The Union Government recently decontrolled the import of Aviation Turbine Fuel
(ATF), the fuel that powers jet aircraft, which is in essence a refined form of kerosene. The airlines, actually one airline, the Vijay Mallya
promoted Kingfisher Airlines
has been clamouring for this to happen, claiming that the high state sales taxes on ATF are a major reason behind the airlines precarious fiscal position.
Indeed, India, rather some Indian states have punitive sales taxes on ATF which drive the price of domestic ATF (ATF sold for international flights does not attract sales tax) to some of the highest levels in the world. This coupled with a highly competitive market where airlines are unable, or unwilling, to charge cost price plus for airline tickets is a major reason behind what ails the airlines today. As an aviation reporter, I might argue that another reason for the problems the industry faces today was an irresponsible rate of growth during 2007 till 2009, but getting an insider to agree to that statement on record is impossible.
I asked Rahul Chopra, Director, Globe Hi-Fabs, a company that specialize in supplying fuelling equipment for aircraft and builds the humougous fuel tankers you see at some airports about the government's decision. He basically felt that while the government has allowed ATF imports, implementing the policy will be almost impossible. "Firstly, an airline can not import a day's requirement or a week's requirement. The global fuel industry does not work like that. They will need to place an order for a few hundred thousand kilolitres at a time. Three or six months supply. And pay the money upfront."
And that is just the start. "If you notice at most airports there are huge 'tank farms' where the Oil Marketing Companies (OMC) store massive amounts of fuel. A mid-sized tank farm with space for say 75,000 kilolitres will cost between $15-20 million dollars and take 18-20 months to build." And you can not build just one tank farm, Chopra says, "the OMC's have tank farms at every airport. Do the airlines have the massive sums of money to build so many tank farms? And then transport ATF across the country? Tankers charge Rs 8-10 per kilometer to transport fuel" On top of that, many new private airports have underground tank bays where fuel is stored and sell exclusive fuelling rights.
"The airlines can delude themselves into thinking that the oil marketing companies will handle the back-end infrastructure, but the OMC's are not altruistic, they will not do that for free. Not when they are losing money on diesel sales", Chopra argues. The point he is making, and a point that at least one senior airline executive at a leading low-cost carrier once told me, "Is it worth the headache and the expense? The simple answer is no."
Basically, if someone cannot run an airline properly can you expect them to run an oil company. The airlines would have been better off trying to persuade state governments to follow the Andhra Pradesh model and cut sales tax on ATF. Instead they went barking up the wrong tree. But that does beg one question, why did the airlines, rather, why did Mallya lobby for this in the first place?