Hedging could have saved bleeding airlines

More than a year ago, the RBI allowed airline companies in India to hedge their fuel needs. But neither public sector carriers like Air India and Indian Airlines nor private players like Jet Airways and SpiceJet, among others, used the permission to cap the fuel cost. By the time they realised, crude oil prices had moved up by a whopping 125%. Had they hedged, they would not have been bleeding the way they are today.
“The rise in crude oil prices has been too fast for us to react,” says SpiceJet CFO Parthasarthi Basu.
Jet Airways, the country’s leading airline company, is suffering losses of around $2-3 million daily on account of rising crude oil prices. The company unfortunately hasn’t hedged its fuel needs.
“Hedging has not been traditionally done in India. In hindsight, it sounds wise today to have done that,” says Go Air spokesperson Neeraj Kapoor.
The company is evaluating the process of hedging. Air India started hedging 10% of its oil requirement four years ago on the international exchanges and increased it to 15% consequently. However, it stopped hedging altogether once crude oil prices stabilised above $40 a barrel.
“The correlation between prices of crude oil and aviation turbine fuel (ATF) prices is very high at 0.9,” says JM Financial Commtrade research associate Vicky Sajnani. The hedge ratio, according to him, works out to be two, which means for hedging three million litres of ATF, one would need 410 contracts of crude oil.
10/06/08 Kiran Kabtta/Economic Times

To Read the News in full at Source, Click the Headline

Categories: Indian Aviation- In General Jun 2008