4. Indian Aviation Industry
• Fastest growing aviation industry in the
world (18 % growth per annum, Jan 09
figures)
• Government's open sky policy -> many
overseas players entering the market
• Growing both in terms of players and
number of aircrafts (310 carriers + 480 in
order)
• Private airlines account for around 75 per
cent share of the domestic aviation
market.
5. Hindrances to perceived growth
• Regulatory uncertainty on aeronautical
charges increases level of risk for
private investors
• Significant slowdown in aviation traffic
• Affect on AAI’s capital expenditure
plans
• Increasing aviation turbine fuel (ATF)
prices and taxes on the fuel continue
to push up costs
7. What is Aviation Turbine Fuel?
• Used for powering jet and turbo-prop
engine aircraft
• Currently two main grades of turbine fuel in
use in civil commercial aviation: Jet A-1
and Jet A - kerosene type fuels.
• Aviation fuels consist of blends of over a
thousand chemicals, primarily
Hydrocarbons & additives such as
antioxidants and metal deactivators, etc.
• Principal components include n-octane and
isooctane.
8. Facts of ATF (India)
• ATF constitutes 40 per cent of airlines'
operating cost in India, compared with 20-25
per cent globally.
• ATF price per kl averaged between Rs 24,000
to Rs 26,000 from the entire East and South-
east Asia to Dubai, London and New York.
• Price in states like Andhra Pradesh, which had
the lowest sales tax rate of four per cent,
ranged between Rs 34,000 and Rs 35,000. In
Delhi, it was Rs 38,000, in Mumbai over Rs
40,000 and in Kolkata Rs 46,000 (Aug 09)
• High ATF costs erode the profitability of a FSC
carrier by 10% and that of a LCC by 15%
9. Indian Aviation Turbine Fuel Market
• Highly controlled and monopolized market
• Pricing traditionally been determined by the
Government under the Administered Price
Mechanism (APM)
• In April 2001, APM dismantled and oil
companies given freedom to price ATF based
on input costs and world market prices.
• Still, the price of ATF in India continues to be
much higher. Due to:
• Irrational tax structure
• Cartelization of oil PSU's and monopoly of pricing
10. Indian Aviation Turbine Fuel market
• Pricing Mechanism for ATF
Source: http://www.scribd.com/doc/3900618/Atf-Document
11. Prices of ATF
• There are no imports of ATF (aviation
turbine fuel) and it is a freely priced
petroleum product in India Prices
• The price of domestically produced 45000
ATF is based on import parity price 40000
35000
factoring in the basic customs duty. 30000
• There is a continued monopoly of the 25000
20000
three state-owned oil companies: 15000
Indian Oil Corp., Bharat Petroleum 10000
5000
Corp. Ltd and Hindustan Petroleum 0
Corp. Ltd.
• These PSU Oil firms, revise jet fuel
rates every fortnight based on trends
in international markets
• High rates of sales tax are imposed
by various state governments on
aviation turbine fuel (ATF)
14. Global Price Trends
Source: http://www.scribd.com/doc/3900618/Atf-Document;
http://www.iata.org/whatwedo/economics/fuel_monitor/price_analysis.htm
15. Current Players in ATF Market
• Before 2005, ATF marketing was a monopoly of the state-
owned oil companies like Indian Oil, Hindustan Petroleum,
Bharat Petroleum, Oil and Natural Gas Corporation (ONGC)
• Private oil companies Reliance Industries Ltd, Essar Oil and
Shell India entered aviation turbine fuel (ATF) marketing after
2005
• Reliance already had started marketing ATF abroad and is
presently exporting premier quality ATF to various countries
• Reliance has 3.6 million metric tonne per annum (MTPA) ATF
production capacity at its Jamnagar refinery in Gujarat and
Essar Oil has a 10.5 MTPA refinery at Vadinar in Gujarat that
produces ATF
• Reliance currently produces about 2.95 million tonne per
annum of ATF at its Jamnagar refinery, most of which is
exported.
• Essar Oil, which also has also been exporting its entire 1.44
million tonne of ATF production, started marketing it in the
domestic market from 2008
17. What brought us here?
• Supply of jet fuel in all of India has
been the monopoly of three state-
owned oil marketing companies and
they typically priced the fuel at about
65% higher than it is available in many
airports outside India.
• With new private players entering the
market, the hold of the three giants
seems to be wavering.
18. Need for PPP
• State-Owned Oil Giants
• Exploration and extraction
of ATF Technological
advances
• Newly created
facilities to
supply fuel at
many Indian
airports.
• .
19. Need for PPP
• Private players
• Easy Government approvals for expansion plans
• Better profit margin in domestic sales compared
to exports
• No setting up new infrastructure costs on airports
that amounts to saving 115 crores
• Aviation Industry/ Consumers
• Public players monopoly ends
• ATF prices might soften for the industry, making
air travel cheaper.
21. Current PPP
• Buy Build Operate (BBO) Model to be
used for a JV between the public and
private partners
• E.g. IndianOil Skytanking (IOSL), a
consortium of Indian Oil Corporation,
Indian Oiltanking and Germany’s
Skytanking
• Wraparound Addition
• E.g. ONGC-subsidiary Mangalore Refinery
tie up with Shell Aviation
22. Advantages of PPP
• Government run companies not working to their
Efficient Asset full capacity
Utilization • Use of airport infrastructure for storage and
machinery for fuel transportation at airports
Dilution of • No Monopoly ensures optimization of prices
Monopoly • Regulatory framework emerging
• Private entities more accountable to stakeholders
than public
Accountability • This leads to better dealings of issues and better
efficiency and productivity with the private sector.
23. Current Scenario
• States are opposed to bringing ATF under the
declared goods category, as demanded by airlines.
If ATF brought under declared goods, no state
would be able to impose more than four per cent
sales tax on jet fuel.
• The sales tax rates, which vary from state to state,
range from a mere four per cent in Andhra Pradesh
to over 30 per cent in several other states.
• The airport economic regulatory authority (AERA) is
formed by the Civil Aviation Policy to regulate air
tariffs and performance standards for domestic
aviation sector.
24. Measures by the Government
• A Group of Ministers (GoM) was set up in August 13, 2009 to
study the impact of high jet fuel prices on the aviation industry
and recommend measures to bring down its burden on the
operational costs of the airlines (Aug 2009)
• Focus is on the "very high nature" of sales tax being imposed
on aviation turbine fuel (ATF) by various state governments as
also its base price, which was "much higher" than most
countries
• the prices of jet fuel had increased by as much as 99.6 per
cent in one year
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