News Backgrounder
Bang goes the oil price
December 1st 2017
After a long period of pain when oil prices stayed stubbornly low, well-hedged airlines are poised to reap benefits from rising fuel prices. Read More »
Only a third of Asia-Pacific airlines are well hedged against fuel prices rises and recent price jumps will hit some of the region’s airlines hard, a recent survey on hedging has revealed. The warning comes as fuel prices climbed 12% in the past month and have risen by 31% since last year – albeit from a very low base.
Consultancy Crucial Perspective has examined all 33 listed airline stocks in the Asia-Pacific and found that only “Air New Zealand, Qantas, Virgin Australia, Singapore Airlines, Cathay Pacific, Thai Airways, AirAsia, AirAsia X, Asia Aviation (AirAsia group), Bangkok Airways and Cebu Air have substantial fuel hedging in place”. The remaining airlines in the region are almost completely exposed to volatile fuel prices, the consultancy said.
Airlines operating younger and more fuel efficient aircraft and those with stronger local currencies such as the Chinese carriers Air China, China Eastern and China Southern Airlines, will mitigate this negative earnings impact because fuel costs are largely paid in U.S. dollars, it said.
Crucial Perspective principal, Corrine Png, who has covered Asian transport equities for more than 15 years at J.P Morgan, Citigroup and HSBC, said she expected Asiana Airlines, China Airlines, Jet Airways, Vietnam Airlines and Philippine Airlines to suffer the greatest negative impact on earnings from higher oil prices.
“A one per cent increase in the jet fuel price cuts these carriers’ annual net profits by 14%, 11%, 8%, 6%, 5%, respectively, based on our estimates, because of their lack of or limited fuel hedging and thin profit margins,” Png said.
“Qantas, Virgin Australia and Air New Zealand have higher than sector average fuel hedging levels at 86%, 83% and 71% of their fiscal 2018 fuel consumption, respectively. Japan Airlines and ANA HOLDINGS are hedged at 40% and 30%, respectively,” she said. “Nevertheless, the recent spike in the jet fuel price is incrementally negative for the Asia-Pacific airline sector if it continues,” she said.
“Historically, the share prices of Virgin Australia, Singapore Airlines, Qantas, Shandong Airlines and Japan Airlines have had the strongest negative correlation with spot jet fuel prices in the past five years notwithstanding their hedged fuel positions. This is mainly because extraneous factors have played a part in driving their share price performance.”
