Soaring oil costs upset Asian airlines' hedges
Saturday, 19 July 2008
Raphael Minder in Bangkok and Robin Kwong
Several Asian airlines have cut back on fuel hedging this year, leaving them exposed to far more substantial costs should oil remain at record highs.
The effect of high jet fuel prices was underlined early this month when Cathay Pacific warned that it expected first-half profits to be "disappointing" because of high fuel prices.
The last time Cathay, whose shares fell nearly 8.0 per cent on the news, warned on profits was in 2003, when Hong Kong, where Cathay is based, was battling with an outbreak of Sars respiratory disease.
"Hedging has gone down and airlines are now more exposed because nobody can comprehend [fuel] prices staying at this level indefinitely, but it is in fact the whole business model that isn't working now," Martin Craigs, president of Aerospace Forum Asia, a regional business chamber, said.
"Fares are too low and a typical budget economy fare between Asia and Europe is simply no longer paying for the fuel price."
Mr Craigs said Cathay was also handicapped because it could not pass on more of its fuel bill to passengers because of limits set by Hong Kong on surcharges.
Cathay's 2008 first-half fuel bill was 60 per cent higher than in the first half of 2007. The airline would not comment further, but as of the end of last month, its hedging level stood at 30 per cent of its fuel needs, compared with 48 per cent for the whole of 2007.
Azmil Zahruddin, chief financial officer of Malaysia Airlines, which also recently warned earnings would suffer due to fuel costs, told the Financial Times that his airline had also slashed its hedging in line with rivals.
"Last year, our competitors hedged at about 70 per cent, and we were hedged at about the same percentage," he said. "This year, our competitors are hedged at about 40 per cent, and we are hedged at 43 per cent . . . It means we will all be equally affected by the fuel price, whether it goes up or down."
Korean airlines, which are also struggling with a depreciating currency, now have much lower levels of hedging, 25 and 28 per cent for Korean Air and Asiana, respectively. Korean Air said it had stuck to 25 per cent "regardless of the market circumstances".
On the other hand, Japanese airlines have hedged more aggressively, with Japan Airlines and All Nippon Airways covering 72 per cent and 86 per cent of fuel needs this year, respectively.
But Singapore Airlines, Asia's most profitable carrier, is one of the few Asian airlines that has been hedging against kerosene rather than crude oil, at a time when the spread has been widening.
Corrine Png, analyst at JPMorgan, said Singpore Airliens would do 'less badly than its peers", including Cathay, because of its wiser kerosene hedging policy and also a more flexible salary structure.
.................................
Under syndication
arrangement with FE
Several Asian airlines have cut back on fuel hedging this year, leaving them exposed to far more substantial costs should oil remain at record highs.
The effect of high jet fuel prices was underlined early this month when Cathay Pacific warned that it expected first-half profits to be "disappointing" because of high fuel prices.
The last time Cathay, whose shares fell nearly 8.0 per cent on the news, warned on profits was in 2003, when Hong Kong, where Cathay is based, was battling with an outbreak of Sars respiratory disease.
"Hedging has gone down and airlines are now more exposed because nobody can comprehend [fuel] prices staying at this level indefinitely, but it is in fact the whole business model that isn't working now," Martin Craigs, president of Aerospace Forum Asia, a regional business chamber, said.
"Fares are too low and a typical budget economy fare between Asia and Europe is simply no longer paying for the fuel price."
Mr Craigs said Cathay was also handicapped because it could not pass on more of its fuel bill to passengers because of limits set by Hong Kong on surcharges.
Cathay's 2008 first-half fuel bill was 60 per cent higher than in the first half of 2007. The airline would not comment further, but as of the end of last month, its hedging level stood at 30 per cent of its fuel needs, compared with 48 per cent for the whole of 2007.
Azmil Zahruddin, chief financial officer of Malaysia Airlines, which also recently warned earnings would suffer due to fuel costs, told the Financial Times that his airline had also slashed its hedging in line with rivals.
"Last year, our competitors hedged at about 70 per cent, and we were hedged at about the same percentage," he said. "This year, our competitors are hedged at about 40 per cent, and we are hedged at 43 per cent . . . It means we will all be equally affected by the fuel price, whether it goes up or down."
Korean airlines, which are also struggling with a depreciating currency, now have much lower levels of hedging, 25 and 28 per cent for Korean Air and Asiana, respectively. Korean Air said it had stuck to 25 per cent "regardless of the market circumstances".
On the other hand, Japanese airlines have hedged more aggressively, with Japan Airlines and All Nippon Airways covering 72 per cent and 86 per cent of fuel needs this year, respectively.
But Singapore Airlines, Asia's most profitable carrier, is one of the few Asian airlines that has been hedging against kerosene rather than crude oil, at a time when the spread has been widening.
Corrine Png, analyst at JPMorgan, said Singpore Airliens would do 'less badly than its peers", including Cathay, because of its wiser kerosene hedging policy and also a more flexible salary structure.
.................................
Under syndication
arrangement with FE