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Wednesday, 08 February 2012 00:00
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Airlines importing fuel easier said than done

Going by the sharp surge in airline shares after the Group of Ministers okayed a proposal to allow them to import aviation turbine fuel (ATF) directly, India’s aviation problems are well on their way to getting resolved—the only reform left is to allow foreign aviation firms to buy a 49% stake in Indian airlines and that, aviation minister Ajit Singh has said, will be something his ministry will be recommending to Cabinet soon. Shares of Kingfisher Airlines rose to the maximum 20% before circuit filters kicked in and it closed the day 13.8% up; SpiceJet and Jet Airways closed at 11% and 14.5% higher, respectively. This is after the country’s second largest low-cost carrier SpiceJet saw its net worth sliding into negative (R24 crore) territory after the company reported losses of R39 crore in Q3—first 9-month losses for the airline are R345 crore. Jet Airways, the country’s largest private sector carrier, has posted combined losses of R937 crore in the first nine months of the fiscal and Kingfisher Airlines has reported losses of R731 crore during the first two quarters (it is yet to announce its earnings for the third quarter).

Much of this has been blamed, and this is why markets welcomed the GoM decision, on the high sales tax charged by different state governments—this ranges from 4-30%, with an average of around 20%. With ATF costs accounting for 40% of the costs, direct imports (which pay no sales tax) will result in a saving of 8% on annual expense, a huge amount by any standard for airlines where profit margins are typically 3-4%. Granting permission to import directly and being able to do so, though, are two very different things. If airlines like Kingfisher and Air India can’t pay PSUs their dues, how are they going to get credit from global suppliers; they will have to buy minimum shiploads of 20,000 tonnes each time, construct storage bays at ports and airports, find ways to transport the fuel between them and even find ways to pump this into their planes. That’s a logistical nightmare and just getting the land can take decades, so chances are airlines will try to tie up with oil PSUs to use their facilities in return for a fee. While the oil PSUs may be persuaded to play ball, a simpler solution would have been to put ATF under GST since this will prevent states from levying high sales taxes, but this hasn’t been done as states object to it. We have yet to see whether states will allow airlines to get away by not paying sales tax if they import the fuel directly via the PSUs. The larger issue of airlines pricing below cost, in the final analysis, is the real one that needs to be addressed—ATF duties are just one part of this.

 

 

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