Some cash-rich airlines are shopping for forward jet fuel swaps as far out as 2007 in a bid to stave off a repeat of this year's shrinking profits as oil prices spiral to record highs, derivatives dealers said on Monday.
The bulk of the paper buying has been for second half 2004 and first quarter 2005 jet, driving up those prices, while the search for cheaper 2006 and 2007 volume is being met with resistance from banks and oil refiners reluctant to offer those barrels and go short in an increasingly volatile global oil market.
"A lot of airlines are finally thinking that we're in a new paradigm and that we're now dealing with an oil price environment where the norm for Brent crude futures is $25-$35 a barrel rather than $18-$25," said Xavier Trabia, senior commodities derivatives marketer at Wall Street bank Morgan Stanley.
"We're seeing something now that we have not seen before, when there were normal hedging programmes by airlines to secure cash flow and reduce volatility of budgets," Trabia said.
"Now airlines are trying to buy disaster catastrophe insurance because they're faced with the possibility of going bust."
Physical jet prices in Europe jumped by a third in the month to May 12 to breach $400 a tonne for the first time since October 1990 as Middle East violence, fears of a summer US gasoline shortage and booming Chinese oil demand have driven US crude futures to record levels beyond $40 a barrel while Brent crude eyes the landmark.
Soaring fuel costs have slashed airline profits, forcing many of them to impose surcharges on ticket prices while at the same time scrambling to hedge against any further spike in world oil prices by buying jet paper.
IATA director general Giovanni Bisignani said last week that the jet price spike would raise its members' costs by $8-$12 billion this year.
Jet dealers at banks and European trading houses say airlines, which cut down on their fuel hedging volumes last year in the wake of the Iraq war, were caught cold by this year's renewed price surge and have since February been scrambling to lock in their fuel costs in the years ahead.
In its annual survey of 50 airlines world-wide, leading global oil and commodities derivatives player Morgan Stanley found that in the wake of the Iraq war carriers cut their hedges mainly for late 2003 and early 2004 jet and crude oil swaps, increasing their exposure to the recent volatility.
"Airlines had less hedging in place than they had before as oil prices had been high and they were hoping for a dip, and as the credit position, especially of the US carriers, deteriorated," Trabia said.
Front month European jet cargo swaps hit a peak of $388 a tonne on March 10, 2003, just days before the US-led ground war on Iraq was launched. They fell to $237 a tonne on May 20, shortly after the war was declared won by US President George Bush.
Resurgence of Middle East violence, US fuel worries, a string of European and Middle East refinery turnarounds and huge Asian demand for jet fuel, led by China, took jet swaps to a 13-year peak of $397 a tonne in mid-May before easing back to $370 on Monday.
The Morgan Stanley survey found that 79 percent of airlines had by late 2003 had some hedging programmes in place for 2004, down from 82 percent hedged for 2003 but still well up on the 2002 level of 71 percent.
Air France said recently it had hedged 72 percent of its 2004 fuel needs at a rate based on an average oil price of $25 a barrel, leaving the rest of its buying subject to US crude futures averaging so far this year at $36.34 a barrel and London IPE Brent at $32.53.
British Airways has hedges in place for about 45 percent of its 2004 fuel needs at an average of $28.50 a barrel of crude, while Lufthansa hedges almost 90 percent of its jet fuel requirements.
Jet traders say this year's price spike saw airlines frantically build up their swap positions since February, buying up second half 2004 and early 2005 hedges at ever-rising costs, while some carriers have also looked further ahead.
"Some of the airlines are now realising that this is not a short-term blip in oil prices, that while they had been budgeting for a $35 a tonne jet premium to IPE gas oil for calendar 2005 they have instead faced premiums of about $55," a jet trader said.
"The airlines are still busy buying up Q3 and Q4 2004 and Q1 2005 jet paper, but they're having to pay up as the back end starts to catch up with the front premiums," a jet broker said.
Prices further forward are more promising for airlines. While calendar 2005 jet premiums are currently assessed at $55-$57 over IPE gas oil and 2006 premiums are $60-plus, compared with $59 for June 2004, the outright jet price is heavily backwardated to reflect much lower oil futures prices down the forward curve.
London IPE gas oil futures, trading on Monday at around $314 a tonne in the June front month, fall away to $246 a tonne for December 2006. Brent crude is currently priced at $29.27 a barrel for calendar 2006 and at $28.92 in 2007, compared with $36.60 a barrel for July front month London IPE futures.
Trabia says mainly cash-rich airlines have been looking at 2006 and 2007 swaps, and that they have been active buyers over the past few weeks. "The airlines which can look forward are the rich ones that have the credit lines, basically medium-sized or big carriers."
Traders and brokers say, however, that traded jet swap volume has been concentrated in the second half 2004 and first quarter 2005.
"There are no volume sellers," a jet broker. "Banks don't want to go short to airlines, and neither do refiners".
Comments
Comments are closed.