Asian airlines are facing the expiration of their jet fuel hedging contracts and must choose between hedging at exorbitant prices or risking an even higher rise without hedging.
Citing industry executives, Reuters reported today that jet fuel prices in Asia are currently about 75% higher than they were before the war in the Middle East began, and the chances of that changing dramatically in the foreseeable future appear slim.
“Our view is that we are facing a new normal in which the price of fuel is here to stay at the levels that we are seeing more or less today,” the general director of Kazakhstan’s Air Astana told Reuters.
This view would support a pro-hedging stance, to guard against even higher price increases – but that doesn’t sit well with everyone, not at current jet fuel price levels. These levels are off October highs of nearly $180 per barrel, but at $148 per barrel they remain quite high.
Jet fuel costs now account for 33% of an airline’s operating costs, according to Wong Hong, chief executive of the Association of Asia Pacific Airlines. Before the war, jet fuel’s share of airline operating costs, according to the International Air Transport Association, was 25 percent. As a result, airlines facing the expiration of their last hedging contracts also face a “very, very tricky dilemma”, according to Hong.
But not everyone is so pessimistic. “We still think it will be cyclical. It will go up and down,” Ross Leggett, chief executive of Japan Airlines, told Reuters. Despite this, Japan Airlines is forecasting a worst-case scenario with jet fuel at $160 per barrel. This is the price the airline had to pay for its fuel between April and September.
Every airline around the world is grappling with the impact of the war in the Middle East on jet fuel prices. Significant declines in profitability and plans to increase ticket prices are among the first-order effects.
By Irina Slav for Oilprice.com
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