Singapore Air extends fuel hedging as Opec cuts sway crude oil

[SINGAPORE] Singapore Airlines Ltd, South-east Asia's biggest carrier, extended some of its fuel-hedging contracts to as long as five years, betting on an upswing in crude oil prices amid Opec production cuts and renewed tensions between the US and Iran.

The marquee airline, which reported a 36 per cent drop in profit for the three months through December, said Tuesday that it has entered into longer-dated Brent hedges with maturity extending to 2022. Earlier, the company used to hedge only for a maximum period of 24 months, according to spokesman Nicholas Ionides.

"Fuel prices have trended upward since the last quarter and are expected to remain volatile as uncertainty lingers around global oil production," it said in a statement on Tuesday.

"The group regularly reviews and adapts its fuel hedging policy to manage volatility in fuel prices."

Singapore Air, which is battling overcapacity and aggressive pricing by budget airlines in the region, is seeking to cut costs as passenger yields - a key measure of profitability in the industry - continue to be under stress. Jet fuel accounted for 26 per cent of the company's total expenditure last quarter, making it the single biggest cost.

Brent crude has gained 10 per cent since major oil producing nations agreed in December to trim output, while policies of US President Donald Trump have fueled uncertainty over prices.

For the current quarter, the airline said it has hedged about 37 per cent of its jet fuel requirements in Singapore Jet Kerosene at a weighted average price of US$67 a barrel.

Its longer-dated Brent contracts extend to 2022, covering between 33 per cent and 39 per cent of its projected annual consumption at an average US$53 to US$59 a barrel.

"Clearly they are taking a view that oil prices will gradually go up," said Mohshin Aziz, an analyst at Maybank Investment Bank Bhd. in Kuala Lumpur.

"Only time will tell, but I think they did it in a safe manner. It's only one-third. If they are wrong, they're only partially wrong. They're not humongously wrong."

US policies on trade, new tensions with Iran and doubts whether major oil producing nations will curb output as pledged have kept investors on tenterhooks. Brent crude may fluctuate between US$52 and US$62 a barrel this year, according to Kho Hui Meng, the head of the Asian arm of Vitol Group, the world's biggest independent oil trader.

Singapore Air, Cathay Pacific Airways Ltd and other carriers have reported losses from hedging on fuel as well because they locked in contracts at prices that were much higher than the market. Carriers try to smooth fuel-price swings with advance purchase contracts linked to the cost of crude.

Hedging Losses

Losses from fuel hedging for Singapore Air were at S$365.9 million in the three quarters through December, following an annual loss of S$1.17 billion in the fiscal year through March 2016.

The airline reported a net income of S$177.2 million last quarter after a S$79 million writedown due to the rebranding of Tigerair. It predicts 2017 to be another challenging year amid "tepid global economic conditions and geopolitical concerns".

Cathay Pacific said last month that it will eliminate some positions as part of a business review, with key changes set to kick in by mid-year.

"The group will maintain vigilance over its costs, and its strong balance sheet positions it well to weather the many challenges ahead," Singapore Air said in Tuesday's statement.

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