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Airline hedges fuel, ups surcharges

(China Daily/Agencies)
Updated: 2008-05-23 09:30

China Eastern Airlines Corp, the nation's third-largest carrier, is hedging more fuel purchases and raising surcharges to offset record jet-kerosene prices.

The carrier plans to hedge 40 percent of its fuel needs this year, compared with about 30 percent in 2007, Board Secretary Luo Zhuping said yesterday. The airline has also boosted ticket levies by about 20 percent on domestic routes, he added.

Chinese carriers have raised fares, retired older planes and increased hedging as the expansion of international services forces them to buy more unsubsidized fuel overseas. The government is also likely to raise the domestic fuel price this year, the country's big three carriers said yesterday.

"Chinese carriers will eventually see an impact from oil hikes," said Kelvin Lau, an analyst at Daiwa Institute of Research in Hong Kong. "Hedging will only be effective at controlling fuel costs in the short term."

Hedging allows airlines to buy fuel at a fixed price in the future, protecting them against potential price increases.

Air China Ltd, the nation's largest international carrier, will hedge about half its fuel needs this year, little changed from last year, Board Secretary Huang Bin said yesterday.

China Southern Airlines Co, the nation's biggest carrier, plans to increase its hedging this year, Board Secretary Xie Bing said, without elaborating. Last year, the carrier hedged all of its fuel purchases for international routes, saving as much as 60 million yuan. The fuel usage represented about 20 percent of the carrier's total needs.

China Southern hedges a smaller percentage of its fuel purchases than Air China and China Eastern as domestic services account for a greater proportion of its flights. Airlines are banned from hedging domestic purchases.

China has cut the domestic price of jet fuel twice this year. The next change is likely to happen as early as next month, as the government has begun setting the price each quarter.

The big three Chinese carriers have all plunged more than 50 percent this year in Hong Kong trading, amid concerns about the impact of rising fuel costs.

Higher surcharges will help China Eastern offset about a third of its additional fuel costs, Luo said. Chinese carriers have to apply for government permission to raise levies on domestic flights. They have more flexibility on overseas routes.