Airlines increase hedging of jet fuel for cost savings

Carriers review strategies to save themselves from oil volatility

By (Reuters)

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Published: Fri 16 Jan 2015, 1:42 AM

Last updated: Thu 25 Jun 2015, 7:35 PM

Singapore/Berlin — Global airlines, looking to lock in huge savings, are preparing to hedge more jet fuel to fix prices as they bet a slide in crude oil to six-year lows may peter out near $40 a barrel.

Some airlines have already stepped up hedging, especially after benchmark Brent crude slipped below $50 a barrel earlier this month, fuel traders and brokers said.

In Europe, airlines such as Aer Lingus and Ryanair are aiming to take advantage of the low oil prices to lock in fuel costs into 2016 and beyond. Thai Airways plans to hedge 100 per cent of its fuel purchases this year.

“If you are a sensible hedger, you have to look at this as an excellent opportunity,” said Robert Campbell, head of oil products research at Energy Aspects.

Current crude output can’t be sustained at these prices, Campbell said, and with “some increase in demand and some reduction in supply, ultimately the price will be forced higher”.

Jet fuel can account for between 20 and 50 per cent of an airline’s operating costs, and swings in oil prices can mean a huge boost or hit to profits. In December, the International Air Transport Association (IATA) said lower fuel prices could mean that airlines globally will report their strongest profit margins in more than five years in 2015.

Still, Brent crude slipping 60 per cent since June has caught many by surprise.

US airlines that hedged based on higher oil prices, such as United Airlines, have had to dump losing bets and are now reviewing their strategies for protecting themselves from oil market volatility.

“Over the last six months of 2014, very few airlines were brave enough to go into the market and if they did, it was in very small volumes,” said Shukor Yusof, founder of aviation research firm Endau Analytics.

At least one Asian carrier, South Korea’s Asiana Airlines, has stopped hedging since November due to recent price volatility, while Germany’s Air Berlin has said it is considering reducing its hedging rate.

Now, hedging interest has picked up, according to brokers and traders, although some airlines remain skittish because of free-falling prices. In line with benchmark crude, jet fuel prices have fallen about 50 per cent over the last six months to around $60 a barrel this week, Reuters data showed.

“Even though hedging volumes have picked up, they are still limited,” said a fuel trader with a Singapore-based bank handling hedges for airlines.

Airlines typically hedge some of their fuel needs — or buy fuel in advance at pre-determined prices — to reduce the impact on earnings from wide swings in the market. But many carriers, particularly in Asia, have been cautious about hedging since 2008, when airlines scrambling to lock in fuel costs as crude surged above $100 a barrel for the first time saw oil plummet to less than $40 before year-end.

With prices dropping, airlines may see buying in the spot market as a better option than possibly getting caught on the wrong side of a long-term hedge, Yusof said.

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