February 3, 2003, Moscow. Aeroflot – Russian Airlines carried out a tender on selecting banks that offer hedging (insurance) services of prices for the obtained aircraft fuel.
The closed competition for the right of hedging of aircraft fuel that Aeroflot buys at the foreign airports is carried out among the banks that are significantly experienced working in this market. Russian banks as well as affiliate credit organizations of the largest foreign banks registered in Russia were invited to take part in this competition.
Four banks were chosen among fifteen participants. They are Russian Alfabank and MDM Bank and also two affiliates of the foreign banks – Deutschebank and Citybank. The choice of this quantity of banks is not occasional. Aircraft fuel volumes that Aeroflot is going to hedge are quite significant. Each bank is ready to propose a contract for hedging the company’s aircraft fuel. For these banks there will be fixed credit lines within which Aeroflot will start hedging prices for aircraft fuel. The work on hedging will be carried out in Moscow, and the deals themselves are going to be registered at St. Petersburg Currency Exchange.
In Aeroflot budget the expense item has amounted to about 20%. Hedging will provide the company’s insurance against possible risks of price increase for aircraft fuel and will also help not suffer losses if they reduce. Hedging aircraft fuel volumes will be determined by the Board of Director of Aeroflot.
From January 1, 2002, the Tax Code of Russia introduced for the first time the notion of deal on hedging. Insurance against risks is getting to be a usual practice among Russian carriers. They insure 30%-50% of fuel from the total purchase depending on the degree of risk.
According to Sergei Sukovatov, the Director of Aeroflot Treasury Operations Department, hedging of the market risk for aircraft fuel will bring an element of stability into the company’s activities, reduce uncertainty of the future financial flows and provide more efficient financial management.