Mumbai: At a time when crude oil has fallen to less than $44 (Rs2,151.60), domestic airlines aren’t yet hedging on jet fuel prices because of their relative inexperience in it and an instance of hedging contracts going awry, industry insiders said.
Nine months after the Reserve Bank of India allowed airlines to hedge fuel purchases, surprisingly little has been done by aviation firms to bring in some predictability in their biggest expense: jet fuel prices, which account for at least 40% of an airline’s operating costs.
Kingfisher Airlines Ltd, the country’s second largest airline by passengers, says it is only “opportunistically hedging since it is a double-edged sword” and has taken hedges to cover just 10% of its purchases, according to A.K. Ravi Nedungadi, president and chief financial officer of the UB Group, which controls the carrier. The uncertainty over crude oil prices and the recent instance of hedging contracts going awry at Texas, US-based Southwest Airlines Co. that had it posting losses for the first time in 17 years have also jinxed airline companies.
Opportunistic deals: UB Group president A.K. Ravi Nedungadi says Kingfisher Airlines has been studying hedging possibilities from time to time and has asked its in-house team to make recommendations. Hemant Mishra / Mint
“Southwest’s experience is a good lesson in hedging. And we are studying hedging possibilities time to time and asked our in-house team to make recommendations on the matter,” Nedungadi said.
Southwest Airlines posted losses in the September quarter for the first time since 1991 as it took on part of its estimated $300 million charges related to fuel hedging arrangements.
The carrier, which posted its second straight loss in the three months to December, had been feted in the industry just months before as a role model to follow as it used hedges to control fuel costs when its peers bled.
The airline, otherwise considered a role model in the industry for how it manages to keep costs low, may burn cash further as it has already hedged 75% of its estimated 2009 fuel purchases at prices set to $73 a barrel of oil and 50% of its 2010 purchases at $90 a barrel—exposures the airline is trying to pare rapidly.
“...we substantially reduced our net fuel hedge position to approximately 10% of our estimated fuel gallons in each year from 2009 through 2013. The current market value (as of 20 January) of our net fuel derivative contracts for 2009 through 2013 reflects a net liability of approximately $1 billion,” Gary C. Kelly, Southwest chief executive said in a statement announcing the December quarter results.
Mark Martin, an aviation analyst at audit and consulting firm KPMG, said hedging makes sense when prices are going up and that nobody wants to lock their cash if fuel is cheap in the open market.
Not just that, Chennai-based full service airline Paramount Airways Ltd’s managing director M. Thiagarajan said, “Some of the research houses are forecasting that the crude oil prices will further fall below $25 a barrel.”
National Aviation Co. of India Ltd, or Nacil, that runs Air India, the only airline allowed to hedge fuel purchases before April last year, had hedged around 10% of its fuel requirements four years ago, but has since discontinued it.
“At present, we are not hedging. We are looking at (an) appropriate time for hedging. Falling oil prices need not necessarily mean that we should start hedging,” said Nacil executive director for corporate communications, Jitendra Bhargava.
Rival and country’s largest private carrier Jet Airways (India) Ltd had also hedged a small percentage of its fuel requirements but has no plans to hedge any more soon.
“Since there is some amount of fund involved regarding paying for banks and others, it will be difficult for airlines to look at hedging options immediately,” said K.G. Vishwanath, senior general manager for management information systems and investor relations at the airline, referring to the losses the Indian airline industry is making. “However, we are talking to oil companies on this matter.”
Both Wadia group’s GoAirlines (India) Pvt. Ltd, which runs low-fare carrier GoAir, and IndiGo, a New Delhi-based low-fare airline operated by InterGlobe Aviation Pvt. Ltd, have no hedges in place, or immediate plans to enter into such contracts.
Gurgaon-based low-fare carrier SpiceJet Ltd has been an early starter in hedging aviation fuel purchases. The airline started hedging its fuel risk on the Multi Commodity Exchange, the only bourse in India offering fuel hedge contracts from September, with help from brokerage Karvy Comtrade Ltd.
Initially, the airline made wrong calls. “But now we are happy and we are hedging up to 40% of our total fuel uplift,” said a senior SpiceJet executive, who did not want to be named, adding that it is difficult to predict whether it will increase hedging exposures soon.