Volatility in the oil market over the past few months has kept the world on the edge. Oil prices settled at a fresh record high of US$87.48 on Tuesday triggered by a weaker dollar and tensions between Turkey and Kurdish separatists in northern Iraq.

Consequently, shares in airline companies, for which fuel is a major cost component, were marginally lower in anticipation of higher fuel prices slashing profit margins.

According to Bloomberg data, jet fuel rose 3.5% to a record US$98.05 a barrel on Tuesday, the biggest single day increase since February 2006.

Analysts said some selling pressure was seen yesterday as investors worried earnings of airlines would be affected if oil prices continued to surge. They said the costlier oil was expected to weigh on the airlines’ earnings outlook

OSK Investment Bank analyst Chris Eng said airlines with hedging strategies in place would better weather high oil prices.

However, with the current oil prices, the bank believed airlines would soon raise their fuel surcharges.

“Jet fuel prices had narrowed their margins earlier but have now almost touched US$100 per barrel with the recent spike.

“We believe the airlines are still enjoying strong profits given demand growth for air travel despite the hike in fuel surcharges.

“Our fair values are conservative but we have a ‘buy’ call for Malaysia Airlines and a ‘neutral’ call for AirAsia Bhd,” he said.

In an e-mail reply to StarBiz, Malaysian Airline System Bhd (MAS) managing director Datuk Idris Jala said oil was the single largest cost element for MAS, representing 30% of its operating cost. He said any increase in oil price would unfavourably impact its financial position.

“We hedged 60% of our fuel requirements at US$62 per barrel. We recover part of the fuel cost through a fair and competitive fuel surcharge in line with the industry.

“We have also implemented the best practices as per the International Air Transport Association’s guidelines on fuel efficiency,” he said.

Idris said industry-wide, the higher oil price was expected to be offset by stronger-than-expected demand for passenger traffic and a general improvement in the airlines’ financial performance.

He said MAS would monitor the oil price situation closely and watch what other airlines were doing before deciding if it would increase its fuel surcharge.

“However, it is important to note that fuel surcharge only offers partial relief from the price of jet fuel,” he added. MAS has hedged 20% of next year’s fuel requirement at US$69 per barrel.

CIMB Research said investors in airline stocks should not be unduly worried despite the substantial increase in oil prices since early 2007.

“In a strong demand environment, airlines have an arsenal of defences that will limit the hit to the bottom line, including raising fuel surcharges and traditional hedging instruments,” it said.

In Seoul, Korean Air Lines Co fell the most in two months on concern costs may rise as oil prices climbed to a record. Its shares fell 4.82% to 73,000 won.

By Leong Hung Yee
biz.thestar.com.my