SINGAPORE, Oct 23 (Reuters) Many Asian airlines have cut their fuel hedging in a bet that record-high oil prices cannot be sustained, but the cost-saving effort could expose them to sharp losses if a harsh winter drives prices to 0 a barrel.
Airlines fear a repeat of last year, when some who had spent hundreds of millions to shield themselves from surging oil suffered losses after crude prices slid from a peak of a barrel in the fourth quarter to below , analysts said.
''These airlines may expect further upside to the oil prices will be limited,'' said Wendy Huang, head of research from SinoPac Securities (Asia) Ltd in Shanghai.
''If the volatile oil prices experience some consolidation in the short term, the hedging activities may lead to financial costs. Hence they want to reduce their exposure,'' she added.
Heavyweights including All Nippon Airways (ANA) <9202.T> have reduced their fuel hedging by a quarter from the previous year to about 75 percent of its fuel needs in the financial year to March 2008, while rival Japan Airlines Corp (JAL) <9205.T> has reduced its hedging to 77 percent from 89 percent in the same period.
Thai Airways cut its hedging to just 10 percent, priced at an average a barrel, down from 20-23 percent in the past few months.
''We have no plans to increase hedging as prices are too high at the moment. It does not make sense to do so now,'' said an official from Thai Airways.
But Air New Zealand is keeping its fuel hedging steady at 60 percent for the second half of the business year to 2008 with prices locked at .23-.46 a barrel.
State-owned Vietnamese carriers -- Vietnam Airlines and Pacific Air -- left their fuel purchases unhedged.
For a factbox on airlines' fuel hedging, click [ID:nSP338357] BET ON FALLS FROM PEAK Oil rallied to an all-time high of .07 last week, up 13 percent in less than two weeks and nearing its inflation-adjusted peak reached in 1980, as funds moved into oil and commodities from markets battered by the global credit crunch.
Prices have since fallen below on fresh worries that a slowdown in the U.S. economy will curb energy demand.
''I am not surprised that the airlines have reduced the hedging given the high prices,'' said Gerard Rigby from Fuel First Consulting in Sydney.
''They will probably wait for crude oil to drop to a barrel again. Remember the average for WTI this year is probably still at a barrel.'' The market view is that there is a good chance that prices will correct downwards as they did last year, said Tony Nunan, a Tokyo-based risk manager of Mitsubishi Corp.
Airlines fear that given the high volatility in oil prices, call option premiums are getting more expensive, with such premiums rising to above a barrel from two months ago, derivatives traders said.
A call option buyer pays a premium for a right to buy at a certain price, the cost of which is often offset in a collar by selling a put. For instance, if an airline sold a put and prices fell below that level, they might have to buy at a price above the market level.
VULNERABLE Some airlines bolstered hedging levels when prices fell last winter. Australia's flag carrier Qantas Airways Ltd hedged all of its fuel needs in January but cut the levels to 68 percent for the current fiscal year to June 2008.
It is tough to pin down whether carriers will stick to their current hedged levels.
''It depends on the cost breakdown whether airlines could cut other operating costs. If they could, they need not increase their hedged levels,'' Sinopac's Huang said.
Hedging may not be the only way to fend off high prices although fuel makes up 40 percent or more of an airline's operating costs, said Shukor Yusof from Standard&Poor's Equity Research.
''Hedging is unable to contain the current price levels, but merely protect an airline against further increases. Soaring fuel prices make hedging a very expensive instrument for airlines, especially those already in debt,'' he said.
But the lack of hedging could leave airlines vulnerable.
Should prices run up higher, airlines may pass on the costs to passengers in the form of fuel surcharges and resort to other cost-cutting measures.
''The question is how much can they pass the costs through?'' said Nexant's Tony Regan in Singapore, adding it was not advisable to lock in numbers at current levels.
''Prices could come off sharply if speculators decide to take profits, geopolitical tensions ease and it looks as if we are heading into a mild winter,'' he said.
Robust Asian economies led by China and India will continue to back passenger traffic and easing airlines' cost worries, as long as high travel costs do not start to erode demand.
Asia Pacific jet fuel consumption is set to grow around 4 percent from this year to 2.33 million barrels per day (bpd) in 2008, making up more than a third of the world's demand, said the International Energy Agency.
''Passengers still want to fly whether prices are on the upward trend given the robust Asian economies,'' said a derivatives trader in Northeast Asia.
(Additional reporting by Orathai Sriring in Bangkok, Osamu Tsukimori and Aiko Hayashi in Tokyo, Gyles Beckford in Wellington, Richard Dobson in Taipei, Fang Yan in Shanghai, Kim Soyoung in Seoul, Nguyen Nhat Lam in Hanoi, Michael J Smith in Sydney, Kamran Haider in Islamabad, Karen Lema in Manila and Felicia Loo in Singapore) REUTERS KR HS2002