ATF — cheaper but still dear

Despite the drop over the past two years, ATF in India remains much costlier than in many other countries

Earlier this year, in March, the country’s leading private sector airlines — IndiGo, Jet Airways, SpiceJet and GoAir — accused the public sector oil marketing companies — Indian Oil, HPCL and BPCL — of profiteering on aviation turbine fuel (ATF). These oil companies supply about 95 per cent of the ATF across India’s airports and reset the fuel’s price on the first day of each month.

Urging disclosure of the “ambiguous” and opaque price discovery mechanism for ATF, the airlines alleged that the benefit of the sharp fall in crude oil prices since 2014 had not been passed on. The 12 per cent hike in ATF price in March was being paid under protest, the airlines said. Indian Oil, the largest ATF supplier, was quick to refute the allegations. There was no monopolistic situation in ATF supply and pricing, the oil major said, adding that airlines were free to import the product, and that it is inappropriate to compare ATF price in an oil importing country such as India with that in oil exporters. ATF price had reduced sharply since 2014, Indian Oil said, asking for good measure whether airfares had reduced commensurately.

While the argument continues, the truth, as always, seems to lie somewhere in the middle. ATF prices have evidently come down over the past two years. At about ₹47,200 a kilolitre in Delhi, the fuel is today about 32 per cent cheaper than it was in end June 2014 (about ₹69,800). But the drop is much lower than the 60 per cent dip in the cost of the Indian crude oil basket over the same period — from $109 to $43.5 a barrel. Three factors account for this — the pricing mechanism, taxes and exchange rates.

Import parity pricing

First, ATF in India is not priced on a cost plus margin basis — that is, the final price is not based on the cost of crude oil plus the margins for refining it into ATF and then marketing it. Instead, similar to petrol, diesel, LPG and kerosene, ATF too is priced based on the import parity mechanism. That is, ATF is priced as if it is imported into the country. So, to the international price of ATF, notional costs such as freight, insurance and customs duty are added. Then come the marketing margins of the oil companies and a host of taxes that add to the final price of the product.

This pricing mechanism has often been criticised because India, while majorly dependent on crude oil imports, is in fact an exporter of petroleum products, including petrol, diesel and ATF, thanks to its huge refining capacity. Oil companies have, for long, been allowed this leeway to shield their margins — something that may have been necessary in the past when the pricing of key fuels such as petrol and diesel was controlled by the government and oil companies suffered huge under-recoveries.

But now, with the prices of most fuels being market-linked, the import parity pricing mechanism may need a re-look. Airlines have a point when they label the ATF pricing “opaque”. That’s because unlike petrol, diesel, LPG and kerosene, where the final price build-up details are regularly published by the oil companies, it is not so the case with ATF. Also, the fuel’s price levels are usually uncannily similar across the three main suppliers , sparking allegations of cartelisation.

High taxes

But not all the blame can be laid at the feet of the oil companies. The governments, both at the Centre and the States, treat petroleum products as cash cows and impose heavy taxes. The Budget 2016 increased excise duty on ATF from 8 per cent to 14 per cent. State taxes on the fuel vary wildly, going up to even 30 per cent or so. Airlines have for long been demanding rationalisation of these taxes but States generally don’t seem inclined to oblige. While some such as Andhra Pradesh have cut tax on ATF sharply, the levy remains very high in major consumption centres such as the metros.

Rupee weakness

Then, there is the currency factor to contend with. The import parity price of ATF is in dollars and a weaker rupee over the years has translated into a higher cost. From about 60 to a dollar in June 2014, the rupee has slipped about 12 per cent to 67 a dollar now; the oil companies have dutifully passed this on to the airlines.

Despite the drop in prices , ATF in India is costlier than in many other countries by about 50 per cent. It doesn’t help that most petroleum products, including ATF, have been kept out of the proposed Goods and Services Tax (GST) ambit. This will mean continuation of high taxes and denial of tax credit on inputs that will be subject to GST.

Airlines in India are touchy about ATF prices with good reason as it their largest cost component. This cost has steadily decreased to about 25-30 per cent of the operating costs from about 40-50 per cent that used to be before the oil rout began in June 2014. Still, it is much too high, the airlines contend, in the highly competitive and price-sensitive Indian aviation market. The recent June quarter results saw airlines on the back-foot due to the combination of low fares (due to the ongoing price wars among airlines) and rising costs, including ATF, which rose lock-step with crude oil prices from early February.

Interestingly, the cost of ATF in India for international airlines is much lower than that for domestic carriers, since the former pay in dollars and are not subject to sales tax. So, at $496 a kilolitre, the rupee cost (at 67 to a dollar) of ATF for foreign carriers is about ₹33,260 — nearly 30 per cent less than what domestic carriers pay.

Benign outlook

If it’s consolation for domestic carriers, ATF (about ₹47 a litre in Delhi) costs less than petrol (about ₹60 a litre) and diesel (₹ 50 a litre) that are subject to higher taxes. The government’s proposed regional connectivity push requires States to moderate taxes on ATF for flights to and from smaller centres. This could help airlines. Also, with crude oil unlikely to rally sharply from the current levels, thanks to global oversupply conditions, ATF too should stay subdued around current levels in the near to medium term. A sharp weakness in the rupee, that could queer the pitch, also seems unlikely.

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