Airline stocks extend falls as fuel price uncertainty weighs

Adds analyst comment in paragraphs 17-20 and details throughout

By Byron Kaye and Julie Zhu

SYDNEY/HONG KONG, March 3 (Reuters) - Asian airline shares extended losses on Tuesday as the U.S. and Israeli war against Iran escalated, with carriers closely monitoring fuel price spikes and many seeing a surge in bookings as passengers switch from Middle Eastern airlines.

Qantas Airways QAN.AX CEO Vanessa Hudson said the airline had "pretty good" fuel hedging in place but the spike in oil prices amid the conflict between the U.S., Israel and Iran was significant for the aviation industry.

"We've got pretty good hedging in place, but these are pretty significant impacts on aviation and we're just continuing to watch how it all unfolds," she said at the Australian Financial Review's business summit as the airline's shares fell for a second day, trading as much as 3.9% lower.

Oil prices have surged amid the widening Middle East conflict, potentially driving up the cost of jet fuel and hurting airlines' profits.

Major Gulf hubs, including the world's busiest international airport Dubai, which usually handles over 1,000 flights a day, remained closed for a fourth day due to the conflict. That has left tens of thousands of passengers stranded as aviation faced its biggest test since the COVID-19 pandemic.

Qantas said last week that it had 81% of its fuel hedged for the second half of its financial year ending June 30, while Singapore Airlines SIAL.SI and Hong Kong's Cathay Pacific Airways 0293.HK are among the other Asian carriers that have fuel hedging programmes.

Japan Airlines 9201.T Chief Financial Officer Yuji Saito said on Monday the carrier planned to adjust its fuel surcharge for international flights, but did not provide a timeframe.

In the domestic market "since there is no surcharge, we're offsetting part of the price spike through hedging," he told reporters.

Japan Airlines shares were down 3.5% in early trading on Tuesday. Shares of Korean Air Lines 003490.KS fell nearly 8% after resuming trade following a public holiday on Monday and shares in Cathay Pacific were down more than 2%.

Shares of major Chinese carriers Air China 0753.HK 601111.SS, China Eastern Airlines 600115.SS, 0670.HK and China Southern Airlines 600029.SS, 1055.HK all dropped between 3% and 5% in both the Hong Kong and Shanghai markets.

The CEO of Australia's biggest investment bank Macquarie Group, MQG.AX Shemara Wikramanayake, said on Tuesday the conflict appeared likely to affect the availability of oil, as well as the cost.

"There is going to be a deliverability issue there," said Wikramanayake, whose company is one of the world's largest traders of oil and gas.

FINANCIAL IMPACT VARIES BY AIRLINE

Uncertainty over how long the conflict will last is likely to force travellers to cancel or reschedule travel plans, in the most severe disruption to global aviation since the COVID-19 pandemic.

With Russian skies mostly off limits to Western airlines since the Ukraine war started in 2022, carriers are now squeezed even further with the closure of flight corridors over the Middle East, forcing many to add more flying time and fuel to circumvent war zones.

Alternatives to Gulf airlines showed a surge in passenger bookings and ticket prices on routes like Hong Kong-London, according to Reuters' checks of the carriers' websites on Tuesday.

Some airlines have oil hedges that would help partially offset the fuel price increase, but other carriers are unhedged.

The operational and financial impact varies significantly among airlines, said Karen Li, J.P. Morgan's head of Asia infrastructure, industrials and transport research.

"There are important differences across carriers in terms of hedging strategy, air cargo exposure, and network rerouting capabilities that will shape the actual impact from the Middle East situation," Li said.

Airlines with prudent fuel hedging programmes are better positioned to manage the increased costs from longer routes, which result in higher fuel consumption and operational expenses, she said.

Li expected that "investors will increasingly differentiate between airlines based on these factors as the situation evolves, rather than treating the sector as a monolith."

($1 = 1.4094 Australian dollars)

($1 = 7.8210 Hong Kong dollars)

($1 = 6.8805 Chinese yuan renminbi)

(Reporting by Byron Kaye in Sydney, Hina Suzuki in Tokyo, Julie Zhu in Hong Kong, Sophie Yu in Beijing, Samuel Shen and Winnie Zhou in Shanghai; Writing by Anne Marie Roantree; Editing by Jamie Freed)

((Jamie.Freed@thomsonreuters.com;))