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Airlines hold hedging plans on uncertain crude

Airlines hold hedging plans on uncertain crude
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First Published: Wed, Jul 16 2008. 03 11 PM IST
Updated: Wed, Jul 16 2008. 03 11 PM IST
Mumbai: Airlines in India are holding back fuel hedging plans, wary that record-high oil prices are unsustainable, and on probable losses if oil slips as fund interest in crude wanes, industry officials and analysts said.
Indian carriers might have reduced their mounting losses if they would have hedged aggressively, when oil was below $100 a barrel, analysts said.
The industry lost $700 million (Rs30,21.8 crore) in 2007-08 and would continue to see in excess of $1 billion -$1.5 billion in losses, according to the Centre for Asia Pacific Aviation. Aviation turbine fuel, or jet fuel, which has a 95% correlation with with crude oil, accounts for about 40% of an airline’s running cost.
But analysts say oil prices are at a tipping point and could see a continuous correction in near future.
“I think there is little more upside left in crude oil...rather a correction is expected,” said T. Gnanasekar, director, Commtrendz Risk Management Services Pvt Ltd.
Oil, which surged about 50% this year to a high of $147 a barrel on Friday, fell by more than $6 on Tuesday, its steepest slide in 17 years as demand fears swelled on the worsening prospects of the US economy.
“It makes sense for the airlines to wait and watch than enter hedging at this stage and make a loss with a price slide.”
India’s biggest private and public sector carriers, Jet Airways and Air India, are putting their plans on hold.
“We had hedged at one point, but prices have gone up so much, and forecasts are so unclear, we are not hedging now,” said Saroj Datta, executive director of Jet Airways.
Air India, which used to hedge about 10% of its fuel requirement in global bourses like NYMEX 4 years ago, is also undecided about hedging, said Jitender Bharghava, its executive director of corporate communications.
Industry observers cite huge fund inflows into commodities as a reason for the rise in crude. “Even at global level there’s more fund participation in energy futures than actual users,” said Commtrendz’s Gnanasekar.
The surge of such funds, often called speculative or hot money, has led to high energy prices.
Most airlines, in an interaction with Reuters in May, had shown interest in hedging on the domestic platform, once ATF futures were launched in Multi-Commodity Exchange (MCX).
But even after the launch on 7 July, the carriers are unsure of participation due to global crude price turbulence.
“We have to evaluate the market before taking a decision on hedging,” said Partha Sarathi Basu, chief financial officer of low-cost carrier SpiceJet.
But domestic carriers were not entirely ruling out hedging at a later stage and officials said they were satisfied with the position limit of 3 million barrels offered to each carrier. “Hedging is something we are looking at constantly,” said Jet Air’s Saroj Datta.
But in the absence of a clear hedging strategy, airlines are resorting to other means to return to profit.
All the major airlines in India have increased fares and are in the process of cutting down unfeasible routes.
Fund infusion through a stake sale is yet another route with US investor W L Ross & Co willing to pump in Rs345 crore in SpiceJet.
But analysts say that it would be difficult to predict when Indian carriers would look at hedging too as a feasible option.
“Your view on hedging will depend on the underlying rate. If you believe that the underlying rate is uncertain, you need not hedge. Airlines are not certain whether there will be any further run-up in prices,” said an analyst, who declined to be named.
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First Published: Wed, Jul 16 2008. 03 11 PM IST
More Topics: Airlines | Hedging | Crude oil | MCX | Jet Airways |