Govt. mulls allowing airline sector to directly import ATF

According to a recent media report, the govt. may allow domestic airline companies to import Aviation Turbine Fuel (ATF) directly in order to help the financially crunched aviation sector. It has been reported that a core group of secretaries was created to review the current situation and recommend a slew of revival measures on the behest of the Prime Minister.

This move comes on the back of some heavy lobbying by domestic private airline companies, who approached the govt. for aid over the past 1-2 months. This will be an extremely positive development for the Indian aviation sector, as it will lead to substantial savings for them and will provide a much-needed fillip to help the sector emerge from tough times like these. Consequently, the companies will be compelled to reduce their airfares and offer services at more reasonable rates.

At present, the fuel cost for domestic airlines is roughly between 40%-50% of their total operating costs. As per the market estimates, the decision to allow domestic airlines to direct import ATF would help them to save nearly Rs 2500 cr annually – which happens to be a fourth of their current total ATF bill of Rs 10000 cr. Of course, there are likely to be some strings attached to such aid plans. The airlines could be asked to show what steps they are taking to improve fares, cut excess capacity and draw up a plan to ensure that loans, if made available, are secured.

On the flipside, the negative impact of this move will be felt on the govt’s revenue receipts. In the current situation, this would put some pressure on its ambitious expectations of staying within the fiscal deficit targets.

Moreover, according to the Foreign Trade Policy (FTP), the Indian Oil Corporation (IOC) is currently the sole state trading enterprise authorised to import jet fuel and supply it to domestic airlines as per their requirements. The Director General of Foreign Trade has the power to relax and tweak the norms, if required, provided certain stringent conditions are met as laid out in the FTP. This too is under the explicit guideline that there has to be a genuine damage in the event of which the changes can be made. In other words, allowing any airline to import oil directly will require the govt to change the Foreign Trade Policy (FTP). All this calls on for some tedious deliberations and discussions on the proposed structure and revisions for the new policy. Since the decision involves a policy change, any decision on this will also have to be referred to the Cabinet for approval.

Further, we also believe that this decision will also hurt the IOC’s financials, as ATF works out to be compensating factor for the company against the subsidised sale of diesel, LPG and kerosene.

In sum though, this may be a step in the right direction. The Indian aviation sector has been suffering for a long time, as they have had to shell out substantially more to pay for their fuel bills as compared to the global average. A decision to allow direct imports will not only benefit the companies in the sector and the air passenger, but will also indirectly benefit the tourism sector, leading to more revenue generation.