Post on 31-Dec-2015
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JET FUEL PRICING AND SUPPLIES SCENARIO IN INDIA JET FUEL PRICING AND SUPPLIES SCENARIO IN INDIA AND ITS IMPACT ON THE ECONOMICS OF THE CIVIL AND ITS IMPACT ON THE ECONOMICS OF THE CIVIL
AVIATION INDUSTRYAVIATION INDUSTRY
Presentation by Presentation by SAROJ K. DATTA SAROJ K. DATTA
EXECUTIVE DIRECTOR EXECUTIVE DIRECTOR JET AIRWAYS (INDIA) PRIVATE LTD.JET AIRWAYS (INDIA) PRIVATE LTD.
1313thth MAY 2004 MAY 2004
MIDDLE EAST JET FUEL CONFERENCEMIDDLE EAST JET FUEL CONFERENCE1212thth – 13 – 13thth MAY 2004 MAY 2004
BAHRAIN 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.
4
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 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.
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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
ATF
Refined ATF
Refinery Transfer Price(RTP)
ATF Price
ATF Price to airlines
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 Expenses:Constitute 13.3% of
Total Operating Expenses.
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0.00%
4.00%
8.00%
12.00%
16.00%
20.00%
24.00%
28.00%
32.00% Fuel & Oil Expenses as a % of Total Operating Expenses(Comparison with Association of European Airlines)
AEA Average: 13.31%
Prices as of July, 2003
India Average: ~30%
ATFOperating Cost Comparison
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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
0
5,000
10,000
15,000
20,000
25,000
30,000
ATF Prices 14,218 12,881 12,638 12,638 11,909 12,030 11,666 21,762 21,485 25,228 23,467
Dubai Paris London New York Hong Kong Singapore Tokyo Mumbai Delhi Kolkata Chennai
Indian Average (Rs. 22,985 per Kilolitre)
International Average (Rs. 12,569 per Kilolitre)
Prices as of December, 2003
+ 83%
Exchange Rate: 1 USD = Rs. 46
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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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0
5,000
10,000
15,000
20,000
25,000
30,000
Pric
e in
Rs.
/ Ki
lolit
er (A
s of
Dec
embe
r 20
03)
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
Mumbai Delhi Kolkata Chennai Average
Price of ATF for different operators
+25%
+51%
* Domestic Operators include domestic operations also of IC
ATFLocal Price Comparison
International Operators
Domestic Operators*
AI / IC (International)
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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