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BW Businessworld

A Manna For Airlines?

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In major steps to bolster the beleaguered aviation sector, a Group of Ministers on Tuesday recommended direct import of jet fuel by airlines to help them save on high taxes and allow Air India to raise Rs 7,400 crore by issuing government-guaranteed bonds or other means.

The decision on jet fuel would help airlines significantly as it accounts for more than 40 per cent of their operating costs. To allow direct import of jet fuel by the airlines, the item has to be removed from the list of those imported through government channels. But this proposal is also likely to deal a heavy blow to a beleaguered oil sector already reeling from heavy losses incurred from selling diesel, kerosene and LPG at subsidised prices.

Currently, oil marketing companies lose Rs 11.35 per litre of diesel, Rs 28.77 per litre for kerosene and Rs 378 per litre of LPG sold. The cumulative losses on selling these three products at subsidised prices has already hit nearly a whopping Rs 1,00,000 crore – and that's only for the first nine months of the current financial year (April-December).

This year, the gross oil subsidy is expected to be at an all-time high of Rs 140,000 crore (compared to Rs 78,190 crore last year), as reported in Business Standard. A third of this will be borne by upstream oil companies Oil and Natural Gas Corporation and Oil India. Last year, the three marketing companies together showed Rs 10,531 crore in profits even after absorbing an under-recovery of Rs 6,893 crore. However, the companies are in no position to absorb any loss this year.

Sales tax imposed by states on jet fuel varies between four to 30 per cent. In the last fiscal, Indian oil companies had sold 5.08 million tonnes of jet fuel, an increase of 9.7 per cent over 2009-10.

The airlines, almost all of which are losing money, are now required to buy fuel from oil marketing companies including government-controlled Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp, which are mandated to levy various centraol and state taxes.

Largely because of these taxes, jet fuel prices in India are among the highest in the world and the move to allow direct imports could reduce costs by 15 to 20 per cent, analysts said.

Kingfisher shares surged by their maximum daily limit of 20 per cent on the news, while SpiceJet and Jet Airways rose 19.5 per cent and 18.2 per cent respectively.

Tuesday's GoM meeting, earlier slated for Thursday, was headed by Finance Minister Pranab Mukherjee. The recommendations would be taken up for approval by the Union Cabinet and the Cabinet Committee on Economic Affairs respectively soon, Civil Aviation Minister Ajit Singh told reporters after the 90-minute meeting here.

It was also attended by Home Minister P Chidambaram, Petroleum Minister S Jaipal Reddy, Commerce Minister Anand Sharma and Planning Commission Deputy Chairman Montek Singh Ahluwalia, apart from top officials.

New Set Of Challenges
Importing the fuel will present its own challenges, however.

"Airlines have to look at where they can store this fuel," said Rajan Mehra, executive director at Asia Pacific Academy for Aviation and Hospitality. "I think actual net savings will be 10 percent because they will be paying for storage as well."

Sharan Lillaney, aviation sector analyst at Angel Broking, said the move would have little impact in the short term.

"Also, when they don't have the money to pay local oil companies how will they buy in the international market," he said. "It will take very, very long time to materialise."

Jet Airways, India's biggest airline by market share, said it may seek help from oil companies to import fuel.

"We do not have the infrastructure. If the oil companies support this initiative it will be a good thing for airlines to bring down the cost," M. Shivkumar, the airline's senior vice president of finance told CNBC-TV18.

The decision, announced by Aviation Minister Ajit Singh, still needs cabinet approval.

Aviation FDI
The meeting was also apprised of the recent decision to allow foreign airlines pick up 49 per cent stake in Indian carriers. A note on the issue would be prepared soon for the Union Cabinet to give its nod, he said.

On Air India, the GoM recommended, among other steps, issuance of bonds with sovereign guarantee worth Rs 7,400 crore, Singh said.

The bond is likely to carry a coupon rate of 8.5-9 per cent and financial institutions may subscribe to these bonds, official sources said, adding this would be part of the national carrier's financial restructuring plan which was also approved by the GoM today.

"First thing is that on Air India's financial restructuring GoM has taken a view. Bonds will be issued, but this will have to go to the Cabinet. Bonds, and there are other ways," the Minister said, adding that about Rs 7,400 crore would be raised through these means.

On ATF imports, Singh said airline "companies will be allowed to import fuel directly for their use. This also has to go to the Cabinet. GoM has approved this. We will try to see whether some kind of credit arrangement can be made."

(With input from Agencies)