Aviation fuel unlikely to take off

The bearish outlook for crude oil will keep ATF prices under check



Aviation turbine fuel (ATF), refined from crude oil, is the largest cost component for airlines in India, accounting for 40-50 per cent of their operating cost.

The cost of ATF in the country is among the highest in the world, thanks mainly to the pricing mechanism in the country and high state taxes.

No surprise then that the sharp dip in ATF prices, following the rout of crude oil since June last year, has provided big relief to airlines.

Public sector oil marketing companies Indian Oil, HPCL and BPCL are the key vendors of ATF and revise the fuel’s price on the first day of each month.

From ₹69,748 a kilolitre at the start of June last year, ATF price in Delhi crashed a third to about ₹46,500 a kilolitre in the beginning of February. With crude oil recovering some ground last month, the price of ATF went up to about ₹50,400 a kilolitre on March 1. But this is still 28 per cent lower than the price at the start of June.

Yet, the fall in ATF price is much lower than the 47 per cent dip in price of the Indian crude oil basket (in dollar terms) since June. Airlines in the country have been complaining that the full benefit of falling crude oil price is not being passed on. The divergence is due to three reasons.

Factors at play

One, the PSU oil companies price ATF at the beginning of each month on the basis of ‘import parity pricing’.

So, rather than taking into account the actual cost of crude oil, refining cost and mark-up, and marketing margin, the oil companies start with the average international price of the fuel in the preceding month.

To this, various expenses relating to import, such as freight, insurance and customs duty, are added. In effect, ATF is priced as if it is imported into the country. Airlines have been protesting this because India is, in fact, an exporter of ATF. So, the import-related expenses are not incurred in the first place.

To the import parity pricing are added other expenses, such as the marketing margins of the oil companies. Airlines also complain that the three oil companies operate as a cartel, since they all charge the same price at various airports.

Next, there is the burden of high state taxes which can go up to 30 per cent. Airlines have, for long, been demanding rationalisation of these taxes.

They have also been asking for ATF to be categorised as a declared good — this will mean a uniform tax of 4 per cent across the country.

Last year, Andhra Pradesh reduced the state tax on ATF to 1 per cent. This was to provide a boost to air traffic in the state after its separation from Telangana and the loss of the key aviation centre of Hyderabad.

According to reports, states such as West Bengal, Jharkhand, Madhya Pradesh, Rajasthan and Chhattisgarh have also brought down their sales tax on ATF to 4 per cent.

In Maharashtra, the tax rate is 5 per cent at all airports, except in the major consumption centres Mumbai and Pune where ATF is taxed at 25 per cent.

If tax on ATF is moderated in major consumption centres such as Delhi, Mumbai, Chennai, Bengaluru and Hyderabad, it will provide much respite to airlines. Interestingly, the price charged to international airlines is far less, since sales tax is not applicable to them. For instance, on March 1, a kilolitre of ATF at the Delhi airport for international airlines was priced at $640.

In rupee terms, this works out to about ₹40,300 a kilolitre (considering the dollar-rupee rate at 63). This is 20 per cent lower than what domestic airlines pay.

Finally, the value of the rupee also plays an important role since it has a bearing on the import parity price. The rupee has weakened from about 60 to a dollar last June to 63 now. This means a higher rupee cost of ATF.

Outlook

Trying to predict the levels of crude oil, the currency exchange rate and also the Government’s intent to moderate taxes on ATF can be a mug’s game.

That said, despite some recovery in recent weeks, crude oil is expected to remain weak due to oversupply and weak global demand. This, along with hopes of a stable rupee, should keep the price of ATF under check.



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