High cost of infra scuttles airlines? ATF import plans

Domestic airlines, which had been demanding that they be allowed to import aviation turbine fuel (ATF) directly, have now put their fuel import plans on the backburner, thanks to high initial costs of setting up infrastructure to import fuel and lack of support from oil marketing companies.

Importing ATF was expected to give airlines a cost benefit of anywhere between 5% and 8% and was allowed by the government in February this year.

Fuel costs have risen sharply during the last fiscal. Troubled private carrier Kingfisher Airlines? fuel cost was up 30% to R2,945 crore despite curtailed operations. SpiceJet?s fuel cost rose 79% in fiscal 2012 while for Jet Airways, fuel cost rose 50%.

The rising fuel prices resulted in the three listed airlines ? SpiceJet, Jet Airways and Kingfisher Airlines ? reporting a combined loss of R4,353.89 crore.

Oil companies hiked ATF prices on Wednesday by a steep 4.5%, the second increase in a month. ATF now costs R65,005 in Delhi per kilolitre.

?There was expectation that private oil marketing companies may support ATF imports, but they don?t have storage facilities at airports and transporting fuel from ports to airports will require even more investment,? a senior official at a low-cost airline said on condition of anonymity. ?Therefore, the fees demanded by the private oil companies for providing services to import ATF is too high, leaving only marginal savings for airlines.?

?Direct import of the ATF could help reduce airline operating costs by anywhere between 5% and 8%,? Amber Dubey, director (aviation), KPMG, told FE in an earlier interaction. ?This is on account of reduced sales tax, but factoring in higher import duties, infrastructure and transportation charges to oil companies and the entry taxes that state governments may impose.?

Airlines have now pinned their hopes on the government giving ATF a ?declared goods? status. When commodities are given a ?declared goods? status, they enjoy a significant reduction in value-added tax.

ATF could enjoy a uniform tax across the states if it is given the ?declared goods? status. Currently, taxes on the commodity range from 4% to 26% in different states.

?Reduction in domestic taxes for ATF is the only long-term solution,? a senior official of Air India said on condition of anonymity. ?A uniform tax regime on the fuel will give the same cost benefits as importing ATF will give.?

?But the initial cost and investment required to make importing ATF viable is just not justified and neither airlines nor oil companies want to invest in it as ATF is a surplus product in India and if state taxes go down people will stop importing,? he added. ?Why should one invest in infrastructure for this purpose if the future is not guaranteed??

Only about 65% of ATF produced in India is utilised by domestic airlines, according to the person quoted above.

SpiceJet, Air India and Kingfisher Airlines had received the nod for importing ATF from the Directorate General of Foreign Trade. The airlines did not respond to e-mailed queries sent by FE about the status of their ATF import plans.

India?s largest private airline Jet Airways also declined to comment on the matter.