With crude falling to five-month low on Wednesday, the aviation industry is not willing to repeat its mistake. All the airline companies have begun examining seriously the option of trading in aviation turbine fuel (ATF) futures on the multi-commodity exchange (MCX).
The MCX on its part has decided to modify ATF contracts to better suit the aviation industry and has already approached the Forward Markets Commission (FMC) for its approval. For even the slightest change in any contract, the exchange has to get FMC approval.
Premier low-cost carrier Spicejet has already hired brokerage firm Karvy Comtrade and begun trading in contracts on Monday. The company hopes to save more than 20% of its fuel bill from futures trading and hedging its fuel risk in the wake of volatile fuel prices, chief financial officer Parthasarathi Basu said on Tuesday. ?The first hedge has been done on Monday,? Basu said.
ATF has 95% correlation with crude oil prices and accounts for about 40% of an airline?s operating costs in India. Globally, fuel contributes only 20-25% of the operating costs.
Public-owned Air India is also looking at hedging, sources said, but will be more cautious this time. In India, ATF is 65% more expensive than in other countries. Indian carriers bought ATF at Rs 71,630/kilolitre in Mumbai in July 2008, while the fuel was priced at Rs 45,159/kilolitre in Singapore.
On August 31, Indian fuel companies slashed ATF prices by 16%. The airlines in India, however, have refused to slash airfares. They believe the ATF prices must fall by another 40% before they start making profits and overcome the huge cumulative losses incurred over the past few years.
Interestingly, ATF is produced in surplus in India and is also exported but it is the only non-subsidised fuel in the nation. Due to cross-subsidisation, ATF prices are kept high to allow subsidisation of other petroleum products. Import Parity Pricing mechanism of oil companies, state sales taxes, custom and excise duties and throughput charges also contribute to the high cost of ATF.
The annual consumption of ATF in the last few years shows amazing growth. In 2003-04 oil companies sold 2,484 thousand metric tonnes (TMT); in 2004-05 around 2,813 TMT, 2005-06 saw sale of 3,299 TMT, 2006-07 of 3,983 TMT and in 2007-08 approximately 4,500 TMT of ATF was consumed.
The major factors influencing the ATF price are base price fixed by oil company including customs duty, freight charges, marketing cost, throughput charges, excise duty at 8 %, education cess at 3% on excise duty and sales tax of 30-40% depending on the state.
The petroleum and civil aviation ministries have been lobbying for the government to rationalise sales tax on ATF. In November 2007, civil aviation minister Praful Patel took up the matter with state chief ministers, before they finalised their state budgets for 2008-09. Consequently, Andhra Pradesh and Kerala reduced sales tax on ATF to 4%, Maharashtra reduced the sales tax to 4% for airports other than Mumbai and Pune, while Rajasthan slashed sales tax on ATF to 4% under certain conditions. Revenue from sales tax on ATF contributes only 0.5% to 2% of the total sales tax collection by the states, but growth in real terms has been significant and is much more than other petroleum products due to the high growth being experienced by the aviation sector.
Sales tax is levied on the base price fixed by oil companies, which is linked to international crude prices. These have seen a phenomenal rise recently creating a double jeopardy situation for airlines. Comparative data collected from Maharashtra, Delhi, Karnataka and West Bengal shows a sharp increase in revenue from sales tax of ATF as compared to HSD (high speed diesel).
The civil aviation ministry has also approached the Empowered Committee of State Finance Ministers to consider the issue. The committee was asked to consider the negligible contribution to overall sales tax collection and that impact of reduction in sales tax rates for ATF would be marginal. They were also told that any losses, however marginal, would be made up with the expected rapid growth in the sector. According to Patel, once the airlines are financially stable, investment in the sector would grow, new players would emerge and competition would increase leading to better connectivity.
High ATF prices are forcing many airlines to withdraw flights from low-yield routes, leading to low connectivity apart from adverse effects on trade, commerce, tourism, economic growth and reduction in employment opportunities. As per Federation of Indian Airlines (FIA) estimate, a reduction of 60% in ATF price to bring it closer to international benchmarks can lower airline operational losses by 25%. A reduction of Rs 1000/kl in costs translates a saving of Rs 300 crore for the sector.
Another major contributor to high ATF cost is the throughput charge. The charge is a concession fee by the airport operator, linked to the ATF volume supplied. Earlier, this charge was fixed at a modest rate (Rs 60/kl) and the oil PSUs were giving this royalty to Airports Authority of India (AAI) based on fuel consumption. Oil companies recovered throughput charges paid to AAI from the airlines. Till last year, the throughput charges were constant at around Rs 60/kl throughout the country. AAI in its effort to raise its revenue introduced a bidding process last year for throughput charges at the time of allotment of land for setting up fuelling service facility. In all, 27 airports were identified by AAI where land has been allotted via call of tenders against payment of throughput charges.
RIL was selected for 25 airports and the throughput charges quoted ranged from Rs 414/kl in Ahmedabad to Rs 96/kl in Raipur. For the other two airports, namely Chennai & Kolkata, IOC was awarded the contract at a throughput charge of Rs 1,201/kl and Rs 1001/kl, respectively. The impact on the airlines is the higher cost of ATF as the oil companies pass on this charge directly to the airlines. If a throughput charge of Rs 1,000/kl is imposed at all the airports, the airlines will have to shell out Rs 300 crore annually on this account.
The solution to the problem is to have a common access facility at all airports for the fuel suppliers so that the airlines benefit from competitive pricing and the present model of throughput charges is dismantled. Common access facility for fuel supply is being introduced at new airports in Bangalore and Hyderabad. Delhi and Mumbai are also in the process of laying down pipelines for the purpose. For other airports, the civil aviation ministry has to prepare a time-bound action plan.
