JET FUEL PRICING AND SUPPLIES SCENARIO IN INDIA AND ITS IMPACT ON THE ECONOMICS OF THE CIVIL AVIATION INDUSTRY

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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
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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

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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.

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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 Indias best
  domestic airline.

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Aviation Turbine Fuel (ATF)

• Aviation Turbine Fuel is one of the most
  important constituents of any airlines costs.
• In India it is even more so because of the huge
  disparity in ATF prices applicable in India and
  elsewhere in the world.

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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 F
Add-on of 20 - Import parity Marketing margin
add on 21
Government levies of 35 - 8 Central Sales Tax
plus 25 State Sales Tax
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
  ExpensesConstitute 13.3 of Total Operating
  Expenses.

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ATFOperating Cost Comparison
Fuel Oil Expenses as a of Total Operating
Expenses (Comparison with Association of European
Airlines)
India Average 30
AEA Average 13.31
Prices as of July, 2003
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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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ATFInternational Price Comparison
Indian Average (Rs. 22,985 per Kilolitre)
83
International Average (Rs. 12,569 per Kilolitre)
Exchange Rate 1 USD Rs. 46
Prices as of December, 2003
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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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ATFLocal Price Comparison
Price of ATF for different operators
Domestic Operators include domestic operations
also of IC
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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