Top Asian airlines are hedging a substantial portion of their jet fuel usage this year, a Reuters survey showed, signaling they expect prices of the fuel to be firm and indicating sustained pressure on their profit margins.
Jet fuel makes up at least 30% 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 subsidized 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 (IATA) said last month that airlines globally expect to make $1 billion less profit this year than previously hoped, as the Ukraine crisis pushes up oil prices.
And 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.
Japan Airlines (JAL), Asia's second-biggest airline by market value, is hedging about 40% of its fuel consumption in the 2014 financial year, similar to volumes seen in the previous year, a spokesman of the airline said.
“Hedging helps us to reduce the risk of volatile and potentially rising fuel costs in the long term. This hedging will be operated monthly,” the spokesman said in an email.
ANA Holdings' hedge ratio for its 2014 financial year is 45%, similar to the 2013 and 2012 financial years, said a spokesman for Japan's largest carrier.
Korean Air Lines generally keeps its hedging volumes around 30% of its annual fuel consumption and this year is no exception, a spokesman said.
The spokesmen of JAL, ANA and Korean Air declined to divulge price details of their hedges.