Nok Air prefers not to gamble, instead turning higher fuel costs into only slightly higher ticket prices.
Published: 8/03/2011 at 12:00 AM
Fuel hedging, a term that airlines are throwing around more and more during this time of soaring oil prices, is not in Nok Air's dictionary.
A Nok Air plane leaves Chiang Mai International Airport last Saturday.
Unlike its mother bird, Thai Airways International (THAI), which seems obsessed with using the speculative mechanism to protect against fluctuations in the oil price, the budget airline has never felt the need to follow suit.
At no time in its seven-year history, not even when crude oil hit a historic peak of US$147 a barrel in July 2008, has Nok Air even considered the practice.
"We've never done this and never will - it's sort of our policy," chief executive Patee Sarasin told the Bangkok Post as turmoil in the Arab world, especially Libya, has sent the jet fuel price skyrocketing to $130 a barrel.
He said Nok Air's board of directors, many of them high-flying bankers, equate fuel hedging with gambling - likely to lose money.
Management has asked the board several times in recent years, including recently, whether Nok Air should embrace fuel hedging, and the answer is always no, said Mr Patee.
Nok Air simply passes on the additional fuel costs in its ticket prices, but so far any increase has been minimal.
"For instance, April's one-way ticket prices, based on oil price projections, will have to be bumped up by only 200-300 baht. We've not seen the increases affect our sales, nor have we received any complaints," said Mr Patee.
The chief executive is not overly concerned about the current oil price jump, as he does not not expect crude oil will soar as dramatically as in 2008.
All parties the world over, having learned a painful lesson from that time, will not allow a repetition, he said.
"Crude oil may peak at only $120 a barrel in the near term. Anything beyond that and the entire world will raise a hue and cry and move to tackle it. We probably should not worry too much about it," said Mr Patee.
Nok Air's decision to forgo fuel hedging has drawn some flak from Piyasvasti Amranand, president of THAI, which owns 39% of Nok Air. He said this is contributing to risk factors at the budget airline this year.
THAI now hedges about half its jet fuel supply, and its president, a former energy minister, strongly advocated the practice upon taking the helm at the national carrier just a year ago.
However, one miscalculated fuel hedging gamble in 2008 cost the airline six billion baht, a major contribution to that year's 21.4-billion-baht net loss, the first in its 48-year history.
But THAI's hedging over the past year has proved more successful, resulting in a 250-million-baht gain in the first two months of this year, Mr Piyasvasti told reporters recently.
Fuel accounts for about a third of Nok Air's operating costs, but rising oil prices will increase the percentage.
Until last year, oil constituted about 30% of the industry's total costs, but industry monitors say that figure has already shot up to 40% this year.
With the industry already under margin pressure, most airlines - low-cost carriers included - are passing on the added costs to consumers. THAI raised its fuel surcharge on Feb 17 and is mulling another hike.
Last Wednesday, the International Air Transport Association (IATA) downgraded this year's industry profit outlook to $8.6 billion, from $9.1 billion estimated last December, due largely to higher fuel prices. Its previous oil forecast was $84.
At the same time, the global economy is now forecast to grow by 3.1% this year, a full half-percentage point better than predicted just three months ago.
However, Giovanni Bisignani, IATA's director-general and chief executive, said stronger revenue will only partially offset higher costs. Profits will be halved from last year's figures, with margins only 1.4%.
Credit: Bangkok Post (www.bangkokpost.com)
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