JET FUEL PRICING AND SUPPLIES SCENARIO IN

INDIA AND ITS IMPACT ON THE ECONOMICS OF THE

CIVIL AVIATION INDUSTRY
Presentation by
SAROJ K. DATTA
EXECUTIVE DIRECTOR
JET AIRWAYS (INDIA) PRIVATE LTD.
13th MAY 2004

MIDDLE EAST JET FUEL CONFERENCE

12th – 13th MAY 2004
BAHRAIN
 Aviation Scenario – Worldwide

 Last few years have once again clearly highlighted the highly
cyclical nature of the Aviation industry worldwide.
 Decade ending with 2000 showed promise of a bright future for
the industry: both in traffic growth and financial results.
 However, following the
–Dot-com bust and cascading economic fallout
–September 11 terrorist attack;
–Followed by events such as the SARS epidemic and the Iraq war;
–Traffic decline; and
–Resultant Increases in costs and expenses;

Post 2001, the industry experienced severe downturn from which it is

only now beginning to slowly recover
 Recent events as also declining yields and competitive pressures
have highlighted the importance of controlling costs and effecting
improvements in productivity
2
 Aviation Scenario – India

 Indian Aviation industry also followed the worldwide trends

during this period.

 Passenger traffic on domestic sectors declined by around 7% in

2001-02 accompanied by a significant drop in yields.

 2002-03 saw a reversal in the trend but the burden of the

previous years continued to be reflected in the bottom lines of
the airlines.

 Assisted by an improved economic climate and favourable policy

changes, 2003-04 saw a growth of over 7.5% in domestic
passenger traffic.

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 Aviation Scenario – India

 Indian Air Travel Market: witnessing dramatic changes due

liberalized Government policies.
 Some of the recent Government announcements are
– Private airlines permitted to operate to neighbouring South Asian
countries, namely Sri Lanka, Nepal and Bangladesh.
– Input costs have been lowered through
• Reduction of Tax burden on air travel by abolishing Inland Air
Travel Tax and Foreign Travel Tax.
• Reduction in domestic Landing Charges for jet aircraft by 15%
and removal of Landing Charges for aircraft lower than 80 seats.
 With a forecasted 8% plus growth in GDP per annum air travel is
also estimated to grow by around 8% per annum over the next 5
years.
4
 Jet Airways – A decade of Successful
Operations
 Started operations on 5th May 1993 with a fleet of 4 B737-300
aircraft.
 1993-94 : 28 Daily Flights covering 12 cities in India.
 Currently : Flies to 41 cities in India and to Colombo, Sri Lanka with
a fleet of 41 aircraft and operating more than 255 flights a day.
 Will be starting operations to Kathmandu and Dhaka shortly.
 Carried 6.9 million passenger in financial year 2003-04 and
estimates to carry around 7.5 million in 2004-05.
 Launched innovative schemes aimed at leisure traveller – APEX
Fares in August 2001.
 Current Market Share: 46%-47%.
 Has received numerous accolades as India’s best domestic airline.

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 Aviation Turbine Fuel (ATF)

 Aviation Turbine Fuel is one of the most important constituents of

any airline’s costs.

 In India it is even more so because of the huge disparity in ATF

prices applicable in India and elsewhere in the world.

6
 ATF Pricing Scenario: INDIA

 Until April 2001 ATF prices in India were determined by

Government through an Administered Price Mechanism (APM).

 This was based on a system of cross-subsidy – for socio-economic

reasons prices of some petroleum products such as kerosene and

diesel were “subsidized” by setting higher prices for ATF.

 In April 2001, the APM was dismantled and the Oil Companies given

freedom to price ATF based on input costs and world market prices.

 Thereafter ATF prices in India have fluctuated widely depending

on movements in world prices.

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 ATF Pricing Scenario

 Despite withdrawal of APM and linkage of ATF pricing with

international market prices, price of ATF in India continues to be

much higher than the prices prevailing worldwide.

 Despite being competitors with possibly differing input and

refining costs, the three Government owned oil companies

effectively work as a cartel; prices charged by the three oil

companies are identical.

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 ATF Pricing Mechanism

 ATF supplied by Indian oil companies is basically from imported

Crude refined by them. There is no direct import of ATF.
 Import Duty on Crude is 10% whilst on ATF is 20%.

 Oil Companies, however, follow an import parity principle and

levy a 20% add-on to the Refinery Transfer Price.
 Apart from the import parity principle, the Oil Companies also
include a 16%-49% add-on towards marketing margin and
contingencies on the Refinery Transfer Price after the addition of
the import parity add-on.
 The add-on varies between the various cities.

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 ATF Pricing Mechanism

 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 4% to 39%: which on an average
works out to 25% countrywide.
 The Government levies thus works out to an add-on of
35%.

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 ATF Pricing Mechanism

A
T Refined ATF
F

Add-on of 20% - Import

Refinery Transfer Price(RTP) parity
Marketing margin add on
21%

Government levies of
ATF Price 35% - 8% Central
Sales Tax plus 25%
State Sales Tax

ATF Price to airlines

Nearly double the world-price

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 Impact of high ATF Prices

 ATF Expenses: Constitute around 30% of the total

operating costs for domestic Indian carriers.

 In comparison, for Association of European Airlines (AEA)

members: Aircraft Fuel & Oil Expenses:Constitute 13.3% of

Total Operating Expenses.

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 ATF
Operating Cost Comparison
32.00%
Fuel & Oil Expenses as a % of Total Operating Expenses
(Comparison with Association of European Airlines)
28.00%

India Average: ~30%

24.00%

20.00%

AEA Average: 13.31%

16.00%

12.00%

8.00%

4.00%

0.00%

Prices as of July, 200313

 Impact of High ATF Prices

 Thus, Domestic carriers in India pay nearly double the prices

vis-a-vis elsewhere in the world.

 Reasons for this have been explained earlier.

 A graphical presentation of this difference follows.

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 ATF
International Price Comparison
3 0,0 00

2 5,0 00

Indian Average (Rs. 22,985 per Kilolitre)

2 0,0 00

+ 83%

1 5,0 00
International Average (Rs. 12,569 per Kilolitre)

1 0,0 00

5,000

0
Dub ai Paris London New Yo rk Ho ng Ko ng Singapo re To kyo Mumbai Delhi Ko lkata Chennai

ATF Prices 1 4 ,2 18 1 2,8 81 12 ,63 8 12 ,638 11,9 09 1 2,0 30 11 ,66 6 21 ,7 62 21 ,485 25 ,22 8 23,467
Exchange Rate: 1 USD = Rs. 46 Prices as of December, 2003 15
 Impact of High ATF Prices

 Even for international operations, the price applicable to Indian

carriers’ uplifts is higher than those applicable to foreign carriers

by 25%.

 Domestic operators pay a 51% higher price than what is paid by

International carriers in India.

 A graphical presentation follows.

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 ATF
Local Price Comparison
30,000
Price of ATF for different operators International Operators
AI / IC (International)
Domestic Operators*
25,000
Price in Rs. / Kiloliter (As of December 2003)

20,000
+51%

+25%
15,000

10,000

5,000

0
Mumbai Delhi Kolkata Chennai Average

Int'l Operators 14,908 15,355 16,306 14,568 15,284

AI / IC (Int'l) 18,635 18,426 20,383 18,792 19,059
Domestic Operators * 21,762 21,485 25,228 23,467 22,985
* Domestic Operators include domestic operations also of IC 17
 ATF Supply Scenario

 The three Government owned oil companies viz. Indian Oil

Corporation, Hindustan Petroleum and Bharat Petroleum jointly fix
prices. Also,
 Airlines cannot source supply of ATF from any other supplier.

 Airlines are offered common terms by the three suppliers, with no

competition amongst themselves.
 Government still has a role in determining the applicable prices even
though APM has been abolished.

 The infrastructure – Hydrants & Storage facilities– are owned by

Oil Companies, who are unwilling to share these facilities with
private suppliers e.g. Reliance who as a result export the ATF they
produce.
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 ATF Supply Scenario

 Direct import of ATF by Indian carriers is not permitted.

 Common carrier principle not applicable for infrastructure

facilities.

 Indian carriers are also not permitted to hedge ATF prices – Air

India is permitted to hedge to a limited extent on Fuel uplifted

outside India.

 Worldwide, airlines have derived significant financial benefits by

hedging ATF.

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 Way Forward

 ATF is the most important constituent of the operating cost

of an airlines in India.

 For successful operations of domestic airlines in India, it is

imperative that ATF costs / prices be brought down to

international levels.

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 Recent Policy Developments: …….

 Policy makers and aviation specialists have recognized the

distortions created in economics of Indian civil aviation industry

because of current high prices of ATF and present pricing policy

 A Committee appointed by the Government to review the

Indian civil aviation scenario and make recommendations about

future civil aviation policy has made several recommendations

about ATF in its report.

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 Policy Recommendations ….

 These include:

• Reduction of State level Sales Tax countrywide to 4%;

• Allow airlines to source ATF from supplier of their choice;

• Allow airlines to import ATF;

• Allow airlines to Hedge fuel prices.

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 Policy Announcements….

• Based on the recommendations of the review Committee and

with a view to further improve economics of Indian aviation

industry, the Government has already announced

• Reduction of Central Excise Duty on ATF from 16% to 8%.

• This however has marginal impact on price reduction of ATF.

• However, further steps are likely to be taken vis-à-vis ATF pricing

whilst framing new Civil Aviation Policy by the new Government to

take office shortly.

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 Policy Announcements….

• The purpose of above decisions is to make the industry viable

and to make air travel is affordable and expand market.
• As recommended by the Policy review Committee, similar
decisions have been taken and are being taken in other areas
such as:
• making international routes available to privately owned domestic
carriers;
• abolishing travel taxes such as the the Inland Air Travel Tax and
Foreign Travel Tax thus lowering air fares;
• replacing onerous requirements about operations on socially
important but largely unprofitable routes by a more equitable
subsidy bidding system;

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 Policy Announcements….

• reducing airport charges to bring them in line with charges

payable in other South East Asian and Gulf countries;
• encouraging operations with smaller aircraft and providing
connecting to emerging interiors markets;
• liberalizing norms for foreign equity participation;
• privatizing major airports like Mumbai and Delhi.

A lot more needs to done but a beginning has been

made in the right direction to make the industry in
India competitive and viable.

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Thank You

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