SINGAPORE, Feb. 12 (Reuters) – Asia-Pacific airlines, stung by billions of dollars in losses and Japan Airlines' bankruptcy, face the test of moving nimbly to protect against extreme fuel price swings and widen hedging activity in an open market.

But old ways die hard.

Oil's unprecedented volatility in 2008 cost some airlines hundreds of millions of dollars in hedging losses each, but most are hamstrung by structural practices and mindsets that prevent them from putting in place a more responsive hedging program.

Some carriers were able to trim hedging costs when oil markets steadied last year, but most will still struggle to find the right balance when prices suddenly turn, traders and bankers say.
Those who hedge are still a minority in this region.

''The problem with the airlines is that they treated hedging as a
profit/loss mechanism rather than as insurance, which should then be regarded as cost and as cover in case of the unexpected happening,'' said Clarence Chu, a trader with Hudson Capital.

Companies such as airlines mark-to-market derivative positions as profit or loss, in line with accounting rules.

''Most still view it the same way, even after the last round of losses. I'm not sure if you can say they have learnt their lessons but at least they are more willing to listen now,'' Chu said.

Carriers tend to hedge their positions with a limited number of counter-parties, mostly banks, shying away from the wider market with clearing house or exchanges such as NYMEX and ICE, where prices are more competitive.

Despite JAL's $441 million in hedging losses and its subsequent $25 billion bankruptcy, the disruption to oil and financial markets was minimal. This was unlike the fall of Lehman Brothers two years ago, which forced counterparties to use clearing facilities due to mutual fears over credit worthiness and banks' squeeze on loans during the financial crisis.

The ready supply of credit and banks' move to boost customer flows offer airlines few incentives to explore alternative ways to hedge, traders said.

''They're still hedging the same way, with the same few banks that they have built comfortable relationships with. It's a bilateral relationship, the banks allow them to trade on credit,'' another industry source said.

''Airlines can probably get more transparent prices from the open market on the exchanges such as NYMEX, but they have often balked at having to pay clearing fees and maintaining margins.''

Most airlines, like other big listed firms whose core business is not trading, have stringent measures to guard against price speculation.

But the safeguards, such as a rigorous regime that goes up to top management before airlines can take new positions to mitigate loss-making hedges, also slow their reactions and limit options when prices spike or fall dramatically.

This is unlike traders and banks which take daily positions -- entering or exiting the market when necessary to limit losses or maximize gains -- but also do so for speculative purposes.