All Nippon's Wrong-Way Bets on Fuel May Hurt Earnings

By Chris Cooper

Dec. 19 (Bloomberg) -- All Nippon Airways Co. tried to protect itself as jet fuel surged to a record $181 in July. Instead, it locked in prices almost twice the market rate.

All Nippon, the world's second-most valuable airline, has hedged 75 percent of its fuel needs for the fiscal year starting April 1 at an average of $111.73 a barrel, according to Bloomberg News calculations based on the airline's reports. Jet fuel traded at $61.75 a barrel in Singapore yesterday.

All Nippon joins Southwest Airlines Co., Cathay Pacific Airways Ltd. and other carriers in making wrong-way bets on fuel prices as oil has tumbled to a four-year low. To recoup higher fuel costs, All Nippon and rival Japan Airlines Corp. are charging more for tickets, making budget-conscious companies and travelers less likely to fly.

``Hedging is very tricky,'' said Edwin Merner, president of Atlantis Investment Research Corp. in Tokyo, which manages about $3.1 billion in assets. ``Unless you know what you're doing, you shouldn't be doing it.''

All Nippon cut its fiscal-year net income forecast 37 percent in October to 17 billion yen ($188 million) for the year ending March 31 because of lower sales. Profit will actually be 12 percent lower than the company's forecast, according to Makoto Murayama, an analyst at Nomura Securities Co.

``Hedging will keep fuel costs high,'' said Murayama ``It will hurt their earnings.''

Higher Costs

All Nippon, also known as ANA, predicts that fuel costs will increase 12 percent this year even as jet kerosene has plummeted to the lowest price in almost four years. Carriers are recouping some of the higher costs of fuel by pushing up surcharges.

ANA and rival Japan Air both pushed up surcharges to a record this quarter, increasing levies for a round-trip ticket to the U.S. by 18 percent to 66,000 yen.

``Some passengers are putting off traveling due to the high surcharges,'' said Yoshihisa Miyamoto, an analyst in Tokyo at Okasan Securities Co. ``Passengers will gradually return as surcharges decline.''

ANA fell 3.2 percent to 338 yen at the close of trading in Tokyo. The shares have fallen 18 percent so far this year. JAL was unchanged at 207 yen. The shares have declined 19 percent this year.

The airlines plan to cut surcharges by 33 percent to 44,000 yen round-trip next month to reflect the tumble in jet fuel prices. Jet kerosene fell to $56.20 a barrel in Singapore on Dec. 11, the lowest since February 2005.

Long-Term Policy

``We hedge our fuel to average out our costs over the long term,'' ANA spokesman Rob Henderson wrote in an e-mail. ``The drop has been very sudden and we do not believe it prudent to alter our policy based on such movement given that we cannot predict future price levels.''

The company is overpaying for fuel as it waits for delivery of Boeing Co.'s 787 in the first quarter of 2010. The delivery, originally scheduled for May 2008, has now been delayed four times by Boeing.

The carrier, the first customer for the aircraft, has 50 Dreamliners on order and the planes carry a list price between $146 million and $167 million, according to Boeing's Web site. The 787 is 20 percent more fuel-efficient than similar aircraft, according to Boeing.

Southwest Airlines, whose hedging techniques have helped keep it profitable for years, posted its first quarterly loss in 17 years in October on costs tied to fuel hedges. The average price of jet fuel in New York dropped 29 percent after reaching a record on July 3, forcing the carrier to reverse gains taken in earlier periods when prices rose.

Cathay's Losses

Cathay, which said it had unrealized losses on fuel hedging contracts as at Oct. 31 of about HK$2.8 billion ($361 million), warned that financial results will be ``disappointing'' because of hedging contracts and falling demand.

``We are facing very uncertain times and the mood has turned decidedly somber,'' Cathay Chief Executive Officer Tony Tyler wrote in the December issue of the airline's monthly internal magazine.

China Airlines and EVA Airways Corp., Taiwan's two largest carriers, reported worst-than-expected third-quarter losses as the economic slowdown damped travel demand and falling jet- fuel prices triggered hedging losses.

ANA predicts kerosene will average $100 in the six months to March 31. The airline levies fuel surcharges internationally and not domestically. It boosted domestic fares by an average of 2.6 percent in April to help cover higher fuel prices.

The airline forecasts fuel costs will rise 33 billion yen this fiscal year, compared with a total cost of 266 billion yen last business year.

``ANA's policy is to hedge their fuel needs,'' Okasan's Miyamoto said. ``In the end, it turns out they hedged too much.''

To contact the reporter on this story: Chris Cooper in Tokyo at ccooper1@bloomberg.net