PAL mulls fuel hedging

Protection from sudden price spikes

MANILA, Philippines — Flag carrier Philippine Airlines (PAL) is exploring the possibility of hedging fuel in light of the abrupt spike in petroleum prices that lead to elevated airfares.

While PAL has no problem acquiring jet fuel supply for its flights, it is struggling with prices as they fluctuate due to geopolitical uncertainties in the Middle East.

PAL chief operating officer Carlos Luis Fernandez said the airline would study if there is a need to hedge fuel again to protect itself from price spikes.

Hedging refers to the practice of buying jet fuel at a set volume for future delivery. In aviation, it protects carriers from market fluctuations by locking in fuel order at a set price.

However, hedging has become less popular since the late-2000s, when airlines like PAL suffered losses because of it. If fuel prices drop, airlines with hedged contracts are stuck paying at higher rates, placing them in an operating disadvantage to unhedged carriers.

Global debt watcher Fitch Ratings views PAL’s hedging risk as manageable, as it covers spending hikes by raising fares through fuel surcharge regulated by the Civil Aeronautics Board.

Likewise, PAL has currency advantage against domestic counterparts, as it earns 35 percent of its revenue in dollars, and converts excess peso into dollars as soon as practicable.

PAL’s parent PAL Holdings Inc. sustained a nine-percent spike in expenses to P46.07 billion due to price hikes triggered by the Middle East conflict.

PAL will be landing five more aircraft this year from aerospace giant Airbus. The carrier will be receiving three A350-1000s for transpacific flights and two A321neos for short-range services.

Fernandez said PAL may have been able to hike fares through fuel surcharge, but this has pulled local demand, particularly from travelers with price-sensitive budgets. He noted that Filipinos are reducing, if not canceling, discretionary travel to cope with cost spikes.

Still, PAL is keeping its doors open to new routes, with the launch of its Chicago flights on Nov. 9.

Based on the monitor of the International Air Transport Association, jet fuel prices have climbed to $160-per-barrel levels again since dropping to below $120 in July.