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.