Not unusually, there’s something a little strange going on with Qantas. It involves hedging contracts, fuel costs and the share price.

KLM overnight reduced its fuel surcharge because, as we all know, the price of fuel has fallen. Funnily enough, there’s no sign or hint of Qantas reducing its surcharge. One’s first instinct is to think that is just the Roo being greedy – but maybe it’s because it can’t as it’s locked in high fuel prices in its hedging program.

Rod Myer has a yarn in the Oz about Qantas and fuel and such but it poses as many questions as it answers. Reports Myer:

QANTAS is not placing much store on the recent dive in oil prices, having just boosted its fuel hedging level to 90 per cent of its needs for 2006-07, compared with 60 per cent when it announced its annual profit five weeks ago …

… Qantas is enjoying the benefits of lower fuel prices but is playing a conservative game, having used the lull to boost hedging. Recent deals have been slightly more favourable as the new average hedge price is $US70.50 a barrel for oil, down from $US71 when the full-year result was announced.

What? That sounds like a rather expensive price for oil when it’s now down in the lower US$60s. Hedging is of course a double-sided sword – just ask the old Pasminco board. You can look like a genius for locking in lower prices on the way up, but you can also get caught paying a lot more than the market when prices fall.

When fuel prices were rising, Qantas was happy to say it had locked in lower prices, but now, well, Myer has these curious paragraphs that don’t quite make sense to me:

Qantas has not locked itself into its hedge prices. It said last month 66 per cent of its hedges were in the form of options that could be wound out if there was a sustained fall in the oil price.

Mr Gregg told The Age: “We have recently restructured some of our hedging cover,” implying that this figure had been increased.

You don’t get anything for nothing in the hedging game, whatever way you play it. Options still cost money even if they’re not taken up, which could explain why the Roo is hanging on to its fuel surcharges.

Exactly how this is being accounted for could be interesting, but we’re still waiting for an answer to a question filed with the airline about how it accounted for the $104 million worth of compensation for the A380 planes running late, about whether cash actually changed hands before the end of the financial year from Airbus to Qantas.

Meanwhile, the Qantas share price has enjoyed a big run on the idea that the airline’s profitability has a direct relationship with the falling price of oil. With the bulk of the fuel bill hedged, that might or might not be so obvious. Qantas shares nudged close to $4 yesterday, a long way above the $2.93 low in June.

If Qantas isn’t locked in to high fuel prices, where’s the unwinding of the fuel surcharge? Or is our national carrier simply being misleading by calling it a surcharge when it’s just part of the normal ticket price?

Peter Fray

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