Firm fuel prices force Asian airlines into hedging
Move indicates carriers expect little movementin costs, putting pressure on profits
Top Asian airlines are hedging a substantial portion of their jet fuel usage this year, signalling they expect prices of the fuel to be firm and indicating sustained pressure on their profit margins.
Jet fuel makes up at least 30 per cent of most airlines' overall operating costs and an effective hedging strategy is crucial as heightened competition forces carriers to cut fares and operate on thin margins.
While there should be sufficient supply of jet fuel in Asia this year to meet buoyant demand driven by healthy passenger traffic, airlines are unlikely to benefit from lower prices.
Jet fuel prices are market based - unlike diesel, kerosene and some other fuels which are subsidised in nations such as China, India and parts of Southeast Asia - and users pay rates that are closely linked to crude oil prices.
Geopolitical tensions are adding to the uncertain operating environment. Industry body International Air Transport Association said last month that airlines globally expect to make US$1 billion less profit this year than hoped, as the Ukraine crisis pushes up oil prices.
Research firm S&P Capital IQ said in a report last quarter that earnings of flag carriers, especially top-tier airlines, will be pressured by intense competition from low-cost carriers and relatively firm jet fuel prices, even as the Asian airline industry's overall profits for 2014 rise.