28 September 2017, Asia Pacific – Jet fuel prices have increased 24% y/y ytd, negatively impacting the airlines in the Asia Pacific as fuel cost is their single largest cost component, accounting for 30% of their total operating cost on average
We analyse all 33 listed airline equities in the Asia Pacific to assess their varying level of fuel hedging as well as their earnings sensitivity and share price correlation to jet fuel price movements.
ONLY ONE-THIRD OF THE ASIA PACIFIC AIRLINES ARE WELL-HEDGED ON FUEL
Jet fuel prices have risen 24% y/y ytd, in line with the rise in crude oil prices. 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. Although the current fuel price is still less than half the level seen five years ago, it could nevertheless eat into profit margins as the industry overcapacity is keeping yields under pressure, preventing the airlines from passing on the higher fuel prices to their customers completely.
Only Qantas (QAN:AU), Virgin Australia (VAH:AU), Air New Zealand (AIR:NZ), Singapore Airlines (SIA:SP), Cathay Pacific (293:HK), Thai Airways (THAI:TB), AirAsia (AIRA:MK), AirAsia X (AAX:MK), Asia Aviation (AAV:TB), Bangkok Airways (BA:TB) and Cebu Air (CEB:PM) have substantial fuel hedging in place.
The rest of the Asia Pacific airlines are nearly completely exposed to the volatile fuel prices. A younger and more fuel efficient aircraft fleet as well as stronger local currency help mitigate this negative earnings impact as fuel costs are largely paid in US dollars.
Chart: Spot jet kerosene price (2013 to 2017)
MOST ASIA PACIFIC AIRLINES’ EARNINGS ARE HIGHLY SENSITIVE TO JET FUEL PRICE MOVEMENTS
Asiana Airlines (020560:KS), China Airlines (2618:TT), Jet Airways (JETIN:IN), Vietnam Airlines (HVN:VN) and Philippine Airlines (PAL:PM) suffer the greatest negative earnings impact from higher oil prices among the Asia Pacific airlines. Every 1% rise in jet fuel price cuts these carriers’ net profit by 14%, 11%, 8%, 6%, 5% respectively on an annual basis based on our estimates. This is due to their lack of/limited fuel hedging and thin profit margins.
Qantas (QAN:AU), Virgin Australia (VAH:AU), Air New Zealand (AIR:NZ), Japan Airlines (9201:JP) and ANA Holdings (9202:JP) have the most defensive earnings against higher oil prices. Qantas, Virgin Australia and Air New Zealand have higher than sector average fuel hedging levels at 86%, 83% and 71% of their FY18 fuel consumption respectively while Japan Airlines (9201:JP) and ANA Holdings (9202:JP) are hedged 40% and 30% respectively.
Chart: Net profit (loss) impact for every 1% rise in average jet fuel price on an annual basis
MORE THAN HALF OF THE ASIA PACIFIC AIRLINE STOCKS ARE NEGATIVELY CORRELATED WITH SPOT JET FUEL PRICES
Asia Pacific airline stocks tend to fall when spot jet kerosene prices rise as investors generally avoid the sector due to its large fuel cost exposure. Among the Asia Pacific carriers, Cebu Air (CEB:PM), Qantas (QAN:AU), Hainan Airlines (600221:CH), EVA Airways (2618:TT) and China Southern Airlines (1055:HK)’s share prices have the strongest negative correlation with the spot jet fuel price in the past 5 years.
In contrast, AirAsia X (AAX:MK), AirAsia (AIRA:MK), Spring Airlines (601021:CH), Thai Airways (THAI:TB) and Air New Zealand (AIR:NZ)’s share prices were positively correlated with the spot jet fuel price. Apart from Spring Airlines (601021:CH), the other four carriers have high fuel hedging levels of over 70% in the current year.
Chart: Asia Pacific airlines share price correlation to spot jet fuel price (2012 to 2017)
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