Fuel Hedging a Strategy for Air Carriers to Combat Fuel Hike
Fuel Hedging
A Strategy for Air Carriers to Combat Fuel Hike
Index
Jet Fuel – The Nemesis of Airlines
In the year 2008, the growth of global aviation industry received a major bolt from the fear of global economic slowdown and the rise in crude oil prices. Though the global economic uncertainties impacted the business of airlines, but the steep surge in crude prices has changed the financial equations of the airline across the world, with India being no exception.
In fact over the previous ten months crude prices have increased over 80 percent, from nearly $80 per barrel in October, 2007 to $147 per barrel in June, 2008. A similar increase was seen in the case of Arabian Gulf Jet prices. As per the figures released by IATA (International Air Transport Association), fig. 1, the price of Jet Fuel, as on 1st Aug’07, has increased by 314.5% since 2000, and almost 70% since August last year. IATA has forecast the loss in aviation sector to be nearly USD 2.3 billion (more than 9500 crores) in 2008.
|1-Aug-08 |
Fig. 1
Aviation Turbine Fuel more popularly known as ATF or Jet Fuel, continues to be the single largest cost factor for airlines constituting nearly 40 per cent of the total operating costs. Hence as ATF prices start to increase, airlines typically respond by raising fuel surcharges. Only Rs. 225 of the surcharge is payable to AAI (Airports Authority of India); the balance goes to the airlines.
In the past six months alone, fuel surcharge has increased from nearly Rs 950 to Rs 2,350. That’s nearly an increase of 150%. Considering a basic fare of Rs 1,000(say) and other charges being constant, cost of flying has nearly doubled. That is deterring the low and middle income group travelers who were beginning to switch to air travel mode from traveling by railways.
The rise in crude prices is hurting both high end
A Strategy for Air Carriers to Combat Fuel Hike
Index
Jet Fuel – The Nemesis of Airlines
In the year 2008, the growth of global aviation industry received a major bolt from the fear of global economic slowdown and the rise in crude oil prices. Though the global economic uncertainties impacted the business of airlines, but the steep surge in crude prices has changed the financial equations of the airline across the world, with India being no exception.
In fact over the previous ten months crude prices have increased over 80 percent, from nearly $80 per barrel in October, 2007 to $147 per barrel in June, 2008. A similar increase was seen in the case of Arabian Gulf Jet prices. As per the figures released by IATA (International Air Transport Association), fig. 1, the price of Jet Fuel, as on 1st Aug’07, has increased by 314.5% since 2000, and almost 70% since August last year. IATA has forecast the loss in aviation sector to be nearly USD 2.3 billion (more than 9500 crores) in 2008.
|1-Aug-08 |
Fig. 1
Aviation Turbine Fuel more popularly known as ATF or Jet Fuel, continues to be the single largest cost factor for airlines constituting nearly 40 per cent of the total operating costs. Hence as ATF prices start to increase, airlines typically respond by raising fuel surcharges. Only Rs. 225 of the surcharge is payable to AAI (Airports Authority of India); the balance goes to the airlines.
In the past six months alone, fuel surcharge has increased from nearly Rs 950 to Rs 2,350. That’s nearly an increase of 150%. Considering a basic fare of Rs 1,000(say) and other charges being constant, cost of flying has nearly doubled. That is deterring the low and middle income group travelers who were beginning to switch to air travel mode from traveling by railways.
The rise in crude prices is hurting both high end
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