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Oil cos told to consider new jet fuel discounts


The ministry of petroleum and natural gas has asked government-owned oil marketing companies to consider offering new discounts on jet fuel prices to India's domestic airlines.
HT Mint; 19 Nov 2007

Mumbai / Delhi: Looking to ease soaring fuel costs and related passenger surcharges, the ministry of petroleum and natural gas has asked government-owned oil marketing companies to consider offering new discounts on jet fuel prices to India's domestic airlines, which have collectively reported a loss of $500 million (Rs2,172 crore) in 2006-07.

Three state-owned oil marketing companies—Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd—are the main suppliers of jet fuel, popularly known as aviation turbine fuel, or ATF.

ATF rates for domestic operations in India are priced 70-90% higher than international benchmarks and often used to help cushion the subsidies that the government mandates for the more commonly used petrol and diesel. Meanwhile, the estimated annual fuel bill for the domestic airline industry is around $1.9 billion based on rates prevailing in November.

The proposal from the oil ministry follows a meeting last week with civil aviation minister Praful Patel, who had made the request to reduce ATF prices, which accounts for 40% of the operating costs of most Indian airlines.

At the meeting, attended by heads of the public sector oil companies, the civil aviation ministry asked for at least a 15-20% correction in ATF prices, which was promptly rejected by the oil companies, which suggested that a reduction in steep state taxes could be a possible solution for lowering ATF costs.

"All airlines are bleeding and in red, all other taxes are also very high and the ATF cost is thus going very high. By next year if nothing is done...it will be an irreversible situation (for the airlines)," Patel is believed to have said at the meeting, according to a government official familiar with the matter, who did not wish to be named.

Eventually, the civil aviation ministry sought a minimum 5% reduction in base prices of ATF, which will result in about Rs1,000 crore subsidy for the airline sector.

The aviation ministry has also asked oil companies to pass on decreases in benchmark prices to domestic carriers, while increases in ATF prices should not be higher than any increases in the benchmark prices. Oil companies have also been asked to simplify the sub-costs in the billing process and reduce marketing margins built in by the oil companies in fixing the ATF prices.

This is the third meeting between the oil companies and the civil aviation ministry.

Murli Deora, minister of petroleum and natural gas, confirmed the development, adding, "We have come out with a proposal in this regard, but nothing has been finalized." Deora declined to elaborate.

Executives with public sector oil marketing companies point out that they already offer various discounts, such as volume discounts, and credit line facilities to airlines.

"We have not taken a decision on further discounts," said an Indian Oil executive, who asked not to be named.

A senior executive of a premium Indian airline, who also did not want to be named, said that airlines are currently getting 2.5% discount on the basis of volume, advance payments and prompt payments. "We would need at least 5-10% discount," the executive said.

ATF is the fastest growing petroleum product for oil companies, with sales more than doubling between 2003 and 2006.

"High ATF cost is leading to high air ticket prices, which is in turn slowing down the passenger market expansion. The widening losses of Indian carriers are steadily making them uncompetitive and unattractive for equity or debt financing," said another senior airline executive, who also did not want to be identified.

Because the Indian airline industry is tightly regulated, it is common for industry executives to not want to be identified for fear of bureaucrats.

"So far we have been passing on the increase in fuel prices as a cess to the passengers. We can't pass that on indefinitely as after a point it will affect capacity (utilization) so we are hoping the government will take some steps," low-fare airline SpiceJet's director Ajay Singh said last week.

"We are preparing our market outlook. It could be conservative next year (as) worldwide fuel prices are something to watch out for," said Boeing Commercial Airplanes' vice-president of sales, Dinesh A. Keskar. "So far, we have not been asked to delay any deliveries of aircraft (from India)."

The ATF price in Mumbai is Rs41,105 per kilolitre, compared with the international price of Rs23,064 per kilolitre, which is about 78% higher (at October prices).

The difference is 97% in the case of Kolkata.

Foreign carriers, which try to minimize filling up in India, also pay about 30% more than prevailing international ATF rates though their rates are lower than what the domestic airlines are currently charged.

A reduction in ATF price could have a significant impact on the domestic airlines' balance sheets.

According to a calculation made by the Federation of Indian Airlines (FIA), a lobbying body for domestic airlines, a reduction in ATF price by 65% (to bring it closer to international benchmarks) results in a near 25% increase in operating profits.

A mid-sized airline in India, whose balance sheet indicates an operating loss of Rs120 crore for the quarter ended 31 December, would have reported an operating profit of Rs30 crore for the same period if the ATF charges were closer to international benchmarks prevailing at that time.

FIA expects that rationalization of ATF prices for domestic operations to international benchmarks will result in an estimated annual savings of $624 million for the airline industry.

Airlines also pay 20% customs duty, an excise duty of 8.24% and sales tax that averages between 12% and 34% on the higher fuel base price.

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