Dubai: Airlines in the UAE are not shifting from their fuel hedging strategies despite jet fuel prices being down 8.4 per cent compared to a year ago.

As of August 29, jet fuel sold at a global average of $120.60 (Dh442.60) a barrel compared to $130.73 a year earlier, according to data from the International Air Transport Association (IATA) website.

Fuel hedging is where airlines purchase fuel in advance at a fixed price in effort to protect themselves from shock increases in prices.

Emirates, which does not hedge, and Etihad Airways, which does, both told Gulf News that their strategies have remained unchanged in lieu of falling oil prices.

“Our current strategy is to remain unhedged on jet fuel prices. This position is based on a continuous assessment of market conditions and the global economy, reflecting a view that the balance of risk is considered greater to the downside given historic high jet fuel price levels,” an Emirates spokesperson said in an email.

Over the 2013-2014 financial year, Emirates’ fuel bill increased by 10 per cent to Dh30.7 billion ($8.4 billion). It is the airline’s single largest expenditure, accounting for 39 per cent of operating costs the spokesperson said.

Expensive and risky

Etihad Airways first introduced a fuel hedging policy in 2007, which is reviewed annually by the board, to manage the impact of fuel prices.

“This on-going programme allows the airline to participate in lower prices on existing hedges, and also to take advantage of lower prices in the market by adding new hedging,” an Etihad spokesperson said by email.

United States-based analyst Addison Schonland, founder and partner at AirInsight, said by email that hedging is both expensive and risky.

“Once bought, you hope prices rise to offset the cost of the hedge, or you’re underwater,” he said.

Escalating violence in Iraq and Libya, as well tensions between Ukraine and Russia, have not led to an expected increase in fuel prices. Analysts say weakened global demand, especially slower growth out of China and growth of the United States shale industry, is behind the decline in prices.

“Airlines seem less worried about price spikes than before — Iraq, Syria, Iran don’t seem upset anymore as they once were. If prices fall, airlines may wait to see how far this could go — most are likely to assume markets will soften even more,” Schonland said.

Brent Crude, a global market indicator for oil prices, fell to $98.80 a barrel on Wednesday, its lowest intraday trade since May 1, 2013. Over the past five years Brent Crude has fluctuated between $75 and $125 a barrel.

Oil ministers are expected to meet in Kuwait on Thursday where they could reportedly discuss pricing levels.

While airlines do not purchase against the Brent Crude price, it is an indicator on how the commodity is performing. US Crude, another market indicator, rose $0.09 to $92.75 on Tuesday, breaking a three-day losing streak.

Global economic crisis

“Not all airlines can afford to lock into hedge contracts while others have made huge competitive gains by doing so, some have equally had their fingers burned by engaging in the practice,” said John Strickland, Director of UK-based JLS Consulting

Emirates, which used to have a hedging policy, wrote down Dh1.57 billion in fuel hedging losses for the 2008-2009 financial year after it signed fuel contracts before the global economic crisis, which drove oil prices down.

“Hedging is an art not a science, while it can at best lead to some cost savings for an airline, often the objective is to build in at least a certainty on fuel price which assists with cost/budget planning,” Strickland said.

Dubai discount carrier flydubai also said it is not changing its fuel hedging policy that it started in the last quarter of 2013. Fuel is the airline’s largest operating cost at 39.5 per cent, a spokesperson said by email, and it has hedged 30 per cent of fuel requirements for 2014.

“The fuel price movements have remained range bound and lower levels of fuel prices are still high,” the flydubai spokesperson said.

Air Arabia, which has an active fuel hedging policy, declined to comment on its strategy, citing commercial reasons. A spokesperson for Qatar Airways said they were unable to comment on commercial decisions when asked about its fuel hedging strategy.