Page 233 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes While the industry has differing levels of hedged exposure, at least the airline industry
has awoken to the danger and the subsequent need to offset risk. However, one possible
obstacle is the difficulty for airlines to find the appropriate exchange-traded contracts to
manage their jet fuel exposure.
Southwest Airlines stated in its latest quarterly filing to US Securities and Exchange
Commission: “Because jet fuel is not traded on an organized futures exchange, there are
limited opportunities to hedge directly in jet fuel.”

Yet all is not lost. The airline added: “We have found that financial derivative instruments
in other commodities, such as crude oil and refined products such as heating oil and
unleaded gasoline, can be useful in decreasing exposure to jet fuel price volatility.”
Although the airline believes that the use of crude oil and other commodities allows them
to hedge its oil market exposure, life may have just got a little tougher. After all,
Commodity Futures Trading Commission (CFTC) has amended its no-action letter to
ICE, which means that its European bourse will be subject to the same position limits as
Nymex, after pressure from many prominent US politicians to curb oil market speculation.
“This powerful combination of enhanced trading data and additional market controls will
help the CFTC in its surveillance of regulated domestic exchanges, while preserving the
important benefits of our international recognition programme that has enabled proper
global oversight during the last decade. This raises the bar for all future foreign access
requests and will ensure uniform oversight of linked contracts,” says CFTC acting chairman
Walt Lukken. “These new conditions for foreign access will provide the CFTC with
additional oversight tools to monitor linked contracts”.
Exchange Innovation

While the trading on the crude oil contract may be slightly more difficult for the airlines,
some exchanges are poised to launch jet fuel derivatives, allowing the industry the correct
tools to offset risk.
Multi Commodity Exchange of India (MCX) is one such exchange set to launch Aviation
Turbine Fuel (ATF) futures, providing Indian carriers a more effective mechanism to
hedge spiralling prices. The move, which has received approval from the commodity
market regulator Forward Markets Commission, will enable airlines to hedge fuel price
on a domestic exchange, rather than an overseas one, as they do at present. With fuel costs
accounting for about 10% of operating costs, the contract could provide significant cost
savings for airlines in the country.
“This future trading, once allowed, shall be good news for both domestic airlines bogged
down by steep ATF fuel bills and the passengers who are forced to pay a disproportionately
higher fuel surcharge on their air tickets,” says Nishant Joshi, senior associate at Armchand
Mangaldas, a Delhi-based law firm.
Although airlines can hedge on foreign exchanges, there is a cap in place. Spice Jet hedges
10% of its fuel jet consumption on the Sing Kero exchange in Singapore. Jet fuel trading on
MCX will therefore allow Indian carriers to increase substantially the amount they hedge.
ATF prices in India are 50% higher than international prices – making them among the
highest in the world. But the launch of these AFT futures will take place after the Indian
exchange studies the financial environment and finalizes a contract, which may take some
time.
MCX, however, will not be alone in the market. Dubai Mercantile Exchange and Russian
exchange, RTS, have also confirmed that they both intend launching jet fuel contracts.

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