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Fuelling worries

Crude oil and its derivatives has always been a controversial commodity around the world and aviation turbine fuel is no different. High prices, especially due to tax issues, are spoiling the party and perhaps keeping India from becoming a truly international aviation hub. By Gayatri Vijaykumar

The economics of crude oil can be summed up in one word - interesting! While nations wage war against each other to acquire this precious commodity, oil in turn plays its own little game with world prices.

At the moment, it’s wreaking havoc on the civil aviation sector in India. Even though increased competition amongst domestic carriers has helped reduce airfares, the spiralling cost of aviation turbine fuel (ATF) has ensured a pressure cooker-like scenario. With ATF accounting for approximately 40 per cent of an airline's operating cost, rising fuel prices in many cases are offset by increasing the fuel surcharge component in the air ticket. A recent example is Jet Airways announcing a Rs 300 hike on its Club Premiere and Economy Class tickets on all domestic routes. As per its press statement, the hike had become necessary in view of the escalating fuel prices.

What makes it worse is that ATF prices for domestic operations in India are unduly higher than international benchmarks - an average of 65 per cent higher than the international rates - resulting in a tremendous financial burden on Indian carriers. Federation of Indian Airlines (FIA) statistics state that the ATF price in India is Rs 37,800 per kilolitre as against the international price of Rs 21,400 per kilolitre, which is about 77 per cent higher (at December 2006 prices).

FIA explains thus: ATF is the single-largest component affecting airfares. It comprises 40-45 per cent of the operating costs of carriers in India (as against 20-25 per cent of operating cost for overseas carriers). This is on account of the excessively priced ATF in India - which costs Indian carriers 70-90 per cent more than what it costs to uplift jet fuel in other regional centres like Singapore or Dubai.

According to the report, ATF is the fastest growing petroleum product for the Oil Public Sector Units - its sale having more than doubled between 2003 and 2006. Comparing prices in India versus other countries, the FIA says that ATF costs 92 per cent higher in Kolkata than Singapore, and 72 per cent higher in Delhi. As per October 2007 prices, the ATF price in Mumbai was Rs 41,105 per kilolitre as against the international price of Rs 23,064 per kilolitre. Also, the differentials charged at Indian airports are amongst the highest in Asia Pacific - in most cases about eight times higher. According to FIA estimates, a reduction in ATF prices by 60 per cent will have an impact by reducing airline losses by 25 per cent. This, when expressed in figures, would mean that rationalisation of ATF prices for domestic operations, to international benchmarks will result in an estimated annual savings of US$ 624 million for the airline industry. FIA adds that the high cost of ATF coupled with high airport charges in India have adversely affected India's prospects of emerging as an aviation hub.

This disparity between domestic and international ATF prices has been attracting a lot of concern from airlines. M Thiagarajan, managing director of Paramount Airways, says, "As part of the industry, we have been requesting various government forums for subsidies in ATF prices citing the non-parity levels with international costs. We are urging the government that certain parity levels have to be brought in as quickly as possible otherwise it will result in a constant fare variation in line with the increases in the ATF fuel costs."

Why the disparity?

Explaining the reason behind this disparity, FIA says that ATF prices for domestic operations include freight charges from the Gulf to India, customs duty of 10 per cent, domestic transportation and other charges, excise duty of 8.24 per cent (including cess), sales tax levied by the state governments averaging across the country at 25 per cent as add-ons to the AG prices, besides the oil companies' marketing margin, and throughput charges paid to the Airports Authority of India.

An FIA report adds that India is an ATF-surplus country, with its production being higher than consumption. Even though the ATF supplied at Indian airports (both for domestic and international operations) is not imported but is the product of crude refined in Indian refineries from imported crude, the customs duty of 10 per cent is taken into account in fixing the prices of ATF supplied to the airline operators. Also, though sales tax on ATF for Indian carriers flying international routes has been withdrawn, the tax on domestic routes still remains.

Secondly, the main suppliers of aviation turbine fuel in India are the three public sector units of Bharat Petroleum Corporation Limited, Indian Oil Corporation Limited and Hindustan Petroleum Corporation Limited. This monopoly has ensured that domestic airlines do not have many options. Though companies like ONGC, Reliance and Essar have been recently granted rights for marketing airline fuel, the non allocation of space at airports has prevented them from supplying fuel.

The good news, however, is that the ministry of civil aviation (MoCA) has urged the Airports Authority of India to develop common fuel facilities at airports. Hence, metro airports are planning to set up common oil fuel supply facilities which would enable players like Reliance and Essar to enter the ATF market. Commenting on the proposal of roping in private oil companies to market aviation fuel in India, Thiagarajan says, "The government needs to address this immediately. It would be a welcome move if the private oil companies can chip in towards cost reduction." However, with a major component on ATF pricing being the taxes applied by various state governments, the question of whether bringing in private players into marketing ATF would help in bringing down prices still remains.

Voicing a different opinion, Kiran Yadav, managing director of Aerobiz India, feels that bringing in private oil companies will reduce ATF prices only to a limited extent. According to him, the price of crude oil in the global market is more or less the same. It is the heavy taxes applied by the state governments which add to the cost. "Private oil marketing companies might bring in competition. After all, private enterprises have to be encouraged for any economy. But since a large chunk of ATF pricing in India consists of state government taxes, private oil companies might not make a drastic difference," says Yadav.

Another reason for the disparity in fuel prices according to the FIA is that in most instances, when there are increases in benchmark oil prices, the corresponding increase passed on to airlines in India is higher than the increase in benchmark prices. Conversely, when benchmark prices have been reduced, the corresponding decreases have not been fully passed on to airline operators. In addition, the oil companies also add high margins in handling and distribution costs to fix the basic price of ATF in a non-transparent manner.

The airstrip ahead

The FIA and individual airlines have been approaching MoCA requesting for reduction in ATF prices. "We have approached the civil aviation ministry to work out uniform taxation system throughout the country and to allow fuel hedging between airlines and banks," says a Deccan spokesperson. According to the FIA, the ministry has been extremely proactive and supportive with regards to the industry's issues on ATF pricing. "It has been helping in taking up the issue with the Ministry of Finance and the Union Ministry for Petroleum. A specific interaction with the states has also been organised by MoCA in January 2008," the source informs.

MoCA, on its part, has also been in touch with state governments requesting them to reduce sales tax on ATF. In an interview published in Express TravelWorld December 2007 issue, minister of civil aviation, Praful Patel, had said that the ministry would continue to work with the state and central government departments to reduce taxation on aviation turbine fuel. According to Patel, the ministry has been talking to oil PSUs to find out ways to bring down ATF costs and was also working with the Petroleum Conservation Research Association to optimise the consumption of ATF by aircraft.

The good news, however, is that a reduction of four per cent on ATF prices has been announced with effect from this month in view of the fall in global oil prices. This would mean that ATF prices will reduce by up to Rs 2,000 per kiloliter for domestic airlines and US$ 30 for international carriers. What remains to be seen is whether this reduction in fuel prices will be passed on to the passenger. According to an airline source, given the constant fluctuation in ATF prices in recent months, unless a significant reduction in ATF takes place, the airline might not pass on any reduction on the surcharge component.

Yadav feels that most airlines would not pass on the gain to passengers, explaining that since most airlines were selling tickets at highly subsidised rates in order to attract customers, they are now running on losses. "The recent reduction in ATF would give most airlines a break from that and help them recover their losses," he opines.