Airlines can expect a significant earnings boost next year if oil prices remain weak as fuel bills are their largest single cost, and mainland carriers have an advantage because they have not hedged their fuel consumption above spot prices. “We forecast a significantly better 2015 for Asian airlines,” HSBC said in a report released last week. “Lower fuel costs are unambiguously positive for the Asian airlines. With fuel amounting to 38 per cent to 48 per cent of operating costs, lower fuel directly boosts profits.” Jet fuel prices, which fell by more than 30 per cent to hit a four-year low in the second half of this year, were expected to remain weak next year and were a key upside driver for airlines, the International Air Transport Association (IATA) said in its year-ahead outlook, also released last week. The industry body forecast that global airlines would post a collective net profit of US$20 billion this year, up from US$18 billion projected in June. “This looks set to rise to US$25 billion in 2015,” IATA said. “Lower oil prices and stronger worldwide GDP growth are the main drivers behind the improved profitability.” Carriers that have not hedged their fuel consumption at higher prices and budget carriers, which have fuel bills that account for a bigger share of their costs, are best positioned to gain from the oil price plunge. “Across Asia-Pac, Chinese airlines benefit the most given their zero hedging position,” Citi Research said of the major three mainland carriers – Air China, China Eastern and China Southern – in a report last week. JP Morgan analyst Corrine Png said in a note that Taiwanese and Korean carriers, which had limited fuel hedging, were also well-leveraged to falling fuel prices, while HSBC picked AirAsia and Cebu Air, both low-cost carriers, as the biggest winners. We would prefer to see hedging losses and continued low prices than to have hedging gain on high fuel prices Cathay Pacific Bocomm analyst Geoffrey Cheng said Cathay Pacific, whose fuel hedging extends into 2018 according to its website, was likely to post a hedging loss next year if oil prices stayed around current levels. IATA expects Brent oil prices to average US$85 a barrel next year – falling below US$100 for the first time since 2010. Cathay Pacific said around 57 per cent of its estimated fuel consumption next year was hedged at an average Brent price of US$99 a barrel. “Cathay Pacific constantly reviews its fuel hedging policy and welcomes the recent fall in oil prices and hopes it continues … hedging losses or gains will depend on prices in 2015,” it said. “We do not speculate on the prices of fuel in 2015 but use hedging to manage price volatility. We would prefer to see hedging losses and continued low prices than to have hedging gain on high fuel prices.” UBS analyst Eric Lin said: “There are no losers in a low oil price environment, though some will be bigger winners than others. “Earnings volatility to oil price depends on each airline’s operating margins as well as their coverage from hedging and fuel surcharge.” Lin said per dollar changes in oil prices might be reflected less in low-cost carriers’ profits, even though fuel was by far their largest single cost, because they tended to have operating margins much higher than full-service carriers. He added that the benefit of falling oil prices would also be delayed for mainland airlines because mainland fuel prices were adjusted each month by the government. HSBC said in its report: “we expect the fuel surcharges to fall in line with the recent decline in fuel prices and that this will stimulate extra demand.” It estimates that every 10 per cent fall in fuel prices will boost demand by 1.6 per cent, with short-haul leisure travellers being the most price-sensitive passengers. Citi said it expects mainland airlines’ passenger traffic to grow by 11 per cent to 13 per cent next year and load factor to improve by one to two percentage points, counting on additional traffic from lower ticket prices. But the depreciation of Asian currencies may offset the positive impact of lower jet fuel prices, as many Asian carriers pay fuel bills in US dollars. Citi said it expects the yuan to decline by 0.5 per cent next year to 6.21 to the US dollar. That would result in further exchange losses for mainland airlines, which had this year’s earnings significantly eroded by yuan depreciation.