Asian airlines gain as jet fuel prices hit a low

Asian airlines gain as jet fuel prices hit a low

SINGAPORE (Reuter): Jet fuel prices have slumped to a 20-month
low giving Asian airlines a chance to raise profitability by
locking in costs at well below last year's average, analysts and
oil traders said yesterday.

"Jet fuel prices have already declined almost 30-40 percent
from their peak...airlines should benefit from the low jet fuel
prices so long as there is a hedging policy," said Gordon Kwan,
oil and gas analyst at Daiwa Securities in Hong Kong. Oil traders
said that Asian airlines have been actively putting in place
hedging programs for the second half of the year because of the
fall in outright prices.

Analysts estimate that airlines' net profit will rise by
between 0.8 percent and 2.0 percent for every one percent drop in
jet fuel prices.

"Airlines like SIA (Singapore Airlines) or Cathay Pacific
Airways are already profitable, so the impact on the bottomline
is less than with other airlines which are less profitable,"
Declan Magee, regional airlines analyst at ABN Amro Hoare Govett
in Hong Kong, said.

Magee said airlines such as Thai Airways International Plc
stand to gain more because jet fuel make up a bigger share of
costs.

Fuel makes up between 10 and 20 percent of a typical airline's
costs.

In its latest results for the half year to March 31, 1997,
Thai Airways said jet fuel expenditure rose by 29.79 percent to
1.311 billion baht compared to the previous six months.

Jet fuel prices in Singapore, a benchmark for regional
markets, are now at around US$23.00 per barrel on a free-on-board
(FOB) basis, well below the 1996 average of $28.00 and after
trading at a post-Gulf War record of $34.20 in early December.

In the forward swaps market -- used by airlines to hedge fuel
costs -- jet fuel prices for the third quarter are currently
pegged at just more than $24.00, in the fourth quarter at $26.50
and the first quarter at $27.50, brokers said.

At those levels airlines can cut their jet fuel costs by about
10 percent compared with a year earlier, analysts said.
Even the more profitable airlines such as SIA should reap some
benefit from these lower prices.

"We are looking at a fuel savings of about Singapore $80
million for SIA," said an airline analyst at a foreign investment
bank.

SIA said fuel costs rose by 23.6 percent to add S$192 million
to expenditure in its last financial year ending March 31 1997.
Magee forecast an 11.4 percent rise in SIA's earnings for its
next financial year, due in part to the lower fuel costs.

Both analysts and oil traders are expecting oil prices to
remain soft over the next few months due to an increase in
supply.

"The trend should be down on oil prices because of Iraqi oil
and more oil from the North Sea," Kwan said.

Global supply of crude oil has increased due to the U.N
decision to allow Iraq to export the equivalent of US$2 billion
worth of oil for another six months.

In Asia, jet fuel production has also risen substantially due
to a large build up in regional refining capacity.

Analyst estimate that in 1996 Asian refining capacity grew by
1.2 million barrel per day (bpd) to 18.1 million bpd.

Jet fuel production in Asia is forecast to rise to 1.2 million
bpd in 2000 compared with 850,000 bpd in 1994, Trans-Energy
Research Assoc of the U.S. said earlier this year.