This June, as oil prices surged during the Hormuz crisis, McKinsey issued a cautious warning to global airlines, not just India’s. It pointed out that fuel costs about a third of a ticket, and most increases are passed on to consumers, potentially raising fares worldwide by 20-25%. India shares this impact. However, the reassuring part of McKinsey’s message — that airlines which hedged fuel costs will mostly safeguard their margins — does not apply to India. Since Indian carriers have not hedged, ICRA predicts they will lose between Rs 36,000 and Rs 38,000 crore this year. The world’s airlines raise fares and continue; India’s airlines suffer. The key difference? Hedging.
Hedging isn’t an exotic gamble; it’s a response to a structural peculiarity. Airlines sell tickets for future flights, such as a Diwali trip in June, and collect payment now, but they only buy fuel closer to the departure date in October. This allows them to set a price before knowing their biggest expense. A hedge simply stabilises the future cost tied to tickets already sold. Here, not hedging is a gamble an airline is making.
The refusal to manage fuel price risk is ingrained in their practices. Look at the annual report of IndiGo or any major Indian airline, and you will see a section mandated by regulators titled “disclosure of commodity price risk and hedging activities”. It mentions the threat of fuel price fluctuations, but when asked about their positions, they discuss only currency hedging. Each year, Indian airlines disclose this risk yet choose not to hedge against it, passing the jet fuel spot price directly to passengers or shareholders. Conversely, airlines praised by McKinsey, like Ryanair, locked in fuel costs at around $67 per barrel for the following year; Lufthansa and British Airways’ parent, IAG, hedged most of theirs; and they all endured the spike with minimal impact on fares. Southwest, with the longest profit streak, employed similar discipline and only hedged when the risk was significant, showing that hedging is a strategic tool to address looming danger, not a constant commitment.
The refusal has its supporters. Choosing not to hedge has benefitted IndiGo for 10 years, avoiding hedge management issues and accounting complications; hedging can cause harm, and Indian airlines have faced setbacks before. Even major American carriers now don’t hedge. However, this suggests the need for smart hedging rather than outright refusal, and for developing the market that would enable effective hedging.
India’s airlines start with a heavier burden. Jet fuel accounts for about 40-50% of their operating costs, compared to roughly 25% globally, mainly due to taxes. Since aviation turbine fuel (ATF) is outside the GST system, it incurs both central excise and a state value-added tax, which can reach up to 30% in some regions. This tax-on-tax policy makes Indian fuel prices about a third higher than those at Gulf or Southeast Asian hubs. For airlines already spending half on fuel, each price increase hits twice as hard. Those without hedging feel the impact acutely, with no buffer in between.
Even airlines seeking to hedge face difficulties due to the lack of a substantial market. Although India trades crude oil futures, these are a limited rupee-based proxy: most liquidity concentrates in the front month, with distant contracts trading very little. Hedging a year ahead involves rolling over the near month repeatedly, incurring costs from a contango, trading fees, and the commodity transaction tax each time. Participating in a foreign derivative would introduce the same currency risk they try to avoid. Moreover, they track crude oil prices rather than jet fuel, leaving the crack spread — highlighted by McKinsey as unusually wide this year — exposed. Essentially, there is no liquid market in the actual fuel that airlines use.
The government has begun handling hedging directly. Recently, the Cabinet approved a Rs 10,000-crore ATF Price Stabilisation Fund, which keeps fuel prices at Rs 115 per litre for up to three years and compensates oil companies if market prices rise. Essentially, this amounts to the government providing a fuel hedge for private airlines. We have seen similar risks before, such as the sovereign gold bonds from 2015, which aimed to reduce gold imports and the associated foreign exchange drain. The government ended up bearing the gold price risk, and as gold prices trebled, the liabilities exceeded `1 lakh crore until the scheme was quietly discontinued in 2024. Likewise, the ATF fund is a bet on oil prices, and if oil prices remain high, taxpayers will bear the cost. That’s a public subsidy to stabilise the private balance sheet.
A better solution exists, involving two interconnected steps. First, expand the market by developing a comprehensive, cleared, and margined market for jet-fuel risk, transforming crude-oil futures into this space. License major natural counterparts — such as Reliance, ExxonMobil, and bank treasuries — to operate under Sebi and RBI oversight, enabling them to enter into these contracts. Since refineries profit during months when airlines struggle, they are ideally positioned to serve as protection sellers. Second, mandate that all scheduled carriers adopt this approach by implementing a board-approved hedging programme, disclosed and audited quarterly, similar to how they currently manage currency risk.
Aviation has become a crucial pillar of India’s economy, ranking as the third-largest air market worldwide. It is highly concentrated, with two major groups accounting for nearly 90% of domestic passengers. When one of these dominant players collapses, it doesn’t just redistribute travellers; it also results in lost connectivity. India has experienced the collapse of several carriers, such as Kingfisher, Jet, and Go First, illustrating how swiftly a low-margin industry can fail. Ultimately, an airline doesn’t just sell seats; it offers time — the assurance that allows an exporter to promise next-day delivery or a surgeon to perform operations across cities by morning. This certainty is what hedging provides, yet India’s skies still lack that assurance.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.