In what came as a twin bonanza for the airline industry on Friday, the oil companies slashed jet fuel (ATF) prices by 16.8% or Rs 9,429.87 a kilo litre followed by finance ministry?s announcement to abolish the 5% customs duty on jet fuel. As a result, the new ATF prices will come down drastically and will help the loss laden airline companies reduce their operating costs.

Oil companies said the cut in the customs duty will further bring down the ATF prices by around Rs 2,000 a kilo litre. The new prices incorporating the customs duty cut will be announced by the oil companies on Saturday.

On whether this would result in immediate benefits for the air travelers, most of the private airlines said they would first assess the gains on account of this reduction before they think of passing on the same to air travelers. Spokespersons of Jet Airways and Kingfisher said they are evaluating the situation before a decision is taken on passing the benefits of reduced ATF prices to air travelers

The cut in ATF prices announced by the PSU oil companies on Friday is the third in a row. Jet fuel prices, which were ruling at Rs 71,028.26 per kl (ex-Delhi) in August, were first cut to Rs 59,650.17 per kl effective September 1 and then to Rs 56,447.80 per kl from October 1. Following a 16.8% cut in jet fuel prices by the three state-owned fuel retailers–Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum?ATF prices now stand reduced by Rs 9,429.87 per kilo litre (in Delhi) from November 1 to Rs 47,017.93 per kl, in line with fall in international oil prices. In contrast, ATF prices in Mumbai, the home to India?s busiest airport, will be Rs 48,656.59 per kilo litre as against the earlier Rs 58,479.37 per kilo litre.

The finance ministry?s announcement that ATF would not be charged with 5% import duty would bring down the base price of the fuel. ?The price cut announced this evening were calculated after taking into account the import duty.

Now that the duty has been cut, the prices will further fall on an average by Rs 1,800-2,000 per kl,? an IOC official said.

Though there are no imports of jet fuel and it is a freely priced petroleum product, the price of domestically produced fuel is based on import parity price factoring in the basic customs duty. The price is calculated by taking the average international price of jet fuel during a fortnight, adding 5% customs duty to arrive at the landed price. On top of this, 8% excise duty is levied and over and above this local sales tax or VAT is charged.

The exemption would result in lowering of the base price of ATF and, consequently, lowering the incidence of excise duty and VAT, giving substantial relief to the aviation sector.

?The aviation sector is experiencing financial stress, which is partly due to high price of ATF. In order to give relief to this sector, the basis customs duty of 5% has been abolished,? the finance ministry announcement stated.

With falling crude oil prices and the recent directions from the government to fix jet fuel prices every fortnight, as against the monthly revision, it is expected that the benefit of falling crude oil prices may eventually be passed on to the airline travelers.

Although it remains to be seen, whether air fares are slashed by the airlines, the reduction in jet fuel prices will indeed help in capping the mounting operating losses of the cash strapped airlines.

High prices of ATF had put airlines in a tight spot with leading private carriers, including Jet Airways and Kingfisher Airline, which had defaulted on payment to oil companies, demanding a bailout package from the Government earlier this month. Higher operating costs had also forced the domestic carriers put on hold their fleet expansion plans.