For some years now, the Airports Authority of India (AAI) has been mulling over the idea of setting up common infrastructure for supplying aviation turbine fuel (ATF) across all major airports as to facilitate direct import of ATF by airlines and also to improve facilities at airports. Several meetings have been held with officials from the Ministry of Petroleum & Natural Gas and the oil companies. However, a breakthrough is yet to happen. Recently, the AAI held a round of consultations with senior officials from the Ministry of Petroleum & Natural Gas, Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Limited (HPCL) and Bharat Petroleum Corporation Limited (BPCL). The proposal, once implemented, would help airlines realise their plans to import jet fuel directly. The authority is contemplating to set up a special purpose vehicle (SPV) along with state-owned oil marketing companies to develop common infrastructure to import and store ATF. One of the benefits of such a common facility would be that it would substantially lower user charges up to ten per cent.

Special Purpose Vehicle

The proposed SPV would have the mandate to set up fuel farms to be operated on the lines of an open access model across major airports. The open access model is claimed to be a one-of-itskind initiatives in India. It is currently under implementation at the Delhi and Hyderabad international airports. Under this arrangement, common storage facilities are set up for utilisation by any oil marketing company (OMC) in lieu of a predetermined fee. Any oil company can supply fuel to airlines according to a mutually decided agreement, resulting in increased competition and thereby enhanced service and competitive pricing. The airlines in turn, have a choice of fuel suppliers to source from.

According to reports, the SPV would be an equity-led facility and IOC has reportedly asked for 37.5 per cent equity; AAI 25 per cent and BPCL and HPCL 20.25 per cent each. But AAI is not in agreement with this arrangement and is seeking higher stake as it would be providing land for setting up common infrastructure and that land was the costliest element. AAI has sought a 50 per cent stake.

Though ATF prices have come down, fuel costs continue to constitute a high percenta ge of operat ional expenses of an airline in India

Amber Dubey, Partner and India Head of Aerospace and Defence at global consultancy KPMG, has been quoted in the media saying, “The government should completely unbundle the ownership of the ATF transmission infrastructure and the ATF flowing therein. Unbundling of transmission infrastructure and distribution in power sector led to greater efficiency, accountability and quality of service. Open access to ATF transmission infrastructure will enhance competition between ATF producers and importers and bring down costs. This is already happening at the few airports where open access for ATF had been enabled. ATF is the single largest cost item for airlines and every thousand rupees saved adds at least four hundred rupees to the airlines’ troubled bottom line.”

Naresh Chandra Committee Recommendations

The Naresh Chandra Committee in its report on civil aviation had cited that the government-owned oil companies enjoyed exclusive privilege over supply (domestic and imported) of ATF and control fuel hydrants and associated infrastructure located at the airports. All the three government-owned oil companies continued to charge the same price. Furthermore, an examination of the fuel price at various points in the supply chain suggests that these companies may be overcharging at the expense of air carriers. The committee was of the firm view that the monopoly of government-owned companies in the supply of ATF is grossly incongruent with the ongoing process of liberalisation in the oil sector.

Accordingly, the committee recommended that airlines should be allowed to source ATF from the supplier of their choice. In order to facilitate this process, the committee further suggested that the AAI should offer to buy out the fuel supply hydrants and associated infrastructure of the governmentowned oil companies and provide all oil companies equitable access to such facilities.

Alternatively, the government-owned oil companies should be required to provide private oil companies access to these facilities based on a ‘common user/carrier’ principle. In either case, given that abuse of monopoly power cannot be ruled out and fuel supply infrastructure at airports should come under the purview of the proposed Aviation Economic Regulatory Authority (AERA).

Based on the Naresh Chandra Committee recommendations, the government in 2012 allowed airlines to import fuel directly; but due to lack of infrastructure for storage the airlines could not bring this to levels desired.

SpiceJet Shelves Pilot Project

SpiceJet was the first to plunge into direct import of ATF with a pilot project in Kochi. It had signed an agreement with Reliance Industries Ltd for technical support including fuel testing, quality control services, etc, at its coastal terminal. SpiceJet was hoping to import 15 per cent of its fuel requirement but then the logistics of it subsequently made the airline shelve the project. Under the pilot project, the imported ATF was being stored and tested for quality at a private tank at the Kochi port. Subsequently, it was carried in trucks or tankers to a common fuel tank at the Kochi airport. The airline paid rent for the use of storage tanks.

A SpiceJet spokesperson had told the media then: “We did a proof of concept last year and then decided to put the idea on hold. Theoretically, importing ATF is a great opportunity to reduce fuel costs; but we do not think that we are still ready for it yet.”

IndiGo imports Small Percentage of ATF

Profitable low-cost carrier IndiGo is also directly importing ATF into Southern ports for feeding some of its flights. In a recent interview, the IndiGo President and Executive Director Aditya Ghosh said the airline was importing ATF and that it was a very small percentage. Asked whether the share would go up, he had responded by saying: “Well, it depends on what happens with domestic taxes as well. In the domestic market, a lot of airports are gradually bringing their fuel taxes down, whether it is Bagdogra, Vizag, Jaipur or Dimapur. There are several cities in India which are gradually lowering tax on ATF and if that continues to happen, then maybe, we do not need to import fuel. I’m very hopeful on that.”

Though ATF prices have come down, fuel costs continue to constitute a high percentage (between 35 and 40 per cent) of operational expenses of an airline in India. Airline profitability depends so much on ATF prices.

ATF Prices Down

On September 1, 2015, ATF prices were slashed by a hefty 11.7 per cent. In Delhi, ATF prices were cut by Rs. 5,469.12 per kilolitre and it will now cost Rs. 40,938.24 per kilolitre. This was the second steepest reduction in ATF prices since January 1, 2015, when the OMCs had lowered prices of fuel by Rs. 7,520 per kilolitre. With the latest price cut, ATF prices have halved in percentage from a peak of around Rs. 80,000 last year, thanks to the meltdown in international crude oil prices.

If airlines import jet fuel directly, they would have to pay only customs and countervailing duty. But the logistical challenges make it economically unviable. To import two things are imperative—tank at a coastal area and pipeline connectivity from the coast to the airport. This is logistically challenging for an airline. Currently, carriers procure fuel from state oil marketing companies who import crude, process it locally and distribute it to airlines across the country. This requires infrastructure such as storage tanks and pipelines, as well as trucks and tankers.The oil companies are geared for this task. If the SPV comes through, then airlines would stand to benefit substantially. The SPV needs a major push from both the Civil Aviation and Petroleum Ministries.