Asian airlines face lasting fuel costs as hedge cover thins

Airlines across Asia-Pacific face growing exposure to high jet fuel prices, according to industry executives speaking in Kuala Lumpur. Older hedging contracts are ending, and carriers must now weigh whether to buy new cover at much higher levels.

The spot price of jet fuel currently sits at about US$148 a barrel, as reported by CNA. That is well below the nearly US$180 seen at the end of October, but still far above the roughly US$85 level before the Iran war started in late February.

Fuel costs squeeze the industry

Wong Hong, who heads the Association of Asia Pacific Airlines, put fuel at roughly a third of operating expenses. The International Air Transport Association, known as IATA, had estimated the share in the prior year at 25 per cent, before the price spike.

Wong, whose group counts 18 regional carriers as members, described hedging as a very tricky dilemma. Airlines that held hedges over the past six to eight months did well, he said, but they now face buying new cover at higher prices.

Wong also warned that ticket prices have not always risen fast enough to offset the extra costs. He suggested a limit exists beyond which travellers would push back. Passenger numbers were negative overall from April to August, and September was only just above that line. He added that capacity cuts were a clear risk.

Executives differ on the outlook

Airline leaders attending the association’s annual assembly do not agree on how long the pain will last. Air Astana chief executive Ibrahim Canliel said the company sees a new normal, with fuel staying near current levels. His airline’s first-half hedges have expired, and prices were too high to lock in new cover, he said.

Japan Airlines takes a different view. Senior managing executive officer Ross Leggett told Reuters that he expects prices to keep moving up and down. JAL’s planning figure for its worst case is US$160 a barrel, matching what it paid on average between April and September.

Japanese carriers adjust their approach

All Nippon Airways chief executive Juichi Hirasawa said fuel costs will rise by 100 billion yen, or US$626 million, this fiscal year above initial plans. He anticipates calmer fuel pricing during the latter half of the year that closes on 31 March.

Both ANA and JAL hedge only their domestic fuel use and rely on surcharges and ticket price changes for international flights. Leggett said JAL will begin levying a domestic fuel surcharge next April, which would be its first such charge. Hirasawa said a similar ANA surcharge was under consideration, but competition from bullet trains makes that choice difficult.

Singapore Airlines shows the strain

Singapore Airlines recorded a 56 per cent climb in fuel spending across the half-year ending in September, reaching S$3.97 billion, or US$3.09 billion. Operating profit fell 29 per cent even though revenue reached a record.

Before hedging, the carrier paid an average of US$171 a barrel, up 87 per cent on a year earlier. Hedging gains of S$731 million reduced the effective price to US$145 a barrel. Chief Financial Officer JoAnn Tan said hedging only offers some protection, and that no one can predict fuel prices.

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Sources

• CNA: Asia-Pacific airlines brace for prolonged fuel pain as hedging cover thins

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