Jet Fuel is crucial to IndiGo’s operations
Jet fuel currently accounts for over 40% of IndiGo’s total operating cost base, which is similar to other Indian airlines.
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Walsh said that IndiGo’s robust financial position allows the airline to absorb short-term fuel price spikes directly.
Amid surging jet fuel prices, the country’s largest airline IndiGo has no immediate plans for fuel hedging, but has started internal discussions on whether it should do so in future as its long-haul operations develop over the coming years, the airline’s CEO Willie Walsh said Monday. He also said that the airline is in talks with the government on potential measures to mitigate high jet fuel prices, adding that IndiGo is open to participating in future government schemes on the issue if they are economically viable for the airline.
No Indian airline participated in the government’s jet fuel price stabilisation fund (PSF) scheme when it was launched in June. According to sources in the know, the government could consider a revival of the scheme to provide stable fuel pricing to airlines amid extreme price volatility in the international market. The recent rise in jet fuel prices has prompted Indian airlines to hike fuel surcharge on flight tickets. Despite that, they continue to bleed as the surcharges aren’t enough to fully offset the impact of high fuel prices. In the September quarter, IndiGo reported a loss of nearly Rs 1,880 crore.
Jet fuel currently accounts for over 40% of IndiGo’s total operating cost base, which is similar to other Indian airlines. This leaves Indian airlines significantly exposed to global fuel price volatility. Unlike European carriers that hedge between 70% and 80% of their fuel needs, or Asian airlines that hedge around 40%, domestic Indian airlines currently operate completely unhedged. In fuel hedging, airlines use financial contracts to lock in future fuel prices and protect against sudden price spikes.
Walsh said that fuel hedging is fundamentally a risk management tool rather than a speculative bet on fuel prices, and because IndiGo’s domestic rivals remain unhedged, hedging individually for domestic operations would introduce asymmetric competitive risk for IndiGo. However, as the airline prepares to introduce wide-body Airbus A350 aircraft for long-haul international routes from 2028, its leadership has initiated discussions with IndiGo’s board to evaluate fuel hedging
“I think we do need to look at what we would do in the context of long-haul expansion given that most of the airlines that we are likely to compete with tend to be hedged at different levels. So we’re evaluating the hedging policy of the airlines that are currently serving the market…I think the long-haul expansion does give us an opportunity to review our hedging policies. We had some discussion with the board last week about that and have committed to come back at a future board meeting having undertaken a more detailed review,” Walsh told reporters in an interaction.
“It’s not something we do today. I think that’s the right decision for IndiGo. It may be something we do in the future. But if we are to change our policy, we will be very clear in terms of what our policy is and the reasons behind any change in policy. But at the moment we’re not hedging and we’re not planning to hedge until we’ve completed a comprehensive review,” he added.
On IndiGo’s decision not to join the government’s jet fuel price stabilisation scheme introduced in June, Walsh defended the choice as correct at the time, noting that the initiative focused primarily on short-term cash flow management. He said that IndiGo’s robust financial position allows the airline to absorb short-term fuel price spikes directly.
However, Walsh said IndiGo is engaged in “very constructive” discussions with the government regarding initiatives to manage fuel price volatility.
“Obviously, we’ll review the proposed scheme that the government is looking at and you know, if it makes sense we will participate in it. As I said, I acknowledge that the government is working hard to come up with a scheme that will help consumers and help airlines in the short term given the very volatile situation that we see,” the IndiGo CEO said.
Walsh pointed out that the current surge in aviation turbine fuel expenses is heavily driven by historic crack spreads — margin between crude oil and jet fuel. While the long-term historical crack spread averages around 22%, it has spiked to roughly 65% due to global refining capacity disruptions due to geopolitical conflicts, primarily the West Asia war.
The Rs 10,000-crore jet fuel PSF scheme was first announced in June amid soaring jet fuel prices, but lapsed after it failed to attract any airline at the time as prices moderated shortly afterwards on hopes of truce in the West Asia conflict. However, jet fuel prices have surged again as the conflict drags on, leading to major disruptions in global energy flows.
Under the PSF scheme, which didn’t find any takers among airlines at the time, the oil marketing companies (OMCs) were to sell jet fuel to participating Indian airlines for their domestic as well as international flights at a fixed price irrespective of the price fluctuations in the international market. The OMCs were to be compensated from the Rs 10,000-crore price stabilisation fund when they incurred losses on ATF sales. When international prices fell, the OMCs’ gains were used to offset the financial support that was provided to them.
The government expected this arrangement, which was to be in place for up to three years, to ease the pain for the OMCs as well as Indian airlines, and rein in runaway airfares due to fuel price pressure. It was a voluntary facility only available to Indian airlines, and was to be implemented through an agreement between the airlines and the OMCs, under which the carriers had to commit to procure fuel exclusively from the OMCs for up to three years.
The stable jet fuel price level under the scheme was set at Rs 115 per litre in Delhi, with price levels varying at different airports due to differences in state taxes. However, soon after the scheme was announced, prices fell below the fixed price level as global prices eased amid hopes of a resolution in the West Asia conflict. As none of the Indian carriers signed up for the scheme within the prescribed timeline, it was allowed to lapse.
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