The Hindu Business Line : Fuel hedging will be future strategy, says AI chief

LACK of decisive action on fuel hedging is costing Air India (AI) dearly, as the country's international carrier struggles to come to terms with a fuel price regime that threatens to blow over the top.

"Fuel hedging ought to have been tried out earlier. But, we could not do it. We now have all requisite clearances now for hedging. Obviously, this is not the right time to try it out," Mr V. Thulasidas, Chairman and Managing Director, Air India, told Business Line here.

"But fuel hedging will be our strategy for the future. Also, improving fuel efficiency wherever we can," he added.

The IATA Fuel Savings Action Plan approved earlier this year agreed that fuel is the greatest threat to profitability. Based on an average price of $37 per barrel (Brent), the association estimated losses of $3 billion -$4 billion for the year. This figure could be much higher now.

The action plan aims to achieve cost savings and a more robust profitability. Globally, IATA's target is to achieve $1.5 billion in fuel savings this year.

According to Mr Thulasidas, rising fuel prices is the most serious threat being faced by not just AI but all others of its ilk. In March this year when the company was preparing its budget, it was looking at one dollar 15 cents per US gallon for crude.

"I believe it has gone up to one dollar 70/75 cents, if not higher. It's a huge increase; if prices don't come down, we're all going to be in very serious trouble."

And within India, the price is even higher. So, Indian carriers will be at a greater disadvantage. To compound matters, many states impose a sales tax on ATF for international flights.

This way, Air India — and Indian Airlines, in the limited manner it operates internationally — are affected. But foreign airlines are exempted from the levy altogether.

"Kerala is one State that has withdrawn the levy on ATF for international flights effective April 1 this year. But many others haven't," Mr Thulasidas said.

Answering a specific question, he said pricing strategies would have to undergo change in accordance with the costing strategies. But, unfortunately, achieving this was not easy in the international air travel industry.

"Unlike the domestic market, you can't decide on your own. You don't have the freedom because you are in a market along with many other players. IATA is the overall umbrella body for deciding on all these matters.

"There's fierce competition out there. So if the costs keep going up and competition leads to lowering of fares, airlines will be in serious trouble, as some of the US carriers have already proved."