Europe airlines hedge against soaring fuel

By Felicia Loo

LONDON (Reuters) - European airlines are hedging their fuel needs to protect against surging oil prices but their bets could go wrong if Chinese demand starts to slow after this summer's Olympics, pulling crude lower, analysts say.

Fuel accounts for more than a third of airlines' operating costs and companies fear even higher oil prices due to falling inventories and robust Asian demand.

China, the world's No. 2 energy user after the United States, has been scrambling for oil to stockpile before the Olympics, helping fuel a rise in prices to a record high of almost $140 a barrel on Monday.

"It's harder to hedge effectively by the day. The hedged book becomes the determining factor the way people look at the value of the company," said Marisa Thompson, an analyst from Morningstar in Chicago.

Fuel hedges -- financial products that give a buyer the right to buy fuel at a guaranteed price -- protect companies from price rises, but also boost their costs when prices fall.

"High oil prices is the number one enemy of airlines. Airlines are trying to minimise uncertainty and volatility," said Michael Waldron, an oil markets analyst at Lehman Brothers Holdings Inc.

Hedging becomes a tool for carriers to fend off soaring crude oil prices, which have doubled since last year.

But some experts argued airlines' attempt to overreach by making money in oil trading distracts them from their basic business.