The launch of aviation turbine fuel (ATF) futures contracts by the multi-commodity exchange (MCX) is showing much promise in helping to bring down the price of ATF for the aviation sector.

Just one month after MCX launched the contracts, the price of ATF traded on the exchange has fallen from Rs 76 per litre of aviation fuel on July 7 to Rs 64 per litre on August 8. With one month of trading showing so much promise, commodity analysts who did not want to be named were very optimistic saying that the new contracts may prove even more successful than petroleum contracts which are at present the most popular.

But airlines for which ATF is akin to lifeblood have still not entered ATF trading in full force and instead still testing the waters. The Indian commercial aviation sector is the single largest user of ATF after which comes the military and the general aviation sector. While fuel accounts for about 40% of airlines? input costs, volatile international crude oil prices spill over into the ATF and industrial kerosene prices wreaking havoc on the airline?s bottom lines.

With the exponential growth in air traffic with introduction of many budget airlines, demand for ATF has increased exponentially. Consumption of ATF has increased by almost 77% in FY 07 over FY 01, said analysts from Angel Broking. India produces 7.8 million tonne of ATF, making the country self sufficient in production, with the ability to export 3.6 million tonne. ATF comes under the country?s kerosene market divided into three segments – public distribution system (PDS), industrial kerosene and ATF.

ATF sales accounted for around 3.5% of total sales of petroleum products in India last year. For most European air carriers who are also considered more healthier globally, their fuel bill constitutes 33% of their total operating expenses. For Indian carriers the fuel bill constitutes about 45-50% of the operating expenses.

Even for international operations, the price applicable to Indian carriers? fuel uplifts is higher than those applicable to foreign carriers by 25%. International operators pay around Rs 50,100 per kl whereas domestic operators pay between Rs 66,000 to Rs 73,000 per kl in the metro cities. This is due to state levies that do not apply to the foreign carriers.

The main reason for this disparity in fuel prices that has all the aviation carriers up in arms is the multiple taxation on ATF. It is estimated that Indian carriers lost $500 million last year due to irrational ATF pricing. As per industry estimates, the projected losses for 2008-09 would be in the range of $2 billion causing many carriers to cut operations or face shut down.

The price of ATF in India is based on international import parity prices. However, the ATF supplied by Indian oil companies is refined in India from imported crude. There is no direct import of ATF. The import duty on ATF is 20% but the import duty on crude is only 10%. Still, the oil companies charge a 20% add-on to the refinery transfer price (RTP). Apart from this, oil companies also include a 16 to 49% add-on towards marketing margins and contingencies on the RTF after the addition of the import parity add-on.

This add-on varies between various cities. On this, the central government levies an excise duty of 8%. On the resultant price, the various state government levy local sales taxes ranging from four to 39%, which on an average work out to 25% countrywide. The total government levies thus work out to an add-on of 35%. Thus, effectively the price of ATF in India works out 60 to 70% higher than international benchmarks. Low-cost carriers SpiceJet and IndiGo were the first aviation companies to trade in ATF at the MCX early July but the companies have not exposed themselves much, MCX sources said.

Both companies deny trading. ?When crude is at $100 a barrel it makes sense to trade but not at current levels,” Parthasarthi Basu, CFO of Spicejet said. Around Rs 34.8 crore worth of ATF was traded on the first day of trading of ATF. SpiceJet?s annual spending on ATF for 2007-08 amounted to Rs 702 crore. Industry estimates show that ATF spending for a low-cost carrier might go up to Rs 1,000 crore for 2008-09.

The aviation industry is estimated to have spent around Rs 15,000-18,000 crore annually on ATF last year. MCX launched ATF trading in India. The maximum period of the contract is six months and the maximum order size is 10,000 barrels.

Trading of ATF in India would give companies an opportunity to hedge the fuel prices on a domestic platform and lock them for a particular period, thus hedging their risks against price rise on ATF for that period. Earlier, airlines were only allowed to hedge fuel from overseas but they have been always wary of doing so due to the constant rise in crude oil prices, uncertainties regarding fuel pricing and complications in trading overseas.