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Rediff.com  » Business » Aviation industry hails RBI move to hedge fuel

Aviation industry hails RBI move to hedge fuel

Last updated on: April 24, 2007 19:13 IST

The Reserve Bank of India's decision to allow airlines hedge jet fuel in global markets came in for praise from the industry and the civil aviation ministry, but end-users are unlikely to benefit in the form of lower airfares.

"It is a welcome move. The ministry has been asking for it for a long time," Civil Aviation Minister Praful Patel said.

He was reacting to RBI's announcement in credit policy allowing authorised banks to permit the users of aviation turbine fuel to hedge in international commodities market for their domestic purchases.

The move is expected to help the sector contain rising costs, but is unlikely to have an immediate impact on airfares, industry leaders said. Almost 40 per cent of an airline's operating cost accounts for jet fuel.

So far, only state-run carrier Air India was allowed to hedge jet fuel abroad. Hedging involves offsetting the price risks by companies through purchase or sale of stocks.

Pointing out that ATF cost in India was "far in excess" of the international benchmark, industry body Federation of Indian Airlines, said, "Any step which can even distantly reduce the burden of high fuel costs for the airline industry, is in the right direction."

FIA chairman and Air India CMD V Thulasidass said this was a "small but significant step to bring about moderation in the excessively priced ATF in India".

Kingfisher Airlines chief Vijay Mallya said RBI decision "will enable us to lower costs. It means we can buy our fuel from anybody and hedge it. However, the stand-alone monopoly of oil firms would also have to be addressed."

Air Deccan chief G R Gopinath, while welcoming the move, said several American airlines use hedging in fuel to report solid profits. Gopinath and IndiGo Airlines CEO Bruce Ashby said the move would have a positive impact on the industry but a fall in airfares should not be expected.

Low cost carrier SpiceJet's chief finance officer Partha Basu said: "This is a very positive and encouraging development for the industry. We will be definitely evaluating options in the near future".

"ATF charges are very high in India. Whenever oil prices rise in the global market, oil companies pass it on to us, but when it lowers by $10, they pass on $5 and retain the rest with them," Mallya argued.

The recent surge in ATF prices had raised concerns about the domestic airline industry's ability to sustain the high growth rate in the sector.

With increased dependence on price-sensitive customer segments, the fate of airlines would significantly depend on managing fuel prices, Mallya added.

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