Should SIA review its fuel hedging policy?

WHILE anyone holding Singapore Airlines (SIA) shares can appreciate that Covid-19 has dealt an unprecedented blow to the entire air travel industry, it may be time to question if SIA's unique policy of hedging its jet fuel costs five years into the future has exposed shareholders to more hedging losses than necessary.

Fuel is the biggest expense item for SIA, as it is for most airlines. To insure itself against rising oil prices, SIA's strategy is to hedge a large proportion of its projected fuel needs. This is done primarily using swaps. Airlines lose out whenever spot market prices fall below their hedged prices, as the swaps require them to make payments to counterparties, such as banks, on specified dates.

At the end of January, SIA had hedged 79 per cent of its fuel requirements for the next two months at US$76 per barrel.