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Asian Petroleum Review : Jan-March 2011
36 Delta Air Lines Inc , the world's second-biggest airline behind United Continental measured by passengers carried, said on Dec. 15 that its hedge position for 2011 is about 40 percent, and of that, 40 percent is capped in the low-to-mid $80 a barrel range. Cathay Pacific , Hong Kong's flagship carrier, is hedg- ing 35 percent to 40 percent for the 2010-11 financial year compared with 50 percent a year earlier, while Malaysia Airlines is covering 33 percent in 2011 com- pared with 60 percent last year. A slowdown in hedging will reduce the volume of busi- ness of banks that sell options and other derivatives to airlines to cover their bets. Oil prices hit a 26-month high over $92 a barrel on Dec. 31, closing the year up 15 percent. Strong growth from Asia, especially China, and a rebound in demand from recovering economies elsewhere fueled a four- month rally that pushed crude over the $70-$80 range it held for much of the year. Prices touched a peak of more than $145 a barrel in July 2008. Jet fuel physical prices were nearly $107.00 a barrel on Tuesday, versus 2010's average at $90.27 a barrel and 2008's average at $121.73 a barrel. LEARNING FROM JAPAN AIRLINES "Fuel hedging allows airlines to forecast their ex- penses in the coming 6-12 months. But you can never get it 100% right, " said Yusof at Standard & Poor's. "They have been very cautious, and concerned about the potential of losing money when they get it wrong, as seen previously." Japan Airlines chalked up $441 million in hedging losses, which contributed to a $25 billion bankruptcy earlier in 2010. The hefty losses, in an environment where most airlines were recovering, suggested the carrier had raised the vol- ume of its hedges when oil was at its peak. This left it over-exposed when prices collapsed. Apart from hedging, another tool often deployed by air- lines to cope with higher jet prices is a surcharge on the fuel they levy on tickets. This levy is often adjusted when prices rise. Singapore Airlines (SIA), the world's second-biggest car- rier by market value, in early December raised its fuel surcharge by $3.00 to $25.00 per sector, its first increase since June 2008 after jet fuel prices went above $95.00 a barrel. "A fuel surcharge is collected to mitigate the effects of escalating fuel prices, " said Nicholas Ionides, vice presi- dent of public affairs at SIA. The airline has also reduced its hedging to about 20 per- cent, down from 30-40 percent, said Lau at Daiwa Insti- tute of Research. Thai Airways has also raised its fuel surcharge since late November. "These actions could help cover the impact of oil prices, so we think our fourth-quarter performance shouldn't be affected by this, " said Raj Tanta-Nanta, vice president for investor relations at Thai Airways. (Additional reporting by Kyle Perterson in CHICAGO, Arada Kultawanich in BANGKOK, Eveline Danubrata and Jasmin Choo in SINGAPORE, Alison Leung in HONG KONG, Fang Yan in BEIJING and Aniruddha Basu in MUMBAI) (Editing by Manash Goswami) Thomson Reuters Asia Petroleum Review