Air Arabia blames fuel hedging as Q4 profit falls 28 per cent

Airlines which hedged against oil price fluctuations are likely to have paid more for fuel than the market price in the latter part of 2014 due to the surprise and sustained drop in crude.

Air Arabia's annual profit was Dh552.9m, up from Dh420.7m in 2013. Sarah Dea / The National

Air Arabia, the Sharjah-based budget carrier, reported a 28 per cent drop in fourth quarter net profit on fuel hedging costs.

Listed on the Dubai Financial Market, the airline made Dh68 million during the period, down from Dh94m a year earlier. However, full year profit gained 30 per cent to Dh566m as it carried more passengers. Its seat load factor was at 81 per cent last year as it carried 6.8 million passengers, up from 6.1 million in 2013.

Fourth quarter earnings missed analyst expectations. In a statement, Air Arabia blamed the drop on "a temporary downward correction in the fuel hedge portfolio, which will regain its benefits going forward".

In 2013, the company said it had hedged about 54 per cent of its jet fuel requirements for 2014 at an average value of US$97.44 per barrel. For the year ahead, it is expected to have hedged 42 per cent at $97.13 per barrel. Airlines sometimes use financial tools to limit their exposure to volatile aviation fuel prices.

Brent crude prices fell by 39 per cent in the three months to December, and are likely to have affected airlines that buy jet fuel in advance at a fixed price.

“Airlines had largely adjusted to being profitable at US$100 per barrel, so fuel prices significantly lower means most airlines should be capable of profits – depending on hedges,” said Will Horton, a senior analyst at the Capa Centre for Aviation.

The Sharjah airline carried 1.7 million passengers in the fourth quarter, a rise of 8 per cent on a year earlier. Air Arabia flies to 101 destinations from its five international hubs in Sharjah and Ras Al Khaimah, Casablanca in Morocco, Alexandria in Egypt, and Amman, Jordan.

Air Arabia shares fell 1.76 per cent yesterday.

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