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Wake up and smell the jet fuel
27 March 2009
Adopting the right hedging strategy is an essential component of risk management, but airlines must not overcomplicate the process and be cautious when doing over-the-counter deals
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oil
ATF
hedging
Air China
crude oil
ATF
What goes up must come down. The age-old law of physics can be applied to the price of oil – one of the most volatile commodities on the planet – after its price fell back down to earth with gravity-defying speed last year.
With a barrel of oil marching towards $150 in July (hitting a peak and all time high of $147) it has now plunged to around $53, with some analysts declaring the commodity boom over.
Aviation turbine fuel (ATF) accounts for a large portion of airlines’ operating costs (40% in the case on Indian carriers), and managing this hefty cost is perhaps the most vital component in a carrier’s risk management practices.
Hedging can be an effective tool in mitigating the impact of wild fluctuations in price, affording a degree of stability and allowing airlines to plan for the future by locking in prices.
But many airlines were...
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