Airlines drop fuel hedging as price falls

Airlines drop fuel hedging as price falls

With tumbling oil prices and expectations of them remaining low this year, airlines are finding fuel hedges less useful to protect them against soaring fuel costs.

Many airlines are revamping their strategies by abandoning hedging altogether or keeping volumes at a minimum.

There seems to be a consensus among carriers that jet fuel prices will stay fairly weak for the whole of 2015 in parallel with crude oil, whose price is expected to hover around US$60-65 a barrel.

At those crude prices, airlines do not see much need to deploy fuel hedges that would prevent them from reaping the benefits of plummeting fuel prices, according to Bangkok-based industry executives, who asked to remain anonymous due to the sensitive nature of the issue.

"Many airlines are quite comfortable with the projected average $60-65 for a barrel of crude oil and a glut situation. They would rather resort to purchasing fuel from spot markets," said an executive with 38 years' airline experience.

At those levels, many airlines think they can easily manage costs without the need to gamble with risky fuel hedges that can leave them with excessive costs.

Fuel hedges made sense years ago when oil prices were rising and above $100 a barrel as a tool to shield airlines from the full effects of rising fuel prices. They were a major part of their efforts to manage business risks.

Fuel represents about a third of airlines' operating costs. Jet fuel typically costs about $20 a barrel more than crude, with the difference going mostly to refining and logistics costs.

By turning to procurement at spot rates, carriers can take advantage of possible further declines in fuel prices instead of being locked into forward fuel-buying contracts.

Several international airlines, particularly those based in Asia, have opted to discontinue fuel hedges. In the case of Thai Airways International, hedges account for about 80% of its fuel, depriving the flag carrier of the benefit of cheap oil prices that have plummeted faster and further than anyone had anticipated.

The six-month slide has halved crude prices to five-year lows, with major benchmark crude settling down late last week below $50 a barrel.

More conservative airlines such as Bangkok Airways, which until recently hedged more than half of its fuel needs, are believed to be considering cuts to forward fuel purchases. But a senior executive said the airline w still looking at price trends and  not rushing to make any drastic decision. "Fuel prices are still moving quite wildly and have yet to stabilise."

An AirAsia official said fuel hedges would remain part of the group's cost management strategy but gave no details.

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