MyValueResearch

Aviation turbine fuel (ATF)

Aviation turbine fuel (ATF) is heavy hydrocarbon oil. It is generally of a higher quality than fuels which is used in less critical applications such as heating or road transport. It is dispensed from specially designed refuellers, which are driven up to parked airplanes and helicopters. It continues to be the single largest cost factor for airlines constituting nearly 40% of the total operating costs.

Besides providing a source of energy to power the aircraft, fuel is also used as a hydraulic fluid in engine control systems and a coolant for certain fuel system components. There is only one type of jet fuel, kerosene type, in civil use worldwide.

The performance of ATF is especially determined by the characteristic of its hygiene, combustion and its characteristic at low temperature. According to these specification, AVTUR (Aviation Turbine) complied the requirements needed such as has a freeze point maximum of -47°C and a flash point minimum of 38°C (100° F).

The price of ATF in India is based on International Import Parity prices. However, the ATF supplied by Indian oil companies is refined in India from imported crude. There is no direct import of ATF. The import duty on ATF is 20 per cent but the import duty on crude is only 10 per cent. Still, the oil companies charge a 20 per cent add-on to the Refinery Transfer Price (RTP). The refinery transfer price (RTP) is the price at which oil marketing companies (OMCs) lift products from the refineries.

For the first time in India, MCX has launched future trading in ATF in a response to increased demand for ATF due to the introduction of budget airlines and increased air-traffic in India. Airlines industry and oil refineries no longer have to face the problem of turbulent oil market Through ATF contracts customers can get an additional opportunity to trade with all the advantages of a domestic exchange.

Companies like BPCL, HPCL, IOC, Nacil, Go Air and Jet Airways have already evinced interest in hedging on the MCX platform. The companies willing to hedge on MCX crude will be exposed to the same volatility as NYMEX WTI crude as the price correlation between these two has ranged from 0.97 to 0.99 over the past three years since the launch of crude contracts on the MCX platform.

Aviation Companies get benefit from hedging on MCX. Suppose crude price weakens, the loss in the futures market the company will get compensated by getting a benefit in the spot market, as they will buy ATF at a lesser rate. As per the recent guidelines of the ICAI any profit/loss on account of hedging transactions in relation to the company’s business can be setoff against normal business profit/loss.

A change in the ATF pricing scenario can come about from a combination of several factors - such as a reduction on the duties of imported ATF, reduction in base price by the oil marketing companies, rationalization of tax structure, allowing trading ATF as a commodity on MCX, hedging of ATF and allowing the market forces to play their role as well.

ATF Pricing Structure

Drivers and Restraints of Aviation Fuels Market

ATF trade exchange
Tokyo Commodity Exchange (TOCOM)
Central Japan Commodity Exchange (C-Com)
New York Mercantile Exchange (NYMEX)
Multi Commodity Exchange (MCX)