Rising jet fuel will help airlines narrow losses
Updated: 2009-06-30 06:58
(HK Edition)
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The surge in the price of jet fuel this year will help Cathay Pacific Airways Ltd, Air China Ltd and Singapore Airlines Ltd (SIA) curb losses from their hedges, according to analysts.
The 43 percent rise in jet fuel price this year may help airlines in Asia trim paper losses from wrong-way bets on oil. Cathay, which posted its first annual loss in a decade last year, could recoup HK$1.1 billion ($142 million), according to Citigroup Inc, while Air China may write back more than 4 billion yuan ($585 million), estimated Deutsche Bank AG.
The gains come as Asia Pacific airlines struggle to reverse an 11-month slump in passenger traffic that may lead to an industry-wide $3.3 billion loss this year for the region. Rewards from fuel hedging could narrow losses at Cathay and help Air China return to profit this year, according to Louis Wong, who manages $50 million at Phillip Securities HK Ltd.
"What has been a negative for airlines may have turned positive with oil prices rising," said Wong. "Any write-back will give airlines the breathing space they need during these times."
The drop in the price of jet fuel from a record $181.85 a barrel in July last year to a low of $46.05 in March worked against airlines which locked in fuel-hedging contracts at higher prices than those in the spot market. With prices rising, most carriers will cut the value of their unrealized hedging losses and write back amounts they have already provisioned.
SIA, Asia's most profitable airline, made a S$543 million ($373 million) loss on fuel hedging in the quarter ended March, including a S$112 million deficit from early termination of some contracts before maturity.
"The silver lining of rebounding oil prices is that SIA will incur smaller hedging losses and write back some of its previous mark-to-market fair value losses on balance sheet," Corrine Png, an analyst at JPMorgan Chase & Co, wrote in a June 15 report. A $5 rise in the price of a barrel of jet fuel could cut SIA's hedging losses by S$50 million, she said.
Cathay doesn't disclose any numbers, said Carolyn Leung, a spokeswoman for the carrier, adding that high fuel prices "are not good for airlines." Nicholas Ionides, a spokesman for SIA, declined to comment.
Not everyone is optimistic. The gains will be one-time and will do little to offset the plunging demand, said Steven Lim, who manages about $200 million at Daiwa SB Investments in Singapore.
"Right now, I am more concerned about the underlying growth in demand and how soon a recovery will be seen in first- or business-class travel," said Lim. "Airlines are still putting in place cost cuts which means the underlying demand is still weak."
The global recession has hammered premium-class traffic, where carriers such as Cathay and SIA get about 40 percent of their revenue. Worldwide premium-travel revenue fell by about 44 percent from a year earlier in April, according to the International Air Transport Association, or IATA.
Passenger traffic in Asia Pacific fell 14 percent in May, the steepest of any region, IATA said June 25. The industry globally may post losses of $9 billion this year, as the spread of swine flu compounds the effects of the recession. Asia Pacific will lead with a $3.3 billion loss, it said.
Bloomberg News
(HK Edition 06/30/2009 page4)