Fuel hedging by airlines not of much help

Friday January 9, 2009 By FINTAN NG - THESTAR

Airlines need to shift concern from earnings to balance sheet as operating cash flow is affected

PETALING JAYA: Airlines’ jet fuel hedges last year will not do them much good as the global economic slump crimps demand for travel.

Yesterday, Cathay Pacific Airways Ltd said it had encountered paper losses of US$980mil from fuel hedging. The price of jet fuel has fallen by more than 70% in tandem with the price of crude oil, which peaked at US$147 per barrel in mid-July.

The International Air Transport Association said statistics pointed to a further 5% global air traffic contraction in November 2008, the third consecutive month of decline. The Asian region registered the worst drop at 10%, the fifth consecutive month of contraction.

According to AmResearch Sdn Bhd research head Benny Chew, airlines would need to shift their concern from earnings to their balance sheet as operating cash flow becomes affected.

“The load factor (passenger volume) is the key. It’s already down and with the bad macroeconomic picture in the coming quarters, operating cash flow will be affected,” he said.

Chew told StarBiz that things had turned from bad to worse in terms of load factor. “There’s going to be less travelling; retrenchments will mean less corporate travel,” he said.

Chew said airlines had got themselves some breathing space with the much lower price of oil but those that were highly leveraged would feel the impact of the weak demand for air travel.

“Lower oil price is not really that important a factor in such an environment. All it means is that the airlines have bought themselves more time because if oil were still above US$100, many would be in trouble or go bust,” he said.

In an e-mail reply, AirAsia Bhd deputy group chief executive officer Datuk Kamarudin Meranun said the airline was currently not hedged for all of its fuel consumption.

“We’ve either unwound or neutralised the impact of any remaining hedges. Our current strategy is to buy a fixed swap with a downward coverage. We are holding the view that oil price will still go down in the next few months,” he added.

Meanwhile, HwangDBS Vickers Research Sdn Bhd said load factors for Malaysia Airlines and AirAsia for the first nine months of 2009 were expected to remain low at 68% and 72% respectively.

However, it said, AirAsia “could benefit from the current environment as customers are increasingly shifting to cheaper flights.”