Asia-Pacific airlines have clipped their fuel hedges to save on steep premium costs as oil slid to three-month lows, but they need to keep a consistent ratio to safeguard against volatile price swings.
Gerard Rigby of Fuel First Consulting in Sydney, said, ‘Hedging gives you the ability to fix costs and/or profit margins, but it typically takes away potential for windfall profits for favorable price movements.
The cost of jet fuel jumped almost 70% over the past year to $144.00 a barrel in Singapore trading, though it came off the record of $181.65 a barrel reached last month.
Fuel hedges — financial products that give a buyer the right to buy fuel at a guaranteed price — protect companies from price rises, but also increase their costs when prices fall. Hedging contracts are usually options.
Some argue that airlines’ attempt to overreach by making money in oil trading distracts them from their basic business.
Peter Lengyel, a consultant with JBC Energy in Vienna, said, ‘The more often you change your hedge ratio, the more you are gambling. Airlines are not traders. They are not in the business of buying and selling. They go into the market to protect price levels on fuel purchases and these are strategic decisions.’