India - Domestic carriers may get to import ATF

The Directorate General of Foreign Trade (DGFT) has sought a no-objection certificate from the petroleum ministry to permit domestic carriers to directly import aviation turbine fuel (ATF).

The move, which will help domestic carriers save 25 per cent on their fuel cost and probably get them in the black, comes after the Federation of Indian Airlines(FIA), the association of Indian carriers, approached the DGFT, which is a part of the Ministry of Commerce.

At present, domestic carriers buy ATF from domestic oil companies, whose rates are much higher than the international prices. Oil companies, which sell other petroleum products at subsidised rates, peg ATF rates higher to reduce their losses.

Airlines will also save on the high sales tax on ATF if they import the fuel directly for their own use.

Fuel at present accounts for around 45 per cent of an airline’s total operating cost. Airlines are estimated to make cumulative losses of Rs 8,000 crore during 2008-09. However, a sharp reduction in fuel costs will help them get back in the black if they keep their fares at the present levels. This, combined with an expected sharp fall in global ATF prices, could help the airlines get out of the severe financial strain much earlier than imagined.

“The move is significant. If allowed, this might save the aviation industry around 25 per cent on the fuel bill, virtually eliminating the 10 per cent gap that now exists between income and expenditure. The FIA had applied to the DGFT, which in turn sought a no-objection certificate from the petroleum ministry,” said an aviation ministry official. An executive of an FIA-member airline said the federation was in talks with oil companies for logistics support. The ministry official said there was no rule disallowing airlines from going for direct imports.

If a domestic carrier imports fuel directly for its own use, it does not have to pay sales tax. The only tax it pays is 5 per cent import duty.

The savings in tax are substantial. Sales tax on ATF varies from 20 per cent in Delhi to as high as 29 per cent in Chennai.

Experts said the Indian airlines, which currently pay around Rs 60,000 a kilolitre, would save up to Rs 9,500 per kilolitre if they imported ATF from abroad.

Kingfisher Airlines Chairman Vijay Mallya had mooted the idea a few months ago saying his carrier was going to tie up with the Mukesh Ambani-controlled Reliance Industries, which would import ATF and supply to the company. This, he said, would help the company save over Rs 600 crore a year.

However, there are some problems— one of which is lack of storage infrastructure for the private sector oil companies which are ready to import ATF on behalf of the domestic carriers.

State oil companies control most of the infrastructure and are chary of giving it to the private companies. “There will be some opposition from both states and oil companies,” said an official.

“Also, while it is easier to have a common access systems (run by the airport developer) in greenfield airports like Bangalore and Hyderabad, there would be legacy issues with public sector oil companies in airports like Mumbai (as they control most of the storage infrastructure). PSUs might show some resistance to the open access system since it would bring competition and hit their revenues,” said an industry expert.