Airlines stay on the sidelines of futures trading in jet fuel

Airlines stay on the sidelines of futures trading in jet fuel
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First Published: Sat, Jul 19 2008. 02 09 PM IST
Updated: Sat, Jul 19 2008. 02 09 PM IST
Mumbai: India’s airlines haven’t yet jumped at the opportunity to trade in jet fuel futures on the Multi Commodity Exchange of India Ltd (MCX) despite staring at $2 billion (Rs8,560 crore) in cumulative annual losses through March 2009, much of it from rising prices of aviation turbine fuel (ATF).
ATF purchases account for about 45% of the operating cost of airlines in India. ATF in Mumbai cost Rs71,630 per kilolitre in July, up from Rs39,062 per kilolitre in the same month last year.
Meanwhile, consumption of ATF increased by almost 77% in 2006-07, the most recent data available, from 2000-01.
MCX launched its futures trade in jet fuel on 7 July. The Tokyo Commodity Exchange (TOCOM) is the only other exchange in the world that trades ATF and Indian airlines now have the option of either participating in MCX or hedging in TOCOM.
As airline companies are the single largest users of aviation fuel, they can use ATF futures to hedge their price risk in the commodity and safeguard themselves from extreme volatility in international jet fuel prices.
Consider an airline company that consumes 1,000 barrels of ATF every month. Assuming it places orders on a monthly basis, the airline can buy ATF at the prevailing rate of $130 per barrel, adding up to $130,000 for 1,000 barrels. If the airline estimates that crude oil prices will rise sharply the following month, it can buy ATF futures for the next month at the prevailing rate.
Regardless of where the ATF price is the next month, the purchase price for the airline is locked in at $130.
If, for instance, the ATF price ends up reaching $150 the next month, the airline would have saved $20 per barrel, or $20,000, on its monthly oil bill.
MCX is a platform where different types of participants trade, including those who hedge, intra-day traders and arbitrageurs.
Each participant has a different view of the market, some bullish, as in prices will go up, and others more bearish, as in prices will fall next month.
“Though crude prices are declining, the kind of volatility of crude oil prices is such that neither international hedging nor MCX will make sense for airlines” unless they have firm views on oil-pricing scenarios, said an airline industry expert, who didn’t want to be identified.
Most Indian carriers haven’t taken a position on oil on account of the global volatility, said this person.
According to a statement from MCX, commodity exchanges are meant for hedging prices. Worldwide, it said, actual deliveries of the commodity on exchanges are less than 1%.
MCX said ATF delivery can generally happen if the exchange receives an intent to do so from both the buyer and the seller.
“Prior to the start of the trade, the exchange had discussions with domestic airlines and readied a rupee contract as per their suggestion,” said Sumesh Parasrampuria, chief business officer of MCX.
He said India’s airlines will participate soon as they study the product and prepare an internal risk-management plan.
Indeed, at least three airlines are planning to join the trade by the end of next month, said Jayant Maglik, head of the commodities division at brokerage firm Religare Securities Ltd. He refused to name them, other than to say that his firm had been in talks with them.
“We are looking at participating the hedging at MCX,” said Hitesh Patel, executive vice-president at Kingfisher Airlines Ltd. “We are examining the possible benefits of the hedging. However, there is no time frame for hedging.”
Others said they haven’t made up their mind.
An executive at Jet Airways (India) Ltd, the largest private carrier by passengers, said his airline hasn’t taken a decision on hedging either, the same as what SpiceJet Ltd’s chief financial officer Parthasarthi Basu said.
Meanwhile, some other traders are participating in jet fuel futures. MCX has six contracts for procuring ATF based on requirement for the months of July, August, September, October, November and December.
The maximum limit for individual investors to buy or sell ATF is 600,000 barrels in one contract and the minimum is 100 barrels. The contracts expire on the 26th of the respective months.
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First Published: Sat, Jul 19 2008. 02 09 PM IST
More Topics: Airlines | Jet Fuel | ATF | Oil Prices | Corporate News |