ATF cut won’t lower fares
Oil companies have cut aviation fuel price by an average 250/kl. However, it’s unlikely to translate into better profitability for airlines and lower airfares.
This is not going to make any perceptible impact on airlines’ operating costs There is an urgent need for transparency in aviation turbine fuel pricing Temporary increase or decrease of ATF has nothing to do with airline profit or loss
Indian oil retailers have cut aviation fuel cost (ATF) by an average of 250/kilolitre (KL) from June 1, on the back of softening international crude oil price, making it the third steepest decline since March 1.
According to the Indian Oil Corporation website, the price for ATF in Mumbai would now cost 64,381.15/kl from
64,624.69/kl. This means, in Delhi, domestic carriers will have to shell out 62,416.16/kl against 62,649.95/kl if they refill fuel. Rates at different airports vary because of differential in local sales tax or VAT. Kolkata would see price cut of around
` 260 to ` 72,250.952 per kl, while it will cost ` 67,925.43 in Chennai as against
` 68,191.73 per kl previously.
Arun Mishra, Director General of Civil Aviation, tells TravTalk, “While reduction in ATF price is a good development, the reduction is not significant (0.3%). This is not going to make any perceptible impact on airlines’ operating costs. The main issue in ATF costs is the huge sales tax on ATF levied by the state governments. Both Ministry of Civil Aviation and the airline industry have been constantly urging the states to reduce the taxes as it will have a good impact on lowering of ticket prices as well as improving connectivity to states. ATF accounts for 40-50% of operating cost of airlines. Reduction in ATF prices would translate into better profitabil- ity of airlines which means growth of airlines and civil aviation sector in general.”
Amber Dubey, Partner and Head-Aviation at global consultancy KPMG, agrees, saying, “A 25 paise per litre reduction in ATF, which costs anywhere from 62-74 per litre, is welcome but inadequate. It may have near-zero impact on airfares.”
“There is an urgent need for transparency in ATF fuel- pricing. It should be priced on an efficient cost plus fair-margin basis by oil companies, and not on an opaque import-parity pricing basis. Added to that is the excessive 22-35% sales tax which renders our ATF one of the costliest in the worldalmost 50-60% costlier than competing regions like Middle East and SE Asia. ATF in India should be priced at ` 42-45 per litre if we have to achieve our target of becoming the third largest aviation market by 2020,” Dubey adds.
Biji Eapen, President, IATA Agents Association of India, “In India, whenever there is any increase in ATF price, our carriers enhance ticket prices immediately, especially Air India and Jet. Variation of fuel surcharge should be in resonance with ATF price variation. However, Indian carriers are not known to have revised the prices downward, even when ATF price fell. Hence, temporary increase or decrease of ATF has nothing to do with airline profit or loss and the travelling public should get the benefit of reduced costs.”
Meanwhile, direct import of ATF by airlines sounds good, but is very difficult to implement. ATF import, transportation, storage and supply to the aircraft is a complex subject and not something that airline managements would like to waste their time and energy on. Dubey points out that they would become the laughing stock of the world if airlines do direct import from foreign suppliers, since chances are that it could actually be ATF produced and exported by our own refineries. “According to industry sources, last year India exported nearly 50% of its ATF production. Imagine the cost and hassle of importing back our own produce, just because we can’t get our taxation structure right. And after all this, nothing stops states that may lose out on ATF taxes to impose taxes in the form of ‘entry tax’, putting this whole exercise in jeopardy,” he concludes.
Director General of Civil Aviation
Partner and Head-Aviation KPMG
President IATA Agents Association of India