Assessing Asia Pacific airline earnings sensitivity to oil price spike

12 April 2018, Asia Pacific – The spot jet fuel price has surged 12% year-to-date and 35% y/y to US$82.8/bbl, a level not seen since Dec 2014. This will negatively impact the Asia Pacific airlines as fuel cost is their single largest cost component, accounting for 30% of their total operating cost on average.

Only one-quarter of the Asia Pacific airlines are well-hedged and the average fuel hedging ratio of the Asia Pacific airline sector is a paltry 15%Every 1% rise (fall) in jet fuel price cuts (raises) the Asia Pacific airlines’ net profit by 3.3% on average on a full year basis based on our estimates. 

We expect Cathay Pacific (293:HK), Jet Airways (JETIN:IN), China Airlines (2610:TT), Philippine Airlines (PAL:PM) and Asiana Airlines (020560:KS)  to suffer the largest earnings sensitivity to rising oil prices among the Asia Pacific airlines due to their thin profit margins and/or limited fuel hedging levels.

By contrast, Qantas (QAN:AU), AirAsia (AIRA:MK), Air New Zealand (AIR:NZ), Singapore Airlines (SIA:SP) and Japan Airlines (9201:JP)’ earnings are less impacted by the rising oil prices due to their high fuel hedging levels and/or larger profit margins.

We analyse all 33 listed airline equities in the Asia Pacific (the most comprehensive analysis available on the Street) to assess their varying level of fuel hedging as well as their earnings sensitivity to jet fuel price movements. 

Spot jet fuel price rises to US$82.8/bbl, a level not seen since December 2014

The spot jet fuel price has surged 12% year-to-date and 35% y/y to US$82.8/bbl, a level not seen since Dec 2014. This is negative for the Asia Pacific airlines as fuel cost is their largest cost component, accounting for 30% of their total operating cost on average.

To put things into context, the current jet fuel price is still 39% below its previous peak five years ago. Nevertheless, the recent spike in jet fuel price is still incrementally negative for the Asia Pacific airline sector if it continues.

Airline profit margins could therefore be squeezed in 1H2018 as there is a lag in the implementation of fuel surcharges on passenger tickets. On routes where there is excessive industry capacity and more intense competition, it would be more challenging for airlines to pass on the higher fuel prices to their customers completely.

Chart: Spot jet kerosene price (2013 to 2018)

Chart: Spot jet kerosene price (2013 to 2018)

 

Qantas, AirAsia, Air New Zealand, Singapore Airlines and Japan Airlines’ earnings are less impacted by rising jet fuel prices

Only one-quarter of the Asia Pacific airlines are well-hedged on fuel, namely Qantas (QAN:AU), Virgin Australia (VAH:AU), Air New Zealand (AIR:NZ), Singapore Airlines (SIA:SP), Cathay Pacific (293:HK), Japan Airlines (9201:JP), Thai Airways (THAI:TB), Cebu Air (CEB:PM) and ANA Holdings (9202:JP).

Specifically, Qantas has hedged 81% of its fuel needs for FY18 (year to June) and 50% for FY19. Air New Zealand has hedged 70% of its 2HFY18 (year to June) fuel consumption and 35% of its 1HFY19 needs. Virgin Australia has hedged 95% of its 2HFY18 (year to June) fuel consumption.

Singapore Airlines (SIA:SP) has the longest fuel hedging among the Asia Pacific carriers. It has hedged 40% of its 4QFY18 fuel needs (year to March) and up to 47% of its fuel consumption needs up to FY22/23. Cathay Pacific has hedged 45% and 18% of its 2018 and 2019 fuel consumption but its 2018 fuel hedging contracts are still out of money.

ANA Holdings (9202:JP) has hedged 30% and 25% of its FY17 and FY18 fuel needs while Japan Airlines has hedged 40% and 30% of its fuel consumption in FY17 and FY18 respectively.

Thai Airways has hedged 31% of its fuel consumption in 2018 while low cost carrier Cebu Air has hedged 30% and 14% of its 2018 and 2019 fuel consumption respectively.

Overall, Qantas (QAN:AU), AirAsia (AIRA:MK), Air New Zealand (AIR:NZ), Singapore Airlines (SIA:SP) and Japan Airlines (9201:JP)’ earnings are less impacted by the higher oil prices due to their high fuel hedging levels and/or larger profit margins.

The rest of the Asia Pacific airlines are nearly completely exposed to volatile jet fuel prices 

Every 1% rise (fall) in jet fuel price cuts (boosts) the Asia Pacific airlines’ net profit by 3.3% on an annual basis on average based on our estimates. This is due to their lack of/limited fuel hedging and thin profit margins. We expect Cathay Pacific (293:HK), Jet Airways (JETIN:IN), China Airlines (2610:TT), Philippine Airlines (PAL:PM) and Asiana Airlines (020560:KS) to suffer the largest earnings sensitivity to oil prices among the Asia Pacific airlines due to their thin profit margins and/or limited fuel hedging levels.

Airlines operating younger and more fuel-efficient aircraft fleet and those with a stronger local currency against the US dollar such as the Chinese airlines Air China (753:HK), China Eastern (670:HK), China Southern Airlines (1055:HK) help mitigate this negative earnings impact as fuel costs are largely paid in US dollars.

Chart: Net profit (loss) impact for every 1% rise in average jet fuel price on an annual basis

Chart: Net profit (loss) impact for every 1% rise in average jet fuel price on an annual basis

 

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