Airlines may get nod to hedge ATF for local flights

The finance ministry is considering a proposal from domestic airlines for permission to hedge aviation turbine fuel (ATF) consumed for domestic flights. While domestic carriers are allowed to hedge ATF for their international operations, the government does not permit them to do so for domestic operations. Since ATF accounts for almost 40% of airlines’ total costs, airlines could save significantly in their domestic operations if hedging of ATF was allowed. Most airlines are confident that they could at least keep costs under control. Air India, for example, uses hedging to keep a check on fuel costs in the cost of international operations. The recently-founded Federation of Indian Airlines (FIA), in a letter to the finance ministry, had sought permission for airlines to hedge ATF used for domestic airlines. “Permitting airlines to hedge their ATF price risk would be a positive step that would, on a longer term, ensure cost-efficient air travel industry,” the association has written in its letter to the finance ministry.

Present regulations permit hedging of only those commodities that are physically imported or exported by domestic companies. However, since Indian carriers’ major ATF procurement is through the national oil companies or local refineries, the airline companies are not allowed to hedge the commodity risk. Therefore, airline firms have now demanded the government to allow hedging of ATF that is purchased from domestic oil companies. They have said that in an upward-moving oil regime, the airline companies have no option to check spurt in input costs. Permitting hedging of ATF could help the airlines that are reeling under heavy losses. It would also help the airlines stabilise their costs of ATF, especially in times of volatility. It has been pointed out that volatility in the case of aviation fuel ranges from 28% to 34%, the FIA has said. The domestic carriers have also presented various fuel-hedging techniques, ranging from limited hedging to extensive hedging, used by major airlines in the US, Europe and Asia.

In India, at present, an RBI Circular No 11 (September 5, 2000) allows hedging of only those oil or petro products that are physically exported or imported by Indian oil companies. The government would need to mend the regulation to permit hedging of ATF by Indian airline companies. Domestic carriers have suggested to the government that “a relook at petro/oil hedging regulations would help the aviation sector in managing costs and maintaining growth”, sources said. The airlines’ demand for jet fuel hedging comes comes close on the heels of their recent request to the finance ministry seeking cut in taxes on ATF. The recently-founded aviation body plans to lobby with various ministries to ensure a profitable environment for the sector. Although the low fare war in the sector is likely to continue, the industry has joined hands to tide over mounting losses, expected to touch Rs 2,200 crore within a year.

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