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Monday, 1 July 2013
Rupee Fall Said to Prompt Carrier to Hedge Fuel: Corporate India
By Karthikeyan Sundaram & Jeanette Rodrigues - Jul 2, 2013 8:45 AM GMT+0400
Air India Ltd. plans to hedge jet fuel for the first time in five years as the rupee’s fall to a record boosts costs for the airline that’s striving to narrow losses, two company officials familiar with the matter said.
The airline has decided to start locking in fuel prices once Brent crude drops below $100 a barrel, according to the officials, who asked not to be identified, citing company policy. Brent for August settlement rose 6 cents to $103.06 a barrel on the London-based ICE Futures Europeexchange at 1:30 p.m. Sydney time. The airline may also go for currency hedges if the rupee weakens further against the U.S. dollar, one of the officials said.
An Air India Ltd. aircraft flies over a bus as it prepares to land at Chhatrapati Shivaji International Airport in Mumbai. Air India narrowed losses to 52 billion rupees ($873 million) in the year ended March from a record 75.6 billion rupees a year earlier. Photographer: Dhiraj Singh/Bloomberg
The rupee’s one-month implied volatility has surged 452 basis points last quarter, the most since September 2011, indicating greater risks of exchange-rate swings. Photographer: Prashanth Vishwanathan/Bloomberg
The rupee’s 8.6 percent depreciation last quarter boosts foreign expenses, masking repatriated gains from higher value of tickets Air India sells overseas. The airline’s domestic fuel bills are also dollar-based, and hence the greenback’s gain hurts efforts to return to profit after six consecutive years of losses through March 31, said one of the officials.
“The key to lowering costs lies in efficiently choosing several options that give the maximum benefit,” said Mark D. Martin, chief executive officer of Dubai-based Martin Consulting LLC that advises airlines on cost optimization. “Hedging fuel makes sense, while doing the same with currency helps safeguard from cost over-runs.”
Hedging jet fuel is one of the options that will help Air India in its turnaround plan, G. Prasada Rao, a spokesman for the state-run carrier, said. He declined to comment specifically whether the company has decided to hedge for fuel.
AirAsia Bhd. (AIRA), the region’s biggest discount carrier that is setting up an Indian venture, hedged 35 percent of its fuel consumption as of March 31, according to data compiled by Bloomberg. Singapore Airlines Ltd. (SIA) has hedged 57 percent of its fuel needs for the year ending March.
Most European airlines are hedging at least 75 percent of their jet fuel needs, according to data from nine carriers compiled by Bloomberg. Ryanair Holdings Plc, Europe’s biggest discount airline, has hedged 90 percent of its fuel requirements for the year through March 2014.
High fuel prices and cut-rate fares have pushed Indian carriers into losses even after passenger traffic more than doubled in the past seven years. Airlines in India lost about $1.65 billion in the year ended March 31, according to CAPA Centre for Aviation, a Sydney-based consultant.
Air India, based in Mumbai, last hedged fuel in 2008. The quantity hedged was less than 10 percent of its total consumption, according to one of the officials.
Air India narrowed losses to 52 billion rupees ($873 million) in the year ended March from a record 75.6 billion rupees a year earlier. It targets to further reduce losses this year to 39.9 billion rupees, Chairman Rohit Nandan said May 14.
The rupee fell to an all-time low of 60.765 per dollar on June 26 after U.S. Federal Reserve Chairman Ben S. Bernanke said on June 19 the monetary stimulus, which has fueled demand for emerging-market assets, may end next year. The Indian currency rose 0.3 percent to 59.3650 a dollar at 10:14 a.m.
The rupee’s one-month implied volatility has surged 452 basis points last quarter, the most since September 2011, indicating greater risks of exchange-rate swings. The rate rose 25 basis points to 12.34 percent today.
Jet kerosene prices in Singapore declined 7.1 percent this year, while Brent crude has fallen 7.4 percent, according to data compiled by Bloomberg. Air India expects crude to rebound to $110 a barrel later this year, one of the officials said.
Brent, which dropped 7.1 percent in the second quarter, may extend its decline because of technical resistance, according to data compiled by Bloomberg.
“In hedging, some are very lucky and some turn out very unfortunate,” said Harsh Vardhan, chairman of New Delhi-based Starair Consulting that advises airlines. “Air India must have its own reasons to go for it.”