Fuel hedges are costly gamble for Asian airlines

By Felicia Loo

SINGAPORE (Reuters) - Asia-Pacific airlines have clipped their fuel hedges to save on steep premium costs as oil slid to three-month lows, but they need to keep a consistent ratio to safeguard against volatile price swings.

A likely slowdown in global travel and ballooning fuel costs, which have more than offset a series of fare and fuel tax hikes and led to industry-wide losses in the second-quarter, have forced many airlines to scrap routes.

Some have even been threatened by insolvency.

To keep themselves above water, regional airlines must salvage any possible costs or seek to book higher profits by trimming hedges, betting on sustained price falls rather than a rebound to new highs, some analysts said.

"Hedging gives you the ability to fix costs and/or profit margins, but it typically takes away potential for windfall profits for favourable price movements," said Gerard Rigby of Fuel First Consulting in Sydney.

U.S. oil futures CLc1 have deepened their losses to three-month lows below $120 a barrel this week from a record of $147.27 last month, but were still around a fifth costlier than the start of the year.

The cost of jet fuel JET-SIN jumped almost 70 percent over the past year to $144.00 a barrel in Singapore trading, though it came off the record of $181.65 a barrel reached last month.

But premiums in options are still high as volatility persists, said Rigby.  Continued...