Transport Airlines

Indian airlines struggle to cut fuel costs at home and abroad

Dec 09, 2012 7:29 am

Skift Take

Storage and transport fees belittle the savings for airlines looking for cheaper fuel abroad and the government will likely find a way to increase import tax as the practice becomes more commonplace.

— Samantha Shankman

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Elliot Brown  / Flickr.com

A Total fuel truck fills up planes in Nice, France. Elliot Brown / Flickr.com


Indian airlines including SpiceJet Ltd. and IndiGo may be allowed to store imported jet fuel at state-owned refiners’ facilities as the government works to ease rules to help carriers pare their biggest cost.

The petroleum ministry agreed to allow airlines to use refiners’ infrastructure at airports when they import the fuel, Aviation Minister Ajit Singh said in a Dec. 4 interview. Oil Minister Veerappa Moily said the next day that his ministry will discuss the terms of access with the refiners. He didn’t give a timeframe for concluding the talks.

Prime Minister Manmohan Singh’s government allowed airlines to import fuel and sell stakes to overseas carriers as high operating costs and a price war caused industrywide losses and forced Kingfisher Airlines Ltd. to halt flights. Purchasing fuel overseas will help operators save on local taxes that are as high as 30 percent.

“It’s a very positive step,” said Sharan Lillaney, an analyst at Angel Broking Ltd. who recommends buying SpiceJet shares. “The industry is going through a structural change and everybody is working to improve the state of airlines.”

Airlines have been holding back on plans to import jet kerosene even nine months after a ban was lifted because of lack of storage facilities. Prior to the rule change, only state trading agencies were permitted to import the fuel. In September, the government also allowed airlines to sell as much as 49 percent to overseas operators.

Bangkok, Dubai

Carriers pay at least 60 percent more for fuel in the country than in Bangkok, Dubai, Kuala Lumpur or Singapore because of state taxes ranging from 4 percent to 30 percent, according to a civil aviation ministry document in June. Jet Airways (India) Ltd., the nation’s biggest listed carrier, and discount airline SpiceJet both posted second-quarter losses as fuel costs eroded gains from carrying more passengers.

SpiceJet rose 0.6 percent to 49.30 rupees at close of Mumbai trading, while Jet Airways fell 2 percent to 530.50 rupees. Kingfisher rose 0.3 percent. The BSE India Sensitive Index declined 0.3 percent.

Sales tax charged by the state government, excise duty and freight-related costs account for 32 percent of the retail price of aviation fuel in Mumbai, according to the oil ministry. Airlines need to pay a 5 percent customs duty when they import the fuel, according to the aviation ministry. Fuel imported directly by users is exempted from local sales tax.

Aviation fuel price in India sometimes move contrary to the international market rate, according to the aviation ministry. Jet fuel prices in major airports also suggest that the rates are almost uniform for all the three state-owned oil marketing companies, the ministry said in its note on industry viability.

Indian Oil 

On June 1, price of jet kerosene sold by Indian Oil Corp., the nation’s largest refiner, dropped 0.6 percent to 66,588 rupees per kiloliter in Mumbai from 66,990 rupees on March 16. In comparison, the fuel slumped about 17 percent in Singapore trading during the same period.

Indian Oil Chairman R.S. Butola declined to comment on the plan to share airport infrastructure. Hindustan Petroleum Corp. Chairman S. Roy Choudhury and Bharat Petroleum Corp. Chairman R.K. Singh didn’t answer two calls each to their mobile phones.

The federal government allows state-run refiners including Indian Oil to sell jet fuel to carriers at market-linked prices, which are revised every 15 days. Jet fuel accounted for 3.4 percent of Indian refineries’ total fuel sales at home in the seven months to October, according to oil ministry data. Diesel, kerosene and cooking gas are sold at prices set by the Indian government to curb inflation.

Import Permission

The Directorate General of Foreign Trade in April gave permission to budget carrier IndiGo to import 715,000 kiloliters of the fuel within 18 months. SpiceJet was allowed to import 50,000 kiloliters of the fuel.

Air India Ltd. won approvals to import 100,000 kiloliters and Go Airlines Ltd. 200,000 kiloliters, Aviation Minister Singh told parliament Aug. 17. Kingfisher won permission to import 500,000 kiloliters. The carrier’s didn’t immediately respond to e-mails seeking comments on their fuel purchase.

Carriers may not benefit much by importing the fuel because of the charges for storage and transportation, said Harsh Vardhan, chairman of New Delhi-based Starair Consulting, which advises airlines. “The costs involved in importing, storing and moving the fuel defeat the purpose.”

Combined Debt

CAPA Centre for Aviation, an industry consultant, predicted in May that rising fuel and airport costs will increase the combined debt of local carriers by 18 percent to $20 billion within 12-18 months. Half of the debt are aircraft related and the rest are working capital loans and dues to airport operators and fuel companies, according to the aviation ministry.

The government is also working to introduce a uniform rate of sales tax on jet fuel across Indian states, aviation minister Singh said. Talks are under way with the finance ministry on this proposal, he said without specifying a timeframe for a decision.

“The government has kept trying to arrive at one solution or another,” to help airlines, said New Delhi-based Kapil Kaul, who heads the Indian unit of CAPA. “Facilitating imports will eventually lead to a uniform tax on the fuel.”

With assistance from Rakteem Katakey and Abhijit Roy Chowdhury in New Delhi. Editors: Vipin V. Nair and Arijit Ghosh.

To contact the reporter on this story: Karthikeyan Sundaram in New Delhi at kmeenakshisu@bloomberg.net. To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net.

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