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.

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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 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