The Hindu Business Line : AI commences jet fuel price risk hedging

Air India has become the first airline in the country to hedge its jet fuel price risk. The airline last week used a derivatives contract on the international commodity markets for the first time.

An airline spokesperson said that the airline had hedged 10,000 barrels for March in the Singapore market last Friday. However, he did not specify the price at which the contract was put through.

The national carrier has decided to initially hedge 10 per cent of its international uplift and based on the experience may enhance it.

International airlines normally hedge 50-60 per cent of their fuel requirements to protect against upward spirals in the cost of fuel.

Jet fuel costs constitute almost 30 per cent of Air India's total operating costs.

Derivative instruments

The airline will use a combination of derivative instruments such as jet fuel swaps, options, and collars to hedge its fuel price risk.

Its fuel bill in the last fiscal stood at Rs 2,200 crore, with 55 per cent of fuel requirement being uplifted overseas.

An Air India spokesman said: "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 in enhancing Air India's competitiveness in international markets."

Earlier, Citigroup was awarded the contract to undertake hedging of jet fuel on behalf of Air India.

Mr Sanjay Nayar, CEO of Citigroup India, said: "This transaction is another milestone in Citigroup's efforts to leverage its global commodities hedging expertise and introduce new structures and asset classes in the Indian market."

Ernst & Young, with expertise in commodity price risk management, are Air India's consultants for handholding assistance in fuel price risk management.