Govt may let airlines hedge fuel price risk

ATF prices for domestic operations include 10% Customs duty, 8% excise duty and sales tax.

Domestic airlines may soon be able to hedge their risk of jet fuel prices. The government is considering a proposal to allow Indian carriers to hedge the price risk of aviation turbine fuel (ATF) purchased from oil marketing companies in the country.

Currently, fuel hedging is allowed only for international fuel uplifts, as the regulation allows hedging only if airline companies are physically importing or exporting jet fuel. ATF procurement is restricted through oil marketing companies.

Sources said the government had asked the Reserve Bank of India (RBI) to examine the possibilities of developing a mechanism that will enable hedging the prices in the Indian market.

"If RBI permits, airlines will be able to fix the price of jet fuel with oil marketing companies through a banking institution. This will enable airlines to arrest the impact of spiralling fuel price hike," sources said.

When contacted, RBI officials declined to comment on the issue.

Jet fuel prices have moved higher by nearly 80 per cent in the last 2 years and by 300 per cent since 1999.

Said Air-India Chairman and Managing Director Vasudevan Thulasidas, "ATF pricing is a major issue for airlines. Fuel accounts for close to 40 per cent of the total operating costs for airlines in India. Currently, there is a huge disparity in ATF prices in India, where the price for domestic operations is approximately 70 per cent higher than the international benchmarks."

For instance, ATF prices as on December 2006 were at Rs 37,800 per kilolitre for domestic flights and Rs 28,450 per kilolitre for international flights from India while international jet fuel price was at Rs 21,400 per kilolitre. This means jet fuel price in India is 76.63 per cent higher than international prices.

The Federation of Indian Airlines (FIA), the apex association for domestic airlines, has recommended the government to allow Indian carriers to hedge their ATF price risk, similar to many global airlines. International carriers such as Lufthansa and British Airways had used hedging for effective risk management.

Said Capt G R Gopinath, managing director, Air Deccan, "We have asked the finance ministry to allow domestic airlines to hedge up to 50 per cent of the total domestic fuel uplift."

The estimated fuel bill for the industry was around $1.7 billion based on the September 2006 rate of jet fuel.

ATF prices for domestic operations include Customs duty of 10 per cent, excise duty of 8 per cent and sales tax averaging across the country at 23 per cent, besides marketing margins by oil companies.

The FIA wants the government to reduce Customs duty on ATF for domestic operations. It also wants the excise duty to be brought down to 4 per cent. It hopes that the ATF will be granted "declared goods" status, thereby being able to attract a uniform 4 per cent sales tax across India".