Gulf airlines eye hedging as fuel costs rise

Wealthy Gulf airlines placing multi-billion dollar jet orders are increasingly looking to hedge their fuel purchases to help offset ballooning fuel costs which threaten to crimp expansion. Gulf airlines unveiled impressive growth plans this week at the Dubai Airshow, betting that the region will continue to expand as a hub for air traffic. Enjoying a petrodollar spending spree while the euro zone is struggling with a debt crisis, Gulf carriers are intensifying competition for their European rivals. But when it comes to rising fuel costs, an Achilles heel for airlines worldwide and typically accounting for about 40 percent of a carrier's operating costs, they are not immune either. "Fuel is our largest expense, equivalent to approximately 35 percent of our cost base," Etihad Airways said in an emailed response to questions. The Abu Dhabi-based carrier's chief financial officer said on Wednesday that the airline has already hedged 81 percent of its fuel needs in 2011, saving around $300 million in costs. For next year, it was hedging 70 percent of its fuel requirements, at prices below the market, James Rigney said. "We have been hedging our exposure to jet fuel prices since 2007 with the objective of reducing the volatile impact that fuel costs can have on our financial performance and to achieve a degree of certainty and stability in our biggest cost item," the company said. The airline said it is hedging fuel prices with 19 financial institutions throughout the world in the over-the-counter (OTC) market. Oil prices peaked in April this year above $127 a barrel as the civil war in Libya cut the country's oil exports. Despite having eased since then on the back of global economic growth worries, Brent crude is trading just above $110 a barrel on Thursday, which is more than 30 percent higher compared to this time last year. It has also gained around 18 pecent since the start of the year. A price index for jet fuel published weekly by International Air Transport Association (IATA) shows the price as of November 4 reflects a rise of 9.3 percent compared with a month ago and a rise of 31.1 percent compared with a year ago. The new jet fuel price average for 2011 stands at $127.6 a barrel, according to IATA, which says this price has added a further $60bn on the fuel bill of airlines this year. In India, where taxes add to carriers' heavy fuel bills, struggling No. 2 airline Kingfisher has appealed to the government to be allowed to import the fuel directly from the international markets. Emirates Airline Chairman Sheikh Ahmed bin Saeed al-Maktoum said the Dubai-owned carrier had to pay an additional $1 billion in fuel costs compared to a year ago. Emirates, the largest customer of Airbus A380 superjumbos, and Qatar Airways were not immediately available for comment. Smaller and younger airlines also struggle to cope with rising costs. "Fuel has never been so high for so long," said Ghaith al-Ghaith, the chief executive of budget carrier flydubai. "We have not done hedging in flydubai because....we are not even three years old yet, so we are still growing. We are currently reviewing different instruments. So next year, we should do some hedging, depending of course on the fuel price."