Aviation firms not yet hedging on jet fuel costs

Mumbai: At a time when crude oil has fallen to less than $44 (Rs2,151.60), domestic airlines aren’t yet hedging on jet fuel prices because of their relative inexperience in it and an instance of hedging contracts going awry, industry insiders said.
Nine months after the Reserve Bank of India allowed airlines to hedge fuel purchases, surprisingly little has been done by aviation firms to bring in some predictability in their biggest expense: jet fuel prices, which account for at least 40% of an airline’s operating costs.
Kingfisher Airlines Ltd, the country’s second largest airline by passengers, says it is only “opportunistically hedging since it is a double-edged sword” and has taken hedges to cover just 10% of its purchases, according to A.K. Ravi Nedungadi, president and chief financial officer of the UB Group, which controls the carrier. The uncertainty over crude oil prices and the recent instance of hedging contracts going awry at Texas, US-based Southwest Airlines Co. that had it posting losses for the first time in 17 years have also jinxed airline companies.
“Southwest’s experience is a good lesson in hedging. And we are studying hedging possibilities time to time and asked our in-house team to make recommendations on the matter,” Nedungadi said.
Southwest Airlines posted losses in the September quarter for the first time since 1991 as it took on part of its estimated $300 million charges related to fuel hedging arrangements.
The carrier, which posted its second straight loss in the three months to December, had been feted in the industry just months before as a role model to follow as it used hedges to control fuel costs when its peers bled.
The airline, otherwise considered a role model in the industry for how it manages to keep costs low, may burn cash further as it has already hedged 75% of its estimated 2009 fuel purchases at prices set to $73 a barrel of oil and 50% of its 2010 purchases at $90 a barrel—exposures the airline is trying to pare rapidly.
29/01/09 P.R. Sanjai/Livemint

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Categories: Indian Aviation- In General Jan 2009