Kingfisher takes hedging route to protect margins

Mumbai: Kingfisher Airlines has begun hedging its exposure to aviation turbine fuel (ATF). The airline has, for the first time, hedged 10-15% of its jet fuel requirements for the remaining part of this fiscal, according to a highly-placed company official.
Domestic carriers have been singed by last year’s unprecedented rise in crude oil to $147 a barrel and the fall in ATF prices is a good time for carriers to build their hedge books and lock in prices at lower levels to protect margins.
The average Platts Singapore (MOPS) assessed price for jet fuel is down from record-high of $167.28 a barrel in July 2008 to $59.02 in December 2008.
The Kingfisher official, however, declined to comment on whether the airline entered into hedged contracts on the OTC market, which is active in Singapore and Japan, or commodity futures bourses such as New York Mercantile Exchange and Multi Commodity Exchange of India.
Hedging is a practice whereby buyers and sellers lock in the paper prices of inputs or final products for settlement at a future date in a bid to insulate their margins from price volatility and price risk.
A study on the airline industry by consulting firm Ernst & Young showed that fuel costs as a percentage of the total expenditure for full-service carriers such as Jet & Kingfisher increased from 33% in fiscal year 2008 (April-March) to 48% in the second-quarter of this fiscal. Significantly, the fuel costs vis-a-vis total sales for low-cost carriers rose from 50% in FY08 to 68% in FY09. The study further showed that ATF prices, going by the Singapore-based Platts’ assessment, hit a high of $170 a barrel and annualised volatility exceeded 80% between January and November last year.
13/01/09 Ram Narsinghdev Sahgal & M Padmakshan/Economic Times

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Categories: Kingfisher Jan 2009