Record low oil prices fuel hedging strategies

A number of airlines, however, are moving cautiously with hedging after getting burned in 2008, when the majority of carriers scrambled to lock in fuel costs as crude surged above $100 for the first time, only to see prices plummet to less than $40 before year-end.


ANA Asiana crude prices fuel hedging Garuda Indonesia IATA Japan Airlines jet fuel


Airlines around the world are moving quickly to increase their jet fuel hedging as they eye five month lows in crude prices that many expect to taper off at around US$50 a barrel. “Some airlines are popping in and hedging bits and pieces daily at a Brent price of $55 and down to $50,” said a trader with a bank that handles hedging for many Asian airlines according to Reuters.
Indonesia’s PT Garuda Indonesia has hedged 45 per cent of its 2015 jet fuel needs and is now looking to raise that to at least 50 per cent, versus only 10 per cent in 2014. Garuda’s hedging strategy, together with cost cutting, helped it swing to a first-half net profit this year.
South Korea’s Asiana Airlines, which had stopped hedging at the end of 2014 as oil market volatility made the strategy a difficult one, has increased its third-quarter jet fuel hedge ratio slightly versus the previous two quarters.
Low oil prices have driven global airlines to forecast 2015 industry profits of $29.3 billion, almost double from last year as the lower fuel cost stripped out $81.6 billion from the industry’s fuel bill this year, according to IATA.
A number of airlines, however, are moving cautiously with hedging after getting burned in 2008, when the majority of carriers scrambled to lock in fuel costs as crude surged above $100 for the first time, only to see prices plummet to less than $40 before year-end.
Some airlines prefer the spot market with Thai Airways International for instance, hedging nearly 80 per cent of its 2015 fuel buys with plans to buy the rest from the spot market. The airline expects to save costs of about 16 billion baht (US$455.45 million) this year due to its hedging strategy and lower oil prices, according to Reuters.
Japan’s ANA Holdings Inc and Japan Airlines have hedged 40 per cent and plan to stick with that level.