India may soon have a new mechanism to price air turbine fuel (ATF) for domestic airlines which will bring more parity between global crude price and ATF price in India.This, say airline executives, may take down the cost of ATF by at least 15 per cent and will be a big boost for ailing Indian carriers for whom ATF consists of 40 per cent of total cost of operations. ATF prices have seen more than 50 per cent hike since January.Sources said that state-owned oil marketing companies (OMC) – HPCL, BPCL and IOC – are likely to shift to a pricing mechanism based on global benchmark index like the MOPAG (Mean of Platts Arab Gulf). This, say airline executives will also bring more reliability and predictability in fuel pricing and allow them the cushion of hedging and control their output cost. OMCs are already selling ATF to international airlines based on MOPAG prices.
Executives of OMCs said that they are working on a dual pricing system where the price of ATF in metro and remote locations may be different and a handling charge may be added for airports in remote locations to cover transportation cost.”Domestic airlines are asking OMCs to use the same formula that is used to price ATF for international airlines. One has to understand that international airlines operate out of limited airports in India whereas domestic airlines operate from over 200 airports. We will have to factor in transport costs for airports which are away from refineries. So OMCs may deliberate on a dual pricing system based on airport location,” said a senior OMC official.
Following the dismantling of the ‘Administered Price Mechanism’ (APM) in April 2001, currently ATF price in India and is fixed based on the International Import Parity Prices, and is linked to the benchmark of Platt’s publication of Fee on Board Arabian Gulf ATF prices (AG). “This doesn’t capture the true price of producing of producing ATF in India and is lop sided against that of airlines as there is no transparency in pricing. Price for ATF sees a steep hike when brent crude price increases but when the crude price falls, the same is not passed in similar proportion to airlines,” an airline executive said.
OMCs also include cost of freight charges from Gulf to India; 11 per cent ad valorem rate of excise duty and other charges like transportation cost. Besides that, state governments also levy value added tax (VAT).A delegation led by civil aviation minister Jyotiraditya Scindia and top airline executives this month told the petroleum ministry that the current pricing mechanism is unfavourable to them and making operations unviable.The civil aviation ministry is also engaging with states to bring VAT on ATF within the range of 1-4 per cent. “In 2020, 12 states had VAT on ATF in the range of 1-4 per cent and 26 states levied VAT from 15-30 per cent. With constant persuasion the picture has completely reversed now with 15 more states including states like UP and Karnataka with large airports like Lucknow & Bengaluru reducing VAT to 1-4 per cent,” said a senior civil aviation ministry official.