THAI defends fuel hedging strategies

Feb 02, 2009 (Bangkok Post - McClatchy-Tribune Information Services via COMTEX) -- TAWNF | Quote | Chart | News | PowerRating -- Cash-strapped Thai Airways International (THAI) vowed yesterday to continue with the much-criticised jet fuel hedging as a risk management tool to deal with volatile oil prices.

Chai Eamsiri, director of the petroleum and fuel management department, defended the usefulness of fuel hedging and said the flag carrier would continue to apply such a mechanism.

However, future hedging contracts would be less ambitious due to current low oil prices, though he indicated the volume involved may cover the same percentage for March 2009 -- 17 percent of the airline's monthly fuel consumption.

Critics suggested that the airline's fuel hedging went awry, resulting in six billion baht in losses last year as actual jet fuel prices were substantially lower than the prices at which they were hedged in advance. They charged that poor hedging management contributed to THAI's first loss in 45 years in 2008, an estimated 10 billion baht.

Mr Chai denied that the airline made such a huge loss by locking in long-term contracts at excessive hedged volumes.

He said THAI's hedging practice was similar to those of other airlines around the world that used oil price forecasts by leading global institutional analysts.

Prior to oil prices tumbling at the end of October, there seemed a consensus that crude prices might zoom to US$180-200 a barrel, which did not happen after a peak of $147 a barrel in late July.

The executive said THAI's hedging volumes were lower than those of several competing Asian airlines as it prudently bet on a small volumes in short-term contracts of 3-6 months. Other carriers typically use one- to two-year terms.

Last year, THAI had 14 hedging arrangements with second-half volumes representing 41 percent of its monthly consumption with a price range of $86-125 a barrel. The airline sourced the remaining 59 percent of its fuel from spot markets. THAI consumed 22 million barrels of jet fuel last year.

Mr Chai said THAI made no gain or loss for third-quarter hedging, but declined to discuss the fourth quarter, pending notification to the Stock Exchange of Thailand.

But he conceded that one hedging contract made for December last year was fixed in September at $137 a barrel, while average Singapore spot prices that month stood at $59. Mr Chai explained that in September average jet fuel prices were projected at about $137 a barrel.

As world oil prices have tumbled and projections are for continued low prices throughout 2009 due to the global crisis, THAI curbed its hedging in the first quarter of this year -- 22 percent in January and 17 percent each in February and March.

THAI expects to use 18 million barrels of jet fuel this year as it flies less due to the slowdown in global travel demand.

It said its hedging was in line with the January 2003 resolution by the national carrier's board that the airline should not hedge more than 50 percent of its annual fuel requirement with contract terms not exceeding one year.

Hedging was never intended as a gamble but a tool to minimise risk from fluctuating fuel prices, the airline insisted.

Aviation analysts say hedging makes sense when prices are going up but nobody wants to be locked into contracts if fuel is cheap in the open market.

THAI also reaffirmed yesterday that its rehabilitation plan for 2009-11 will be completed by mid-February.

Acting president Narongsak Sangapong said in a statement the plan would prepare the company for the changing business environment and deal with liquidity problems.

The business improvement plan will emphasise increasing revenue through improving yields, expanding online sales, as well as revising flight frequencies on non-profitable routes.

THAI is also working on cost and expense controls, such as reducing fuel utilisation and staff expense, including rationalising unnecessary investments.

The plan is due to be tabled at the board meeting on Feb 11.

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