India’s Temporary Fuel Shield for Airlines

The Indian government has approved a one-time budgetary support of up to Rs 100 billion for oil marketing companies (OMCs) to provide Aviation Turbine Fuel (ATF) price stabilization support to scheduled Indian airlines for their domestic and international operations.

The move could benefit the operations of Air India, IndiGo, SpiceJet, and Akasa Air, among other airlines, and help moderate fares.

A Memorandum of Understanding will be signed with the Indian airlines that choose to participate in the new government endeavor, along with the OMCs, the Ministry of Civil Aviation, and the Ministry of Petroleum & Natural Gas as signatories. “Under this one-time arrangement, participating airlines will procure ATF only from OMCs for up to three years, subject to annual review or until the advance amount is fully recovered, whichever is earlier,” the government has mandated.

Interest-Free Advances

The proposal may be extended beyond thirty-six months with the approval of the Competent Authority if the corpus is not fully trued up within this period, as mandated by the government.

The scheme, approved on Wednesday, provides budgetary support in the form of interest-free advances to OMCs through the Ministry of Petroleum and Natural Gas’s Demands for Grants. The support shall be provided to OMCs to facilitate stable ATF pricing for airlines during the ongoing period of exceptional fuel price volatility arising from the West Asia crisis. In India, the ATF market is largely controlled by OMCs, which are government-controlled. There are exceptions, but they are few and far between for providing ATF, petrol, and diesel for domestic consumers.

The corpus shall compensate OMCs for losses arising from elevated international ATF prices whenever the prevailing Import Parity Price exceeds the benchmark price determined under the approved mechanism, the government said in a statement. Further, the government said that when international ATF prices moderate, the differential amount shall be recovered from OMCs and returned to the Consolidated Fund of India (CFI). The CFI is a sovereign fund into which all government earnings are deposited before being allocated to various government departments. The arrangement shall continue until the entire support amount is fully recovered and settled, the government has stated.

A monitoring committee, which includes members of the Ministry of Civil Aviation, Ministry of Petroleum & Natural Gas (MoPNG), and Department of Expenditure (DOE), shall oversee implementation, claim verification, reconciliation, and settlement. All claims and recoveries shall be subject to audit.
While the Ministry of Civil Aviation monitors and facilitates the smooth functioning of airline operations in, from, and to India, the MoPNG ensures fair pricing of oil products for domestic users, be it industry or the common man. The DOE is a department in the Federal Finance Ministry that keeps a hawk eye on the spending of the Federal government and its departments.

Outcomes expected from the latest government move

The government has proposed the latest move in hopes of providing enhanced stability and predictability in ATF pricing for Indian airlines, enabling better operational and financial planning.

Besides, it should shield OMCs from losses stemming from volatile, elevated ATF prices amid the ongoing West Asia crisis. “The measure will help protect and sustain domestic and international air connectivity, ensuring continuity of air services. It will reduce the pass-through of fuel price shocks to passengers, thereby helping to moderate fare volatility,” the Government has said.

It is hoped that the latest move will help sustain employment across airlines, airports, ground handling agencies, MROs, travel agencies, hospitality, and logistics sectors. Besides, continued air connectivity will facilitate the movement of passengers, high-value cargo, business travelers, and tourists, thereby supporting economic activity across sectors. It is also expected that the move will have a positive spill-over effect on tourism, hospitality, trade, exports, regional development, and investment.

The government move comes as ATF prices have sharply moved northwards for Indian airlines since the Gulf war started at the end of February this year going from Rs.60.50 to a litre in March this year to Rs. 142 a litre in May. 1 US dollar is about Rs 95 or Rs 96 in India.

ATF accounts for nearly 40% of an airline’s operating cost. Therefore, this volatility in ATF prices has resulted in high cost pressure on airline financials. Incidentally, TF accounts for nearly 40 percent of airline operating costs, and during periods of extreme fuel volatility, it can constitute up to 60 percent of total operating expenditure.

“The capping of ATF prices is a temporary measure and not sustainable in the long run for OMCs. Due to the capping of ATF prices, OMCs are also incurring losses, particularly with volatile and surging ATF prices during the Gulf crisis.” Besides, the closure of Pakistan airspace for Indian carriers has resulted in longer flight paths to Europe, North America, and Central Asia, increasing fuel burn and operational costs, the government has pointed out.

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