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RBI permits airlines to hedge price risk on ATF

The central bank permits actual ATF users to hedge economic exposures in the int'l commodity exchanges based on domestic buyouts, reports Indulal PM.

india Updated: Apr 25, 2007 02:21 IST
Indulal PM

Airlines can relax a bit now. In a major relief to the loss making aviation industry, the Reserve Bank of India has allowed airlines to hedge their price risk on Aviation Turbine Fuel in international commodity exchanges.

In its annual monetary policy review, the central bank decided to permit ‘actual users’ of Aviation Turbine Fuel to hedge their economic exposures in the international commodity exchanges based on their domestic purchases.

“This change in policy will provide a greater flexibility. So far RBI allowed us to hedge on international fuel uplift. Now the policy has been extended for the domestic purchases as well,” said Carl Saldanha, CFO, Jet Airways. Jet Airways currently uplift 80 per cent of its fuel requirements domestically.

Fuel cost constitutes to one third of the total operational cost of the airline. Federation of Indian Airlines has welcomed the move stating that this will moderate the extensively priced ATF in India. Domestic ATF prices are 65 per cent higher compared to international benchmarks.

“Any step which can even distantly reduce the burden of high fuel costs for the Indian airline industry is in the right direction,” said V Thulasidas, CMD Air India and the chairman of Federation of Indian Airlines.

Currently, Air India has already started hedging up to 25 per cent of its international fuel uplift. With the relaxation, AI would be able to extend its hedging after seeking necessary approvals from the board for the domestic uplift also.

AI uplifts 45 per cent of its fuel requirement domestically and 55 per cent internationally. Kingfisher Airlines said the move would help the aviation industry to control costs.

“The decision (by RBI) will enable us to lower costs. It means we can buy our fuel from anybody and hedge it. However, the stand-alone monopoly of oil firms would also have to be addressed,” Kingfisher Airlines chairman Vijay Mallya told reporters in Delhi.
Though the industry has witnessed huge growth in passenger traffic in recent years high fuel costs, wage inflation and high airport charges have rendered the industry losing over Rs 2,000 crore annually.

First Published: Apr 25, 2007 02:03 IST