Futures trading in jet fuel brings no cheer to airlines
There is a new ray of hope for beleaguered airlines. They can now hedge against rising jet fuel prices through futures contracts, but the industry feels the fresh option is a case of “too little too late”.Updated: Jul 07, 2008 20:53 IST
There is a new ray of hope for beleaguered airlines. They can now hedge against rising jet fuel prices through futures contracts, but the industry feels the fresh option is a case of “too little too late”.
Commodity market regulator — Forwards Market Commission — from Monday allowed futures trading of aviation turbine fuel (ATF) in the Multi-Commodity Exchange (MCX).
Hedging allows carriers to insulate themselves against the rising fuel prices and maintain stable profitability. Having hedged for the future, the airlines can prevent themselves from unforeseen rise in ATF prices as is being witnessed now across the industry.
“The futures prices of ATF was ruling at Rs 64,347 per kilolitre as against a spot price of Rs 69,097,” an MCX official said.
The aviation industry is the single largest user of the ATF, the others being oil refineries, power generation, shipping, railways, and metallurgy.
India’s airlines are reeling under an aggregate loss of Rs 4,500 crore largely due to the steep rise in ATF prices that has risen by nearly 50 per cent since January from Rs 45,495.84 per kilolitre.
Airlines, however, said futures contract in ATF should have been allowed much earlier. “We wish that such trading had started when crude prices were in the $60 per barrel range. Expert agencies continue to advise us not to hedge at these levels. Still, it is a good option for the future,” Sidhantha Sharma, executive chairman of low-cost carrier SpiceJet said.
An analyst with research firm Forst & Sullivan endorsed Sharma’s views. “Hedging may not be such a beautiful option now.
Hedging is always done when prices are not so irrational,” the analyst, who did not wish to be identified, said.
State-owned carrier Air India that used to hedge 10 per cent of its fuel requirement in global bourses like US-based Nymex
four years ago, refused to comment about hedging through the MCX.
A Kingfisher Airlines spokesman said it would not enter into futures contracts for ATF as of now.
According to MCX “indigenous production of ATF in India is 78,05,000 tonnes. India is self sufficient in production of these products with exports of 36,62,000 tonnes. The Indian oil companies produce enough kerosene and ATF to meet the domestic demand.”
ATF price in India are nearly 60-70 higher than anywhere in the world due to an array of taxes that range from 4 to 39 per cent.