International Law

Damned If You Do, Damned If You Don?t: China Airlines Criticized for Fuel Hedging

By Stan

You gotta feel sorry for these guys. Just consider the volatility in oil prices over the past couple of years.

Hedging, a tool used by airlines to stabilize jet fuel costs, has been blamed as the culprit behind huge losses for China’s biggest airlines.

Its three largest carriers reported 2008 losses totaling 28 billion yuan (US$4.09 billion), almost half of which was attributed to fuel hedging.

Air China lost 7.5 billion yuan on fuel-hedging contracts, and China Eastern Airlines said wrong-way bets on hedging dragged its revenue down 6.4 billion yuan. China Southern Airlines bucked the trend, however, reporting a profit of US$6.28 million after ending its hedging last June.

“The more you hedge, the more you lose when betting the wrong way,” said Theo Panagiotoulias, American Airlines vice president for Asia-Pacific. He said hedging should be used as a tool to stabilize exposure to rising fuel prices, not a gambling devise in hopes of making bigger profit.

Indeed, the revenue fiasco for some Chinese airlines has triggered discussions about the advisability of fuel hedging. (Shanghai Daily)

The companies that hedged during the incredible run-up in oil prices were lauded as heroes and geniuses. When the bottom dropped out of the market due to the recession, they were stuck out there with their pants around their ankles.

Both the run-up and the plummeting of fuel prices occurred over very short periods of time and were, in the case of the price increases, not exactly “normal” market phenomena. Tough to make bets on future prices when this kind of thing happens.

That being said, it’s usually a lot easier to guess where prices are headed. That means that it really is OK to make those forward bets. It would be a shame if, on the basis of two very weird short-term price fluctuations, fuel hedging by airlines was seen as an unwise business practice. Really too bad that the writer of the article above chose “fiasco” to describe the situation — really sends the wrong signal.

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Full post as published by China Hearsay on April 22, 2009 (boomark / email).