Airlines bet high on ATF futures as MCX tweaks trading norms

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New Delhi, Sep 5: With crude falling to five-month low on Wednesday, the aviation industry is not willing to repeat its mistake. All the airline companies have begun examining seriously the option of trading in aviation turbine fuel (ATF) futures on the multi-commodity exchange (MCX).

The MCX on its part has decided to modify ATF contracts to better suit the aviation industry and has already approached the Forward Markets Commission (FMC) for its approval. For even the slightest change in any contract, the exchange has to get FMC approval.

Premier low-cost carrier Spicejet has already hired brokerage firm Karvy Comtrade and begun trading in contracts on Monday. The company hopes to save more than 20% of its fuel bill from futures trading and hedging its fuel risk in the wake of volatile fuel prices, chief financial officer Parthasarathi Basu said on Tuesday. “The first hedge has been done on Monday,” Basu said.

ATF has 95% correlation with crude oil prices and accounts for about 40% of an airline’s operating costs in India. Globally, fuel contributes only 20-25% of the operating costs.

Public-owned Air India is also looking at hedging, sources said, but will be more cautious this time. In India, ATF is 65% more expensive than in other countries. Indian carriers bought ATF at Rs 71,630/kilolitre in Mumbai in July 2008, while the fuel was priced at Rs 45,159/kilolitre in Singapore.

On August 31, Indian fuel companies slashed ATF prices by 16%. The airlines in India, however, have refused to slash airfares. They believe the ATF prices must fall by another 40% before they start making profits and overcome the huge cumulative losses incurred over the past few years.

Interestingly, ATF is produced in surplus in India and is also exported but it is the only non-subsidised fuel in the nation. Due to cross-subsidisation, ATF prices are kept high to allow subsidisation of other petroleum products. Import Parity Pricing mechanism of oil companies, state sales taxes, custom and excise duties and throughput charges also contribute to the high cost of ATF.

The annual consumption of ATF in the last few years shows amazing growth. In 2003-04 oil companies sold 2,484 thousand metric tonnes (TMT); in 2004-05 around 2,813 TMT, 2005-06 saw sale of 3,299 TMT, 2006-07 of 3,983 TMT and in 2007-08 approximately 4,500 TMT of ATF was consumed.