Weak Asian Jet Fuel Outlook Sees Airlines Cutting On Hedging

Manila Bulletin
February 6, 2012
By JESSICA JAGANATHAN

SINGAPORE (Reuters) – Weakness in Asian prices of jet fuel in the fourth quarter, normally a peak demand period, looks set to persist through 2012 on a dip in air travel caused by Europe's debt crisis, which could tip the world economy into recession.

The bleak outlook is prompting airlines to throttle back on hedging plans, with most just sticking to current volumes. For oil refineries, less income from processing a barrel of crude into jet fuel may force them to switch to more profitable fuels, such as diesel.

''Most airlines have adopted similar strategies as they did in mid-2011, with regard to hedging,'' said Shukor Yusof, a Standard & Poor's analyst in Singapore. ''They will keep monitoring the markets and adjust their requirements within 5 to 10 percent of their fuel needs for the next 12 months.''

For example, Air France is looking to hedge about 52 percent of its fuel costs for the first quarter, sticking to its strategy of last year.

Cathay Pacific aims for hedging coverage of at least 20 to 30 percent for the next 12 to 18 months, depending on prices, a company spokeswoman said. Hedging by Hong Kong's flagship carrier for the 2010-11 financial year was estimated around 35 to 40 percent, and 50 percent for the year prior.

Jet fuel prices relative to diesel are usually at their strongest in the first and fourth quarters of the year, typically spurting as much as 50 percent, when holiday air travel picks up and winter demand for heating fuel kerosene, a product similar to jet fuel, increases.

But there has been no such rise so far in 2012 as a weaker economic outlook pushes people to cut back on vacations and travel. Asia's jet fuel market looks for support to Europe, where any spike in air travel demand draws fuel from Asia.

Jet fuel prices rose nearly 19 percent over the January to October period last year, while diesel prices gained almost 18 percent. In contrast, from November to last month, jet prices gained just 0.77 percent compared with 2.89 percent for diesel.

International air traffic shrank 1.5 percent in November from October, and has grown just 0.5 percent since May, the International Air Transport Association said in a December report.

Europe's passenger market has slowed sharply, with 4.9 percent annual growth in November, just half the figure of 9.5 percent for the first 11 months of 2011, the airline body added.