Asia-Pacific airlines cut back on fuel hedging

By Felicia Loo - Analysis

SINGAPORE (Reuters) - Many Asian airlines have cut their fuel hedging in a bet that record-high oil prices cannot be sustained, but the cost-saving effort could expose them to sharp losses if a harsh winter drives prices to $100 a barrel.

Airlines fear a repeat of last year, when some who had spent hundreds of millions to shield themselves from surging oil suffered losses after crude prices slid from a peak of $78 a barrel in the fourth quarter to below $60, analysts said.

"These airlines may expect further upside to the oil prices will be limited," said Wendy Huang, head of research from SinoPac Securities (Asia) Ltd in Shanghai.

"If the volatile oil prices experience some consolidation in the short term, the hedging activities may lead to financial costs. Hence they want to reduce their exposure," she added.

Heavyweights including All Nippon Airways (ANA) (9202.T) have reduced their fuel hedging by a quarter from the previous year to about 75 percent of its fuel needs in the financial year to March 2008, while rival Japan Airlines Corp (JAL) (9205.T) has reduced its hedging to 77 percent from 89 percent in the same period.

Thai Airways THAI.BK cut its hedging to just 10 percent, priced at an average $85 a barrel, down from 20-23 percent in the past few months.

"We have no plans to increase hedging as prices are too high at the moment. It does not make sense to do so now," said an official from Thai Airways.

But Air New Zealand (AIR.NZ) is keeping its fuel hedging steady at 60 percent for the second half of the business year to 2008 with prices locked at $62.23-$73.46 a barrel.

State-owned Vietnamese carriers -- Vietnam Airlines and Pacific Air -- left their fuel purchases unhedged.

BET ON FALLS FROM PEAK

Oil rallied to an all-time high of $90.07 last week, up 13 percent in less than two weeks and nearing its inflation-adjusted peak reached in 1980, as funds moved into oil and commodities from markets battered by the global credit crunch.

Prices have since fallen below $86 on fresh worries that a slowdown in the U.S. economy will curb energy demand.

"I am not surprised that the airlines have reduced the hedging given the high prices," said Gerard Rigby from Fuel First Consulting in Sydney.

"They will probably wait for crude oil to drop to $70 a barrel again. Remember the average for WTI this year is probably still at $70 a barrel."

The market view is that there is a good chance that prices will correct downwards as they did last year, said Tony Nunan, a Tokyo-based risk manager of Mitsubishi Corp.