Mumbai: Airlines in India are looking to hedge their exposure to aviation turbine fuel (ATF) on local commodity exchanges to offset price volatility and currency fluctuations, company officials told Reuters.
The Forward Markets Commission, the commodity markets regulator, in April permitted Multi-Commodity Exchange of India to offer ATF futures and trade could start by July.
“We would be looking at hedging in a domestic contract. If we can bring some certainty in our fuel bill, that will be of advantage to us,” said Ajay Singh, director of budget airline SpiceJet.
Skyrocketing fuel prices have hit profitability of domestic carriers, an industry that expanded by a fourth over last 2-3 years, where burgeoning demand has led carriers to order 453 planes for $28 billion.
Indian jet fuel, which is almost three-fourths costlier than international benchmarks, accounts for 40% of the operating cost of an Indian airline.
India’s top carriers such as Jet Airways and Deccan Aviation have posted losses due to high oil prices.
“Price of fuel has gone up so high, we are evaluating.. if we can have a better predictability of fuel cost,” said Sudheer Raghavan, chief commercial officer, Jet Airways.
ATF prices, as offered to domestic airlines in Mumbai, rose 56% in a year to Rs60,468.28 a kilolitre in May 2008, Indian Oil Corp data showed. “ATF price have risen on firming up of global energy prices and strong demand from the domestic airlines sector, ..which is emerging in a big way,” said Amar Singh, head of research at Angel Commodities Broking Pvt Ltd.
India’s four major airlines prefer to buy from the spot market, while some, including state-owned Air India and privately-held Jet Airways, have hedged abroad.
Air India, which used to hedge 10% of its fuel requirement in global bourses like Nymex four years ago, is planning to revive hedging on Indian bourses, said Jitender Bhargava, executive director of corporate communications.
Most airlines hedge on energy contracts, which are co-related to jet fuel like crude oil and heating oil, analysts and officials said. Crude has a 96% correlation to jet fuel prices.
ATF futures may not find favour with airlines initially because of a shortage of volumes, analysts said.
“Despite the positives of the jet fuel futures it will take higher volumes to attract the participants,” said Shailendra Kumar, head of research with Sharekhan Commodities Pvt. Ltd.
But the rupee-denominated contracts by local commodity exchanges will carry another benefit — lack of currency risk that companies face in international bourses.
The rupee has lost nearly 7% against the dollar in 2008, after a rise of more than 12% in 2007, to be Asia’s weakest currency behind the Korean won.