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Reliance entry could see jet fuel prices fall
P R Sanjai, HT Mint; 5 Oct 2007

Until now, supply of jet fuel in India has been the monopoly of IOC, HPCL and BPCL, and they typically charge about 65% more than prices outside India

Mumbai: The new company that encompasses Air India and Indian (Airlines) is hoping to pare its hefty aviation fuel costs by about 10%, starting November, by Reliance opening up a supply tender, for the first time, to a private supplier: Industries Ltd.

The National Aviation Co. of India, or Nacil, is set to come out with a mega fuel tender this month to purchase jet fuel, better known as aviation turbine fuel (ATF), to meet the annual fuel needs of both Air India and Indian Airlines. And it is expecting Reliance to be a potential bidder, thanks to its newly created facilities to supply fuel at many Indian airports.

Supply of jet fuel in all of India has been the monopoly of three state-owned oil marketing companies and they typically priced the fuel at about 65% higher than it is available in many airports outside India.

This is also done because these companies then use ATF margins to cushion the impact of having to subsidize normal petrol and diesel sales.

Meanwhile, ATF constitutes about 40% of the operating cost of domestic carriers. The fuel bill of Air India and Indian, for the last fiscal year alone, was Rs 6,500 crore.

The estimated annual fuel bill for all of India's aviation companies is around $1.7 billion, based on September 2006 rates.

In a recent presentation to the government, the Federation of Indian Airlines, a lobbying body, has asked the profit margins built into ATF prices by the state-owned oil marketers be reduced and the supply opened up to competition by allowing private players to supply fuel at Indian airports.

A major reason for the high prices-even after the government deregulated ATF prices-is the continued monopoly of the three state-owned oil companies: Indian Oil Corp., Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd. The three companies also fix ATF prices on a mutually agreed common formula.

"We will be having better negotiating power this time as a private player, such as Reliance Industries, would also take part in the bidding for supply of fuel," said a senior Nacil executive, who did not want to be named. The idea being that the presence of a private supplier would force state-owned marketing companies to offer a better deal.

A Reliance Industries spokesperson declined to comment for this story.

The government had granted marketing rights to companies such as Essar Oil Ltd, Shell India, a local unit of Royal Dutch Shell, and Mangalore Refinery and Petrochemicals Ltd, a subsidiary of Oil and Natural Gas Corp.

But none of these companies could start supplying ATF as they were not allotted space by the Airports Authority of India, which is also state-owned. Recently, however, Reliance has been allotted land at 25 airports in India and is moving towards setting up aviation fuelling stations at some of these airports.

According to the federation's recommendations, the current storage and supply facilities for ATF at Indian airports should be converted to common user facilities owned by a neutral agency instead of the current duplication of such infrastructure, through investments in separate facilities, by the state-owned oil companies, as is the case now.

A reduction in the cost of ATF has a significant impact on the aviation industry's results. If ATF prices come down by a hypothetical 65%, or to global market rates, operating profits can go up by close to 25% for registered carriers.

One mid-sized airline in India, which posted an operating loss of Rs 120 crore for the quarter ended 31 December, would, in fact, have reported an operating profit of Rs30 crore for the same period if the ATF charges were closer to international benchmarks.

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