Emirates writes down Dh1.5bn in fuel hedge losses

The airline joins the list of carriers including Singapore Airlines and British Airways, which took big bets on a rising oil price last year.

Emirates, along with many other airlines, was caught by surprise when oil prices collapsed last year, after it had hedged its fuel purchases as crude climbed towards $147.

Emirates Airline wrote down fuel-hedging losses of Dh1.57 billion (US$428 million) for its fiscal year ending in March after it signed large fuel contracts before the global economic crisis sent oil prices tumbling, according to its annual report. The higher fuel costs contributed to the carrier posting an 80 per cent drop in profits to Dh982m compared with the previous year. The Dubai airline joins the list of carriers, including Singapore Airlines and British Airways, which took big bets predicting oil prices would continue to rise at a time when prices were climbing to a record $147 a barrel last July. That bet turned sour when spot prices began to decline to below $40 a few months later. "Oil price movements in 2008 caught out many energy consumers off guard, including Emirates," the carrier said in the report. Emirates has said it purchased much of its fuel needs when oil was between $70 and $80 a barrel, resulting in a fuel and oil bill of Dh14.44bn for the fiscal year, a 31 per cent increase from the previous year. British Airways said it hedged prices to be between $91 and $96 a barrel. In its last quarter ending in March, Singapore Airlines took a write-down of S$543m (Dh1.38bn) in fuel hedging losses. And in February, Air France-KLM said fuel hedging was a primary reason it reported a $250m operating loss in the December quarter. "While the company never bought into the arguments that these prices were sustainable, one certainly did not anticipate the historic and rapid fall to below $40 per barrel in the space of a few months," the Emirates report said. "Like many other airlines involved in fuel-risk management, this substantial fall in prices in such a short time frame, coupled with the increased volatility, also impacted Emirates." "While a restructure programme was activated immediately, it has still resulted in an increase in fuel costs." Despite the extra costs and a global slump in air travel, Emirates Airline carried 22.7 million passengers, a 7.1 per cent increase from the year before, helping it post a profit when many airlines are reporting losses. Buying bulk fuel on the futures market is a common strategy among airlines to lock in their fuel needs at current prices and provide a buffer against prices increases. "All airlines hedge to fix in certain costs," said Kareem Murad, an aviation analyst at Shuaa Capital. "This allows them to budget accordingly." Emirates said its strategy was "to attempt to minimise the impact of rising fuel prices on the business, while also being in a position to benefit from falling prices". The airline's fuel strategies worked well during the fiscal year ending in March last year, when it shaved Dh729m from its fuel bill, according to its annual report. Emirates is the only one of the three state-owned long-haul Gulf carriers, which includes Qatar Airways and Etihad Airways, which produces an audited annual report. This year, lower fuel prices are providing relief to carriers as they struggle with falling demand due to the global recession. Worldwide, airlines will spend $116bn on fuel this year compared with $168bn last year because of lower prices and a reduction in the number of flights. "Fuel is the only good news," said Giovanni Bisignani, the director general and chief executive of the International Air Transport Association. "But the relief of lower fuel prices is overshadowed by falling demand and plummeting revenues. The industry is in intensive care. Airlines face two immediate fundamental challenges: conserving cash and carefully matching capacity to demand." [e-mail]