Airlines stay on the sidelines of futures trading in jet fuel

Mumbai: India’s airlines haven’t yet jumped at the opportunity to trade in jet fuel futures on the Multi Commodity Exchange of India Ltd (MCX) despite staring at $2 billion (Rs8,560 crore) in cumulative annual losses through March 2009, much of it from rising prices of aviation turbine fuel (ATF).
ATF purchases account for about 45% of the operating cost of airlines in India. ATF in Mumbai cost Rs71,630 per kilolitre in July, up from Rs39,062 per kilolitre in the same month last year.
Meanwhile, consumption of ATF increased by almost 77% in 2006-07, the most recent data available, from 2000-01.
MCX launched its futures trade in jet fuel on 7 July. The Tokyo Commodity Exchange (TOCOM) is the only other exchange in the world that trades ATF and Indian airlines now have the option of either participating in MCX or hedging in TOCOM.
As airline companies are the single largest users of aviation fuel, they can use ATF futures to hedge their price risk in the commodity and safeguard themselves from extreme volatility in international jet fuel prices. Consider an airline company that consumes 1,000 barrels of ATF every month. Assuming it places orders on a monthly basis, the airline can buy ATF at the prevailing rate of $130 per barrel, adding up to $130,000 for 1,000 barrels. If the airline estimates that crude oil prices will rise sharply the following month, it can buy ATF futures for the next month at the prevailing rate.
19/07/08 P.R. Sanjai and Ajayan/Livemint

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Categories: Indian Aviation- In General Jul 2008