Asia airlines raise hedging volumes on oil price fall

Thu Sep 25, 2014 3:56am EDT
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By Jessica Jaganathan

SINGAPORE (Reuters) - Airlines in Asia are stepping up jet fuel hedge volumes after oil prices fell below $100 a barrel this month, with some locking in fuel purchases as far out as 2016, suggesting airlines see oil prices bottoming.

Airlines have been cautious about fuel hedging since 2008, when several large carriers scrambled to lock in fuel needs as oil prices surged above $100 a barrel for the first time – only to see them plummet to less than $50 by year-end as a global recession hammered travel demand.

But fuel traders at several regional banks have noted a widespread pick-up in hedge interest as oil prices have dropped, and volumes could rise in the next quarter if oil prices keep falling, they said.

"Volumes increased when Brent crude was at $100 a barrel, and they increased last week when [oil prices] fell further and now [airlines] are waiting for prices to drop to below $95," one trader said, speaking on condition of anonymity, as he was not authorized to speak with the media.

Jet fuel can account for anywhere between 20 and 50 percent of an airline's operating costs, so swings in oil prices can hit their bottom line and have an influence on fare prices.

Airlines have different hedging policies with Australia's Qantas Airways (QAN.AX: Quote) hedging as much as 94 percent of its fuel needs for the first half of next year, while Singapore Airlines (SIAL.SI: Quote) is hedged at around 52 percent for its 2014-2015 financial year.

The amount of hedging eased after the 2008 crisis but has picked up pace recently with prices on a downward trend.

Brent crude oil prices LCOc1 fell below $100 a barrel on Sept. 8 before sliding to a 26-month low of $95.60 a barrel on Wednesday due to a soft global economic outlook.   Continued...

A Thai Airways plane prepares to land at Bangkok's Suvarnabhumi Airport July 17, 2014.    REUTERS/Athit Perawongmetha