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 to squeeze 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. Jet’s, chairman Naresh Goyal had also in the company’s 17th annual general meeting held in September had said, “The aviation industry is in a financial turmoil mainly due to high costs of ATF, owing to the unprecedented escalation in the prices of crude oil during the first half of the year, While there was some abatement in the latter part of the year, crude prices have lately been rising again.” Jet’s fuel bill for financial year 2008-09 was nearly Rs 500 crore.
Says Ajay Parmar, head research, Emkay Share And Stock Brokers Ltd, “If the cost of ATF goes up, airlines will not completely pass on the burden to customers. But they might hike fares minimally to make up their cost.”
For the troubled aviation industry, labour and fuel costs dominate 65% of the operating cost to any airline. However labour costs are largely fixed and predictable whereas fuel prices are volatile and cannot be predicted.
The oil price peaked to $147.27 a barrel in July 2008 which prompted the carriers across the globe to freeze its hedging programme, and this strategy allowed it to enjoy wider profit margins when oil prices sank to under $55 a barrel last December.
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