In the first deal of this kind in India, Delhi-based low fare carrier SpiceJet Ltd is set to enter into an agreement with an oil marketing firm to buy 20% of its yearly aviation turbine fuel, or ATF, requirement for a fixed price in an attempt to insulate itself from volatility in the price of ATF, a result of fluctuations in crude prices.
A person familiar with the development, who did not wish to be identified, said the base price for this contract would be the January price. “The agreement will be signed early next month with 3% plus- or minus to January’s base ATF prices. It is most likely with a public sector oil marketing firm,” he added. The ATF price in January was Rs47,045.16 per kilolitre at Mumbai airport.
The person said the oil company would, in turn, enter into a hedging agreement with a third party to protect its own interests.
Partha Sarathi Basu, chief financial officer, SpiceJet, confirmed that the company plans to enter into an agreement with one of the four oil companies, but would not add more.
The supply of ATF in India is controlled by three state-owned firms—Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd—that also fix ATF prices on a mutually agreed common formula every month.
Reliance Industries Ltd sells ATF in select airports such as Hyderabad and Ahmedabad.
ATF accounts for 40% of the operating cost of Indian carriers, against only 20% for international carriers, according to V. Thulasidas, chairman and managing director of National Aviation Company of India Ltd.
“Also, ATF is priced 70-90% higher at Indian airports compared with international benchmarks. The price in Mumbai in October, for example, was Rs41,105 per kilolitre against the price in Singapore at Rs23,064 per kilolitre, which is about 78% higher,” said Thulasidas, who is also chairman of Federation of Indian Airlines, a lobbying body for domestic airlines.
Siddhartha Khemka, an analyst with domestic brokerage ICICI Securities Ltd, said SpiceJet’s move would help the airline control the cost of jet fuel, if not reduce it. “I have not heard about any such deal by a domestic airline in the past. This fixed-price deal will help to minimize the volatility. This is a kind of indirect hedging where airline is not involved,” Khemka said.