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Flying High and Falling at the Hedge

Tuesday, 10 Feb 2009 | 4:09 AM ET

In this winter of discontent, the steep reduction in fuel prices is cold comfort for many carriers locked into higher prices. Forward contracts have provided spectacular losses for many airlines in the past few months. In short -- carriers have fallen at the hedge.

According to the Centre for Asia Pacific Aviation, a sample of North Asian airlines that have disclosed their positions as at 31 December 2008, shows unrealized losses totaling over a mind-boggling $3.5 billion. Merrill Lynch expects nine Asian carriers to report combined losses of $6 billion in 2008, due to 'wrong way' bets on fuel and slowing demand for air travel.

In the realm of Charting Asia, there are two issues of interest. First, to decide if chart analysis provides a clue to the dramatic fall in the jet fuel price. The second, to apply chart analysis to develop an outlook for 2009.

The first issue is easily resolved. The jet fuel price chart has all the characteristics of a parabolic trend. Although jet fuel does not exactly follow NYMEX oil , there is a close relationship.

At commodity conferences in early 2008, in commentary on CNBC's Asia Squawk Box, and in CNBC.com chart notes, I've highlighted the parabolic trend and its highly probable outcome -- a sudden and dramatic collapse in prices. The parabolic trend analysis is one of the few technical analysis methods that helps construct an end date for the trend.

The second issue is a little more difficult. This is because the available price data can only be displayed as a line chart. This is the least effective chart display for classic charting analysis as it does not reveal the full range of psychological factors at play in pricing. A chart that shows open, high, low and close helps to identify the psychological behavior of the market and establish reliable support, resistance and trend lines.

The long-term support level is near $48. The long term resistance level is near $63. This combination of support and resistance creates a trading band. The current price activity is a temporary consolidation inside the trading band.

The pattern of behavior shows a down sloping triangle. This is a bearish chart pattern. A downside breakout from this pattern sets a downside target near $45. The higher probability outcome is a fall to the long-term support level near $48 with perhaps a temporary spike towards $45.

The bearish pattern also limits the upside. A bullish breakout has a pattern target near $65 to $66. The target follows the slope of the triangle trend line, so the target continues to fall as the triangle pattern develops. There is a high probability the historical resistance near $63 will cap any immediate breakout.

Asian Airlines Fuel Hedging

AIRLINE Gain/Loss (USD millions)
Air China (994.5)
Cathay Pacific (980)
China Eastern Airlines (908)
China Airlines (629)
Shanghai Airlines (24.9)
China Southern Airlines* 6.3
* Gain from fuel hedging activities (as of 31 Dec '08)Source: Centre for Asia Pacific Aviation

In the longer term, there is substantial resistance near $85. These strong support and resistance areas suggest that despite the downward price pressure there is a high probability of price developing a consolidation pattern within the trading band. A breakout from this trading band has an upside target near $77. The downside target is near $35. But, this is a low probability outcome because the trading band pattern is a consolidation pattern. This type of pattern after a large trend collapse is usually evidence of a developing change to a new uptrend.

Long-term hedging strategies include locking in price as it nears the lower edge of the trading band. There remains limited downside to jet fuel prices, however upside breakout pressure is weak. It looks like an uncomfortable long-haul flight in economy for carriers who have hedged 2009 at exorbitant prices.


If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. Daryl will also be appearing on CNBC's Asia Squawk Box on Thursday, 12th February, 7 to 10 a.m. Hong Kong/Singapore time. You can send in your requests to squawkbox@cnbcasia.com.

We welcome all questions, comments and requests.

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