Macroland

Fuel hedging is a tool used by airlines, to reduce their exposure to volatile and potentially rising fuel costs. A fuel hedge contract allows an airline to lock in a guaranteed amount of fuel for future consumption at a fixed price.
The actual amount of fuel that is hedged varies from airline to airline and depends on internal risk assessment and projections of where the market could go. Singapore airlines for example, has hedged about 65 percent of its needs until the end of March.

When fuel prices increase, airlines benefit from hedging. But on the flip side, when prices fall as they have in recent months, carriers end up paying more than the current market price.

Despite the risk, many airlines still prefer to hedge given volatile oil price.. This is because it gives them certainty in their fuel expenditure.. The cost of fuel accounts for as much as 40 percent of airlines operating costs.. Fuel hedging is also common in other industries such as shipping, transport and logistics.

There are many reasons why oil prices fluctuate. Production levels is a major one. A large part of the world's crude oil share is produce by OPEC nations and decisions the make to raise prices or reduce production has an immediate impact in the global commodity market.

Oil prices are also tied up to demand which has risen significantly in recent years due to high growth and demand from the emefing economies. On the supply side however, the jump has not been as great, hence the higher prices.

There is nothing more politically sensitive in Indonesia than raising the price of fuel. Price hiked have frequently sparked violent protests. Such protests brought an end to the rule of long-serving president Suharto in May 21,1998, after he hiked fuel prices by up to 70 percent in May 4 under pressure from the international monetary fund (IMF) as a condition of a US$43 billion bailout.. Riots and looting broke out on the streets in Jakarta, resulting in some 1200 deaths. In an attempts to mollify the angry public, the government subsequently revoked the hefty price increases and Mr Suharto resigned in May 21, 1998.

Subsidies on fuel began under the Sukarno era as a way to protect people from the effects of inflation.. By 1965, fuel subsidies alone absorbed 20 percent of the state's total revenue. Fuel subsidies acted as a buffer against rising living costs in a country where tens of millions of people still live on less than US 1 ($1.3) a day. The underlying rationale for subsidising fuel and other basic commodities was political. Mr Suharto believed that by ensuring price stability in basic necessities such as rice and kerosene, which is used for cooking by majority of Indonesians, he would achieve political stability. That system worked until the advent of the 1997 financial crisis when the collapse of the rupiah made it impossible for the government to sustain fuel subsidies. After Mr Suharto 's attempt to raise from to raise fuel prices sparked widespread roots which led to his downfall, his successors have been cautious about broaching the fuel subsidy issue - although cutting subsidies had been a necessity and fuel prices have been raised several times over the past 15 years, attracting significant protest each time.

Although many of the poorest Indonesians do not benefit directly from fuel subsidies, any hike in prices affects them as it drives up the prices of all items, Including basic necessities like food and clothing due to increased transport costs. The government has a longstanding fear that a price hike will push tens of millions of Indonesians below the poverty line stood at 28.3 million, or 11.25 percent of the total population, as of March 2014.they have a monthly income of below 300.000 rupiah ($33) per month.

Furthermore, pro poor advocate groups says the benefits of the government's proposed programmed using the funds saved from cut in duel so didoes will only flow to the poor later. They claim that the the poverty alleviation programmes look good on paper, they have historically been badly implemented and subject to graft the government officers. Thus convincing the country's poor, who depend on fuel subsidies to get by day-to-day, to take the hit now and to wait for benefits to materialise sometime in the future will be any president 's toughtest challenge.. Whole the economic rationale for slashing fuel subsidies is sound, politically it remains a very hard sell.

An increase in the price of a litre of petrol to make it even fractionally closer to the international market level would have to be accompanied by cash handout - similar to what Dr Susilo Bambang Yudoyono 's government gave in 2005 and 2008 - which were viewed as effective.

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