Friday, February 10, 2012

Indian Carriers Count on the Direct Jet-Fuel Import Approval

On Tuesday, Indian government panel approved a plan that authorizes Indian airlines to import jet fuel directly. This approval is likely to help cash starved carriers to cut fuel costs by up to 20 percent.

At present, Indian carriers are required only to buy jet fuel from oil marketing companies including some government owned companies like Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp.

The right to import jet fuel directly has long been demanded by Indian carriers led by Kingfisher Airlines. Jet fuel accounts for about half of the operating costs of these carriers.

The oil marketing companies as mandated by the government levy different federal and state taxes raising the cost manifold and the jet fuel prices in India rank amongst the highest in the world. Fuel costs make for the biggest lump of the tickets price and remain an important factor in deciding an airlines’ ability or inability to offer cheap flights for travel.

The authorization to allow direct fuel imports is likely to reduce costs by 15 to 20 percent. However, the authorization announced to import fuel directly is still pending approval from the cabinet.

Jet Airways, popular choice of travellers booking flights to India, has shown interest in seeking help from oil companies to import jet fuel.

Most Indian airlines have succumbed to the high fuel costs, ruthless competition and economic slowdown, in the recent years.

Indian carriers are expected to lose up to $3 billion in the current fiscal year ending March and the State-owned Air India is expected to account for more than half of this estimate, as revealed by CAPA.

Sources revealed that Indian Aviation Ministry expects the total debt of the aviation industry in this fiscal year to rise to $20 billion. Air India has been approved for a $4bn debt restructuring and may issue INR74 billion ($1.5 billion) of bonds, informed Aviation Minister, without providing details.

The move is still pending approval from the cabinet and requires buy-in from lenders, who have been reluctant to agree to any plans involving acquisition of equities in Air India or requiring large writedowns.

The panel is soon going to pass its recommendation to the cabinet to allow participation of foreign airlines to buy up to 49 percent of Indian airlines.

Passenger’s Benefit

The possibility for the airlines to pass on the savings to the travellers in the form of cheap ticket deals on flights to India and within can not be ruled out. However, it is quite certain that the airlines would first focus on paying off their debts, cut operational costs and recover losses.

While cheap flights due to this move may not be on the cards, practical judgement indicates that, if not sooner, the passengers who travel frequently on Indian carriers stand to benefit from the government’s decision at a later stage, provided other price factors remain reasonably stable.

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