Domestic carriers fly low as high jet fuel prices squeeze cash flows

Mumbai: Aviation turbine fuel (ATF) prices have been creeping up after hitting a low of $50 a barrel at the end of Q1 of the current financial year and is now trading at $85 a barrel. During the first half of the year, fuel prices were substantially lower (between $60-$70 a barrel) than 2008 levels, but now the year-on-year advantage is disappearing, say analysts, adding that even hedging will not provide financial relief. Crude oil at $85 a barrel is now close to late October 2008 levels. Further rises are expected by futures markets which will continue tosqueeze airlines cash flows.
This difficult scenario comes at a time when airlines are groping for a toehold on recovery amid economic downturn. Says Raj Halve, principal consultant, Samara Capital, “Airlines will now have to adjust fuel-hedge strategies to control that huge expense, which has been climbing higher of late. Hedging of fuel can provide some protection. But it cannot be absolute protection.” He further added that it all depends at what price companies are hedging fuel which is a contractual agreement to buy fuel in future in future at a pre-determined rate.
Though Indian carriers have the permission to hedge fuel from the apex body they don’t find business sense to lock their cash because there could be a possibility of fuel being sold cheap in the open market in the ensuing days.
However, Jitendra Bhargava, flag carrier Air India’s director (PR) told FE that the carrier does not hedge fuel. Private carrier Kingfisher Airlines hedges fuel but on a minuscule scale. Jet Airways spokesperson said the carrier does not hedge fuel.
10/11/09 Shaheen Mansuri/Financial Express

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Categories: Indian Aviation- In General Nov 2009