Asian airlines are facing expiring jet fuel hedge contracts and need to make a choice about whether to hedge at exorbitant prices or risk them going even higher without a hedge.
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 started, and that the chance of that changing dramatically in the observable future appears to be slim.
“Our view is that we are facing a new normal where the fuel price is there to stay at the levels that we see more or less today,” the chief executive of Kazakhstan’s Air Astana told Reuters.
This view would support a pro-hedge stance, to insure against prices going even higher—but not everyone is happy about this, not at current jet fuel price levels. Said levels are off October peaks that reached close to $180 per barrel, but at $148 per barrel are still quite high.
Jet fuel costs now represent 33% of an airline’s operating costs, according to Wong Hong, the director general of the Association of Asia Pacific Airlines. Before the war, the share of jet fuel in airlines’ operating costs, per the International Air Transport Association, stood at 25%. As a result, airlines that are facing the expiration of their latest hedge contracts are also facing a “very, very tricky dilemma,” according to Hong.
Not everyone is as pessimistic, however. “We still think it will be cyclical. It’s going to go up and down,” Japan Airlines senior managing executive officer Ross Leggett told Reuters. Despite this, Japan Airlines is budgeting for a worst-case scenario with jet fuel at $160 per barrel. This is the price that the airline had to pay for its fuel between April and September.
All airlines globally are struggling with the impact of the Middle East war on jet fuel prices. Sharp drops in profitability and plans to raise ticket prices are among the first-order effects.
By Irina Slav for Oilprice.com
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