Air India to hedge jet fuel lifted overseas to cut costs

In a major step to slash costs, Air India today cleared a proposal to enter into hedging of aviation turbine fuel its airplanes lift overseas, officials said.
A maximum of 5,00,000 barrels of jet fuel, lifted abroad, would be hedged each quarter at a price of up to USD 110 per barrel, as per a decision taken by the airline Board's Finance Committee which met here today.
A small committee has been set up to take the process forward, with the airline identifying organisations like J P Morgan, Citibank and GDF Suez to carry out the fuel hedging, the officials, requesting anonymity, told PTI.

Fuel hedging is a contractual tool large fuel-consuming companies like airlines use to reduce their exposure to volatile and potentially rising fuel costs. A fuel hedge contract allows such a company to establish a fixed or capped cost through a commodity swap or option.
Maintaining that the jet fuel budget of Air India was close to Rs 9,000 crore for 2013-14, they said it amounted to 45 per cent of the total cost and almost 60 per cent of the total revenue. The airline also pays about Rs 600 crore as sales and other taxes on ATF to state governments per year.

Asked why the airline was not interested in direct import of fuel which has been allowed by the government, the officials said it was not at all economical since the smallest package of jet fuel would be one tanker of 10,000 KL which would be a much more than required each month.
A problem after a tanker was brought into a port like Chennai was of storage and transportation, they said, adding that ATF converted into kerosene if stored for a long period.
The officials were upbeat over the induction of Boeing 787 Dreamliners, which were at least 15 per cent more fuel efficient than competing planes of similar size and range.