A-I to hedge fuel price risk through derivatives

Air-India has become the first airline in India to hedge its jet fuel price risk by using derivatives contract on international commodity markets.

Air-India's fuel bill in the last fiscal was Rs 2,200 crore, with 55 per cent of its fuel requirement being uplifted overseas.

"The airline will hedging over 10 per cent of total overseas uplift. Air-India will hedge for approximately 10,000 barrels per quarter," Air-India Company Secretary S Venkat told Business Standard.

The airline is hedging in Singapore market. But as and when it gains experience, the airline will be hedging in different market and increase volume for hedging, Venkat pointed out.

Citigroup has been chosen as the hedging counter party for maiden fuel hedging transaction while Ernst & Young would act as consultant for handholding assistance in fuel price risk management.

Jet Airways has also obtained approval from the Reserve Bank of India (RBI) for hedging their fuel uplift overseas. Other domestic airlines are also mulling fuel hedging as jet fuel prices was volatile during the last few years exposing to significant fuel price risk.

Considering that the jet fuel cost constitutes almost 30 per cent of its total operating costs, Air-India decided to proactively manage this risk using a combination of derivative instruments such as jet fuel swaps, options and collars.

"The risk management function is expected to help in reducing the volatility in cash flows, protecting profit margins and resulting in better cash management. It is also expected to help enhance Air-India's competitiveness in international markets," Venkat added.

Commenting on the contract, Sanjay Nayar, CEO, Citigroup India said : "This transaction will leverage group's global commodities hedging expertise and introduce new structures and asset classes in the Indian market.