Page 29 - AAA NOVEMBER - DECEMBER 2013 Online Magazine

FEATURE FUEL PRICING

RISING CRUDE OIL PRICES AND A FALLING tax regime. The average base price of 5,00,000 barrels of jet fuel each quarter at
rupee are prompting cash-strapped Indian ATF in India is currently around Rs65000 a price of up to US$110 per barrel.
carriers to hedge their jet fuel needs and reduce (US$1000+) a kilolitre as on Nov. 1, 2013, Not just India
their exposure to volatile and potentially rising much higher than in Dubai, Singapore Experiences of airline operators in the
fuel costs. In October, financially squeezed and Kaula Lumpur. Once the taxes and U.S., Europe and in some South East and
national carrier Air India decided to hedge jet margins are added to the base price, the Middle Eastern countries show that high
fuel for the first time in five years, as part of its retail price of ATF turns out to be over 60% fuel prices have dealt a much milder blow
turnaround plan. higher than the prices in the competing to carriers that practice fuel hedging,
“We have started fuel hedging and countries. which most often involves purchasing
have hedged 10,000 barrels for immediate The jet fuel budget of Air India was futures contracts that allow airlines to
delivery,” an Air India official, who didn’t close to Rs90 billion rupees (US$1.5 fix or cap the price they will pay several
want to be named, admitted. Times are billion) for 2013-14 and it amounted to months or years in advance.
indeed changing. 45% of the total cost and almost 60% of AirAsia, a leading discount carrier in
The primary benefit of hedging is total revenue of the debt-ridden airline. Air South East Asia (and one that is setting up
that it can stabilise cash flow. One way India also pays about 6 billion as sales and an Indian venture) hedged 35% of its fuel
an airline can hedge its jet fuel needs is other taxes on ATF to state governments consumption as of March 31, according to
by entering into a forward agreement, every year. data compiled by Bloomberg. Singapore
which essentially means it is agreeing to Though buying fuel from an Airlines (SIA), which is also launching
buy fuel in the future for an agreed price. international supplier is not really hedging a full service carrier with India’s Tata
Though hedging is speculative by nature, if the airline is buying their current needs Group, has hedged 57% of its fuel needs
its effect is similar to buying insurance, for the supplier – it may make good for the year ending March, 2013.
in that hedging provides the operators business sense if it is cheaper to do so.
with protection against major fuel price However, if they are entering into an
swings. agreement to purchase fuel in the future
As the industry is grappling with at an agreed upon price, that would be an
high operating cost which has already example of hedging, regardless of whether
compressed margins, the Indian the supplier is domestic or international.
government allowed airlines to directly Air India is making massive efforts to
import fuel in February 2012. This was return to profit after six consecutive years
partly in a bid to shave off the additional of losses through March 31. The flag
expenses incurred by the operators in carrier last hedged fuel in 2008 and then
sourcing Aviation Turbine Fuel (ATF). ATF the quantity hedged was less than 10 % of
costs much more in India than it does in its total consumption. This time around,
the rest of the world, due to a stringent Air India is likely to hedge a maximum of
WWW.ASIANAIRLINES-AIRPORTS.COM NOVEMBER / DECEMBER 2013 ASIAN AIRLINES & AIRPORTS 29