Fuel Hedging Ban Causes Major Dip In Chinese Airlines’ Profits
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China’s biggest airlines have seen their profits plummet in recent months, claimed a report by the Financial Times on Tuesday, with most companies unable to hedge against rising oil prices due to a three-year old government ban on crude future contracts.
According to FT, profits for Air China and China Eastern fell by 38.8 percent and 9.1 percent respectively last year, as growing fuel costs continue to leave a dent on companies’ expense sheets.
China’s biggest airlines have seen their profits plummet in recent months, claimed a report by the Financial Times on Tuesday, with most companies unable to hedge against rising oil prices due to a three-year old government ban on crude future contracts.
According to FT, profits for Air China and China Eastern fell by 38.8 percent and 9.1 percent respectively last year, as growing fuel costs continue to leave a dent on companies’ expense sheets.
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Although this problem is not confined to just Chinese carriers, the Chinese airline industry was particularly hard hit as the government had barred all airlines from buying crude oil future contracts in 2009 – following big losses in 2008 when the value of crude futures collapsed during the global financial crisis.
As such, Chinese airlines had little choice but to let their existing contracts expire, while recent rising fuel prices wreck havoc on their profit margins.
“All the contracts signed in past years were settled by 31 December 2011,” wrote China Eastern during its full-year financial statements published this week.
[quote]“As at 31 December 2011, the fuel derivative contracts of the company all expired, and no new position has been established,” noted Air China in its own financial results.[/quote]According to FT, the Chinese government took the hard-line approach after they felt that their companies had been duped by Western bankers in their past contracts.
Airlines also sought to recover some of their losses from the banks, alleging that they had been “maliciously” sold hedging products, which were overly complex.
But industry executives, such as China Eastern chairman Liu Shaoyong, now believe that the government may have no other choice but to slowly begin lifting its blanket prohibition on hedging and allow for some future trading on oil.
[quote]“As an airline, rising crude costs are what we most dislike seeing,” said Liu.[/quote]“They (the Chinese government have now given us permission to buy hedging contracts for jet fuel. These will be about 20 per cent of our overall fuel cost,” Liu added while noting that they had yet to enter into any new contracts.
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Fan Cheng, executive director of Air China, also claimed that his airline had received permission to finally resume hedging, though oil prices were “too volatile” at the moment to do so.
“We’ll wait for better timing,” he said.
Major airlines typically hedge about a third of their fuel bills in order to compensate for any fluctuations in oil prices. Air China’s jet fuel costs in 2011 for instance was $5.5 billion – nearly 38 percent of their overall expenses – though they only recouped a mere 0.2 percent of this cost from hedging contracts held before the ban was implemented.
