On Tuesday, the cabinet approved a Rs 5,000cr Emergency Credit Line Guarantee Scheme for airlines. This is the clearest signal, so far, that Indian aviation is in trouble. Indian carriers were not, anyway, having an easy run since the IndiGo crisis last Dec. War in Iran has compounded that misery.
An industry pleading for tax cuts and govt support is hardly novel. But a recent letter from the Federation of Indian Airlines (FIA) to civil aviation ministry, carries both genuine desperation and a partially credible threat. Current pricing of Aviation Turbine Fuel (ATF), FIA warns, will result in insurmountable losses, and “grounding of aircraft, resulting in cancellations of flights”. The crack spread, which is the gap between crude prices and the final price of ATF, has widened to $132 per barrel, according to FIA. So, fuel now accounts for nearly 60% of airline operating costs, up from the historical 35-40%.
Yet, what FIA seeks in the form of temporary duty waivers, or a reinstated crack band (a mechanism that caps refining margins within a defined range), or the approved emergency credit lines, are not silver bullets. They merely suppress symptoms.
Disease lies deeper, in a tangle of govt interventions that have left Indian aviation structurally fragile, long before the Hormuz shock arrived. While global oil prices are beyond India’s control, their shock is amplified domestically by a series of policy choices, which demand correction.
● First problem is in the market structure for ATF, where three OMCs (oil marketing companies IOC, BPCL, HPCL) control 100% of ATF supply at Indian airports. Sure, the current crack spread is driven by the Hormuz disruption. But on top of that, OMCs add their own marketing margin, historically around 21%, over which Indian airlines have no negotiating leverage, as there is no competition.
OMCs also revise prices on the same days of the month, a pattern that looks collusive, but is better described as price coordination by structural design, rather than conspiracy.
Before we rush to vilify OMCs, note that they are not free agents either. As state-owned entities, they are routinely asked to hold petrol, diesel, and LPG prices below cost, during politically sensitive periods. Today, they are losing roughly Rs 14 per litre on petrol and Rs 18 per litre on diesel, and more on LPG. Some part of this is recouped through margins on industrial products like ATF, where there is no political constituency to defend.
Indian aviation, in effect, helps subsidise India’s retail fuel populism. The solution here is to free up OMCs on pricing retail products, which will reduce the pressure to extract compensatory revenue from ATF. Longer-term solution is to introduce competition in the market, by bringing in private players to supply ATF.
● Second problem is rooted in absurdity. India produces more ATF than it consumes, exports half of it, and prices the rest as if it were imported as a finished product. Since 2002, ATF has been priced on an import-parity basis, including notional freight from the Gulf and customs duty and cess, adding roughly 10% to the cost. This pricing principle has no rational basis, and should be scrapped.
● Third problem is a mathematical one, and an important reason why Indian airlines pay much more for fuel than their foreign counterparts. India levies 11% ad valorem (percentage of price) excise duty. So, if the base price of crude jumps up, the tax burden increases along with the price increase, even though quantity remains the same.
In most other countries, taxes on ATF are a flat rate per gallon instead. In US, for instance, federal excise tax on jet fuel is a fixed cents-per-gallon amount, so when crude prices spike, the tax portion stays constant. Many other countries, such as Gulf states and Singapore, have zero taxes on ATF. If India has ambitions of becoming a transport and aviation hub, it must move towards a flat and low rate of taxes on ATF.
● Fourth problem has a political-economy flavour to it. ATF, along with other crude oil-based products, was kept outside the purview of GST in 2017, because states refused to surrender their VAT revenue. This has also resulted in a fragmented VAT architecture, with different VAT rates in different states. VAT on ATF ranges from 1% in some states, to 29% in Tamil Nadu. This wide range distorts route economics, and encourages airlines to fuel up in low VAT states.
Due to all of this, FIA has long maintained that Indian airlines pay nearly 65% more for ATF than their foreign counterparts, which is a structural disadvantage. Bringing ATF under GST, atopic that was discussed and summarily shelved at the 45th GST Council meeting in 2021, deserves a fresh push.
● Also, Indian airlines are not blameless either. Carriers globally use financial hedging, which involves locking in fuel prices months or years ahead through forward contracts, to insulate themselves from sudden price spikes. Major Europeanairlines typically hedge 50-80% of their forward fuel needs. Indian carriers hedge a fraction of that, often less than 5%. Some of this is strategic choice: hedging, like all insurance, carries a premium that looks wasteful in calm times. But part of it is regulatory friction, with RBI’s commodity hedging framework being cumbersome for airlines to navigate. So, when a crisis arrives, they are left vulnerable.
The time has come for GOI to change its conception of air travel as a luxury good, consumed solely by the rich, which is what drives its extractive and rapacious tax structure. Govt owns the OMCs that profit from high spreads, and taxes the airlines that suffer from these. As a growing and aspirational nation, which has schemes such as UDAN, it is time to design policies that allow aam nagrik to fly easily. This won’t be possible as long as we see aviation as a cash cow.
Disclaimer
Views expressed above are the author’s own.
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