Jet Fuel Import By Airline Companies May Prove To Be Bad Economics

In order to help the financially crunched aviation sector, an Empowered Group of Ministers (EGoM), yesterday, passed a resolution recommending the direct import of aviation turbine fuel (ATF) by the Indian airline carriers. The EGoM recommendations would now be taken up for approval by the Union Cabinet and the Cabinet Committee on Economic Affairs (CCEA) respectively.

This move to allow the direct import of ATF by airline companies comes on the back of some heavy lobbying done by domestic private airline companies, who have approached the government for aid over the past 2-3 months. According to market estimates, the fuel cost for domestic airlines is roughly between 40-50 per cent of their total operating costs. The decision to allow domestic airlines to directly import ATF would help them to save nearly Rs 2,500 crore annually – which happens to be a fourth of their current total ATF bill of Rs 10,000 crore. It has been noted that the average sales tax of 24 per cent on ATF in India is amongst the highest charged the world over. 

In hindsight, this move seems to be very positive for the aviation sector as it may 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 airline companies will be compelled to reduce their airfares and offer services at more reasonable rates.

However, the practicality of this move is far from clear. First, according to our country’s Foreign Trade Policy (FTP), Indian Oil Corporation is the sole state-owned trading enterprise authorised to import jet fuel and supply it to domestic airlines as per their requirements. In order to materialise the move to allow direct imports, changes would have to be made to the FTP. As per the guidelines, there has to be genuine damage, in the event of which the changes can be made. Therefore, the Director General of Foreign Trade (DGFT), bestowed with the power to relax and tweak the norms, would have to adhere to certain stringent conditions as laid out in the FTP. 

Second, the airline companies would have to chalk out concrete plans to set up the required infrastructure at the ports for the imported fuel and arrange for secured transportation to the airports. Arranging for all this would actually translate into more capital infusion and burden on the airline companies. 

In recent media reports, oil companies have been vocal in raising alarm over this issue. As per an article in Business Standard, domestic oil refiners have cautioned the government that private airline companies may end up paying higher import duty on the direct import of fuel as compared to their current tax outgo. Moreover, due to the shortage of ‘open access’ basis fuel dispensing tanks in the country, the airliners may have to enter into special contracts with the domestic oil marketers who hold monopoly over the dispensing tanks, which would add to their woes further.

In conclusion, the decision to allow direct imports would spell bad news for the domestic oil marketing companies (OMCs) viz. IOC, BPCL and HPCL as ATF works out to be a compensating factor for the companies against the subsidised sale of diesel, LPG and kerosene. At times when the OMCs are facing a severe financial crunch, it’s appalling to see the government concerned about making good the losses of the airline companies.