Asia-Pacific Airlines Face Rising Fuel Costs and Hedging Dilemmas

Asia-Pacific carriers face rising fuel costs as old hedging contracts expire and spot prices hover near 148 dollars a barrel.

Wong Hong, director general of the Association of Asia Pacific Airlines, said that fuel now accounts for roughly 33 percent of airline operating costs. That figure compares to 25 percent last year, according to figures from the International Air Transport Association recorded before prices surged following the outbreak of war with Iran in late February.

Airlines that held hedging contracts over the past six to eight months managed well, but renewing those protections now requires locking in higher rates. Industry leaders meeting in Kuala Lumpur for the annual assembly of the Association of Asia Pacific Airlines expressed starkly different views on how long high energy prices will persist.

“We estimate entering a new normality, characterized by a sustainably close fuel price to the levels we see more or less today,” Ibrahim Canliel, chief executive officer of Air Astana, said, referring to Brent crude trading between approximately 90 and 100 dollars a barrel.

Canliel said that the Kazakh carrier’s hedges for the first half of the year expired and quoting new coverage made no sense at current prices. The airline still plans to rebuild its position to cover all fuel purchased outside Kazakhstan, which represents about 30 percent of its total annual needs.

Japan Airlines expects ongoing market volatility, according to Ross Leggett, deputy managing director. The carrier bases its budget on a worst-case scenario of 160 dollars per barrel for aviation fuel, which matches the average price it paid from April to September.

Juichi Hirasawa, managing director at All Nippon Airways, said that the company’s fuel costs will climb by 100 billion yen, or 626 million dollars, for the fiscal year compared to initial forecasts. Both ANA and Japan Airlines limit their hedging to domestic fuel consumption, relying instead on ticket surcharges and fare adjustments to absorb international exposure.

Leggett announced that Japan Airlines will introduce a domestic fuel surcharge starting in April, after concluding it could no longer rely on public fuel subsidies. Hirasawa said that ANA is also studying a domestic surcharge, though competition from high-speed trains complicates the decision.

Passenger traffic growth across Asia-Pacific turned negative between April and August, with September landing just above zero, according to Wong. Capacity reductions remain a distinct risk if ticket prices cannot keep pace with expenses.

Singapore Airlines demonstrated how margins shrink even for carriers with substantial hedges. Its fuel bill jumped 56 percent in the six months ending in September to 3.97 billion Singapore dollars, dragging down operating profit by 29 percent despite record revenue.

Singapore Airlines paid an average of 171 dollars per barrel before hedging, an 87 percent year-on-year increase. Hedging gains of 731 million Singapore dollars reduced the effective price to 145 dollars per barrel, though JoAnn Tan, chief financial officer, said that hedging offers only limited protection.

“Nobody can predict fuel prices, which is why we put hedges in place,” Tan said.