fuel costs as they wait for oil to dip below $70 a barrel in hopes of securing lower prices, industry executives said.

The benchmark Brent crude oil price fell more than $6 to under $72 a barrel on Thursday, its lowest since July 2010, after the Organization of Petroleum Exporting Countries opted against cutting production even though a supply glut is pulling down prices.

Airlines “hedge” some of their fuel needs — or buy fuel in advance at future, pre-determined prices — to reduce the impact on earnings of any volatility or increases in prices.

But many believe prices will fall further and will buy futures contracts when they do, said a trader with a bank that handles hedging for many Asian airlines.

“They are holding back, with the general sentiment being one of wait-and-see as the market is quite bearish (risk averse) at the moment,” said the trader, who was not authorized to speak with media on the matter and so declined to be identified.

Airlines bought futures contracts to hedge against adverse price changes when Brent slipped below $80 two weeks ago but have since slowed hedging activity, the trader said.

Low fares, high profits

Fuel accounts for 20 to 50 percent of an airline’s operating costs, so swings in oil prices can have a significant impact on profit and air fares.

Buying fuel at low prices means airlines can cut fares and attract customers, allowing airlines to generate higher profit than the year before.

AirAsia Chief Executive Tony Fernandez wrote on his Twitter microblog on Friday that the oil price decline was an early Christmas present for his airline which has hardly hedged yet for 2015.

Garuda Indonesia Finance Director Handrito Hardjono said hedging has benefited Indonesia’s flag carrier so far this year, though not by a significant amount. The airline hedged around 20 percent of its 2014 fuel needs.

“We’re just keeping to stabilize the price, not just gaining from the decreasing oil price,” he told Reuters.

Qantas Airways is hoping to benefit from lower prices with its hedging profile, which is primarily aimed at protection from adverse price spikes, a spokesman said.

“As of today, in the second half of FY15, 70 percent of our fuel requirement is participating in the lower prices. The remaining 30 percent, while no longer participating, did participate in a significant proportion of the price falls so far,” he said.

No speculation

Meanwhile, Air New Zealand said it is hedged at 80 percent for the fourth quarter, 67 percent for first quarter of next year and 44 percent for second quarter. Japan Airlines said it will keep hedging at 40 percent of this financial year’s fuel needs, unchanged from 2013.

At Singapore Airlines (SIA), second-quarter operating profit rose 51 percent almost entirely due to a reduction in fuel costs.

SIA earlier this month said lower fuel prices were beneficial for its operations, but that its hedging strategy would damp the impact of a decline in oil prices. The airline hedged 65.3 percent for the second half of this year at $116 a barrel.

“We do see a reprieve in terms of lower fuel prices, at least in these immediate months,” said Chief Executive Goh Choon Phong.

“SIA adopts a hedging policy of consistently hedging for our fuel, and therefore the purpose, of course, is not to speculate in the market, but to ensure that we reduce the volatility of fuel price movements on our earnings,” Goh said.

Reuters