Commodity bourses plan to launch ATF futures

The Multi Commodity Exchange of India (MCX) and the National Commodity & Derivatives Exchange (NCDEX) are firming up plans for launching future contracts in aviation turbine fuel (ATF).

"The exchange was working on the ATF contract specifications and the exercise would be completed within a week," said Jignesh Shah, managing director of MCX.

NCDEX Chief Executive Officer and Managing Director P H Ravikumar said the bourse had initiated a study to look into prospects of ATF contract and would arrive at a decision in a month.

This move would help airlines to control the fuel cost which is anywhere between 20 and 25 per cent of the airlines' total operating cost. For example, the fuel budget of Air-India for 2004-05 was Rs 2,100 crore against Rs 1,339.75 crore in 2003-04. This rise was mainly owing to increase in ATF prices.

Moreover, excise duty on ATF is levied at 8 per cent and sales tax at all the stations ranging between 4 per cent and 30.55 per cent. This is also affecting the fuel cost of the airlines.

However, industry experts are keeping their fingers crossed on the success of the future contracts as this would be the first of its kind and therefore, nobody knows the number of participants that may take part in the trading.

Ravikumar said there should be sufficient participation in an ATF contract for the success of the product. "I hope at there will be enough participants including oil companies and airlines. More participants are required for better price discovery," he said. At present, there are three oil marketing companies - Oil Corporation of India, Bharat Petroleum Corporation and Hindustan Petroleum Corporation - into ATF sale.

The users and suppliers of ATF are limited. Domestic airlines are busy securing the approval of the Reserve Bank of India (RBI) for hedging jet fuel prices in the overseas market.

Air-India and Jet Airways have already secured permission for hedging fuel in the international market. Air Deccan and other private airlines are in the process of applying with the government for hedging arrangements.

Earlier, private airlines were not permitted to enter into fuel hedging in the overseas market due to government regulations while international airlines hedge 50 to 70 per cent of their fuel cost exposure.

The airline entering into fuel hedging need to implement risk management policy in addition to prior approval of the Reserve Bank of India (RBI).

"As part of the risk management policy, the company should appoint an internal committee to lay down hedging parameters, risk exposure limit and risk appetite. It should indicate the extent of risk exposure and risk left uncovered in its annual accounts," sources said.

The airlines need to enter into agreement with International Swap Dealers Association (ISDA) and should appoint international bankers for hedging transactions, they said.