Airlines lose out after failing to take Chinese path
Falling oil prices favour carriers who decided against hedging, write Clement Tan and David Fickling
AFTER many airlines were burned because of slumping fuel prices in 2008 and 2009, Chinese carriers stopped hedging their fuel purchases — even when prices soared above $100 a barrel. Now they are having the last laugh.
Air China, China Eastern Airlines and other Chinese carriers are expected to benefit the most after oil prices in London fell below $50 a barrel on Monday to their lowest closing price in more than six months. Yesterday, Brent crude futures for September settlement were up 84c to $50.36 in Singapore.
More airlines in Asia are looking to reduce the amount of fuel they buy under hedges, or at least sign shorter hedging contracts, according to Malayan Banking. Fuel costs are the biggest expense for Asian carriers, accounting for about 40% of the total.
“Hedges have come off,” says Mohshin Aziz, an analyst at Malayan Banking in Kuala Lumpur. “A lot of airlines have decided not to hedge, or to hedge less,” he says.
Air China, China Eastern and China Southern Airlines, the country’s three biggest carriers, all said that they did not hedge on fuel purchases. They were expecting first-half net income to jump — by as much as 743% for Air China.
In 2008, when crude prices plunged more than 50%, hedges that locked in fuel at higher prices pushed Cathay Pacific Airways into its first annual loss in more than a decade.
Air China and China Eastern also reported paper losses from fuel hedging in 2008.
Chinese airlines “haven’t hedged for a long time after they suffered a big loss during the 2008-09 financial crisis,” says Geoffrey Cheng, a Hong Kongbased analyst at BOCOM International Holdings.
AirAsia, Southeast Asia’s biggest budget carrier, and its AirAsia X unit have gone completely unhedged for 2016, says group CEO Tony Fernandes. About 50% of AirAsia’s fuel needs for this year are hedged.
“Nice to wake up and see Brent below $50,” Mr Fernandes tweeted yesterday.
Some Asian airlines have continued hedging despite the decline in fuel prices.
Singapore Airlines, Southeast Asia’s biggest carrier, said last month that its savings from lower fuel prices were partially offset by hedging losses and a stronger US dollar in the quarter ended in June.
Before hedging, Singapore Air’s fuel costs dropped 33% because of lower prices. With almost 60% of its fuel requirements for the quarter hedged at an average of $110 per barrel, it lost $191m on its hedges.
Singapore Air says it has hedged 55% of its jet fuel needs for the July-September quarter at an average price of $104 a barrel. Jet fuel prices closed at $60.15 a barrel on Monday in Singapore, according to data compiled by Bloomberg.
Cathay will give an update on its hedging strategies when it announces first-half earnings on August 19.
In March, after Cathay announced it lost $118m from fuel hedges last year, the carrier said it still considered it prudent to hedge against a steep increase in fuel prices — although it hoped to lock in future hedges at lower levels.
Hedging is an important part of the airline’s risk management, CEO Ivan Chu says.
Malaysia Airlines has no hedges but would like to have some — if it could afford to, CEO Christoph Mueller said yesterday at a conference in Sydney.
“A fuel hedge does not come for free, and our financial means are constrained now.”
The airline, taken private last year by Malaysian sovereign wealth fund Khazanah Nasional, is undergoing a restructuring after it lost two aircraft in disasters last year.
For now, at least, airlines that have not hedged will report lower costs.
They are also expected to benefit as lower oil prices have led carriers to reduce fuel surcharges, making air travel more affordable.
Travel demand in the Asia Pacific region has increased more than 6% this year, according to Mr Mohshin. “Below $50, everyone makes money,” he said.
Hedges have come off. A lot of airlines have decided not to hedge, or hedge less