Thursday, February 5, 2009

Jet Airways to hedge 25% ATF

MUMBAI: In a move necessitated by the sharp volatility in the prices of crude oil in the past 10 to 12 months, the country’s largest private

carrier Jet Airways is actively concluding the final negotiations for hedging about 25% of its aviation turbine fuel (ATF) requirement with two oil companies. During that period, oil prices rose to an all-time high of $147 per barrel but tapered off to as low as $35 per barrel in recent times.

The hedging deal is almost final and is expected to go through anytime now. When contacted, Jet Airways CEO Wolfgang Prock-Schauer told ET: “We are discussing with oil companies for hedging and it will go through in the next few weeks.” He declined to give any more details.

Hedging is a process wherein buyers lock in on the prices of final products for settlement at a future date to insulate margins from price volatility. Hit by high expenditure on ATF, the Naresh Goyal-promoted airline incurred a net loss of Rs 214 crore in the quarter ended December 31, 2008.

Said senior consultant with KPMG India Mark Martin: “A historical analysis of ATF prices indicates that airlines could have benefited by hedging against their exposure to ATF price volatility.”

Last fortnight, oil marketing companies announced a 3.4% hike in ATF prices following a rise in international prices of ATF. This is the first time since August last year that aviation fuel prices have recorded an increase. In Mumbai, home to the nation’s busiest airport, ATF costs Rs 32,447.65 per kilolitre as of Saturday night. “At these prices, when crude is hovering around $45 and expected to touch $80, it makes sense to hedge. Airlines can take a partial long hedge to lock into prices, otherwise unexpected volatility may result in losses,” said Daljeet Kohli, head of research at Emkay Global.

ATF accounts for 50% of the operating cost of airlines, which are expected to post a combined loss of $2 billion for fiscal 2009, primarily due to high ATF prices. India is among the most expensive places to buy ATF due to higher and differential sale-tax structure in different states.

Jet Airways operates a fleet of 87 aircraft, which includes 10 Boeing 777-300 ER aircraft, 12 Airbus A330-200 aircraft, 51 classic Boeing aircraft and 14 ATR 72-500 turboprop aircraft. It flies to 63 destinations at home and abroad, including New York, Toronto, Brussels, London, Hong Kong, Singapore and Colombo.

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