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Asian Petroleum Review : Jan-March 2011
35 Top global airlines are staying away from further hedging jet fuel purchases that account for around a third of their costs, betting that a re- cent surge in oil prices to two-year highs will slow. Skimping on cover risks a squeeze in earnings for these companies, which typically have razor-thin mar- gins and had just returned to profitability in 2010 af- ter economic turmoil had sapped corporate and con- sumer demand for air travel. Two factors are giving airlines pause: they have with- stood prices far higher than current levels and the global economy now seems better placed to cope with the surge; and the industry hasn't forgotten Ja- pan Airlines' bankruptcy, triggered by wrong bets on crude prices. "The risk is if oil prices rise too rapidly beyond a cer- tain level, airlines will be exposed to the price risk and the hedging portfolio will not be effective, " said Kelvin Lau, an aviation analyst with Daiwa Institute of Re- search in Hong Kong. While there are no available figures on the volume of options being traded, transactions in OTC swaps con- tracts that are sometimes used by airlines as a bet- ting tool have been falling. The visible volume of Asian regrade and jet fuel swaps purchased by banks in the last quarter of 2010, when oil prices crossed $90, dipped compared with the same pe- riod last year and also versus the three months to July 2008 when prices climbed to a record high of $147 a bar- rel, Reuters data showed. "I am not seeing any airline coming out (to hedge) ag- gressively yet. Many appear quite comfortable with their positions, " said Shukor Yusof, aviation analyst with Stan- dard & Poor's Equity Research. "The current oil prices are not too acute for them to rush into the (hedging) market just yet." OTC SWAPS Some 2.85 million barrels worth of the two contracts changed hands in the October-December period last year, versus 3.55 million during May-July 2008, when Japan Airlines was disastrously betting that oil prices would keep rising. "It is not the right time to do hedging now," said a Singa- pore-based distillates trader. "It is too risky unless you expect prices to keep going up. " Airlines contacted by Reuters supported the view that most are either well covered, or are not in a rush to hedge. Thomson Reuters Asia Petroleum Review Airlines bet oil will correct; stay away from hedging By Francis Kan and Seng Li Peng