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Singapore: Asia-Pacific airlines have clipped their fuel hedges to save on steep premium costs as oil slid to three-month lows, but they need to keep a consistent ratio to safeguard against volatile price swings.
A likely slowdown in global travel and ballooning fuel costs, which have more than offset a series of fare and fuel tax hikes and led to industry-wide losses in the second-quarter, have forced many airlines to scrap routes.
Some have even been threatened by insolvency.
To keep themselves above water, regional airlines must salvage any possible costs or seek to book higher profits by trimming hedges, betting on sustained price falls rather than a rebound to new highs, some analysts said.
"Hedging gives you the ability to fix costs and/or profit margins, but it typically takes away potential for windfall profits for favourable price movements," said Gerard Rigby of Fuel First Consulting.
"Option premiums are a function of volatility and price levels, so evidently they have become more expensive," said Gerard Raynor of Societe Generale in Paris.
Fuel hedges - financial products that give a buyer the right to buy fuel at a guaranteed price - protect companies from price rises, but also increase their costs when prices fall. Hedging contracts are usually options.
"If they have bought calls, then they could just be losing the price of the premium. But at $17 per barrel, that is a lot to lose straight up. It is always the hardest question to answer for hedgers - do they hedge now or wait for the market to dip?" said Rigby.
But derivatives traders spoke against frequent changes to the hedge ratio to save on premium costs, and urged airlines to adopt a more consistent strategy by having a fixed quantity of hedges.
"The more often you change your hedge ratio, the more you are gambling," said Peter Lengyel, a consultant with JBC Energy in Vienna.
"Airlines are not traders. They are not in the business of buying and selling. They go into the market to protect price levels on fuel purchases and these are strategic decisions."
Carriers embark on different hedge strategies, depending on their risk appetite. Established ones with deep pockets, such as Singapore Airlines (SIA), tend to hedge within a range regardless of oil price moves.
SIA hedged about 36 per cent of its fuel needs at an average price of between $104-$109 a barrel, in line with its policy to hedge between 30-60 per cent.
Air New Zealand shaved fuel hedges to 65 per cent in the first quarter of financial year 2009 (July-Sep-tember), from 83 per cent of the last quarter of financial 2008 (April-June).
Japan Airlines Corp trimmed hedges to 75 per cent for March 2008-April 2009, from about 90 per cent a year ago.
Australia's Qantas cut hedges to 65 per cent for 2008-09 at around $116 a barrel for crude inclusive of option premium, from a previous hedge of 100 per cent locked at $75 a barrel.
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