India's ATF pricing puzzle: Why airlines pay global rates for domestic fuel and why a reset is needed

India's aviation turbine fuel (ATF) pricing mechanism is coming under scrutiny as rising fuel costs squeeze airline finances, with Markets by Zerodha highlighting the disconnect between the country's domestic refining capacity and the prices paid by airlines. The debate has gained urgency after ATF prices in Delhi rose 13% in a month to ₹137 per litre, prompting carriers to increase fuel surcharges.

The central issue is that airlines do not necessarily pay prices based on the actual cost of producing fuel at Indian refineries. Instead, ATF prices are linked to international benchmarks, exposing domestic carriers to global energy market volatility and currency fluctuations, even when the fuel is refined locally.

Why domestic fuel is linked to global prices

International benchmark-linked pricing means domestic ATF prices reflect prevailing global market conditions rather than simply the cost of crude oil procurement, refining and distribution in India. Prices are also influenced by the rupee's exchange rate against the dollar, adding another layer of uncertainty for airlines.

Taxes compound the burden. Central excise duty and state-level value-added tax (VAT) contribute to the final price, with differences in state VAT rates creating additional variations in fuel costs across airports.

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This combination of international benchmark pricing, currency exposure and taxation has become particularly challenging as geopolitical tensions in West Asia disrupt energy markets and raise operating costs.

According to the Federation of Indian Airlines (FIA), fuel now accounts for around 55-60% of airline operating costs, compared with 30-40% historically. The industry body, representing Air India, IndiGo and SpiceJet, has sought cost-plus pricing for ATF used in domestic operations, a fixed-rate excise levy and continued relief on taxes and airport charges.

Why the government's safety net failed

The Centre had proposed a ₹10,000-crore ATF Price Stabilisation Fund (PSF), designed to protect airlines against sharp fuel price movements around a benchmark of ₹115 per litre. However, the scheme lapsed after no domestic airline signed the mandatory memorandum of understanding with state-owned oil marketing companies within the prescribed timeframe, Hindu Businessline reported in July.

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Markets by Zerodha highlighted the scheme's participation problem: when market prices temporarily fell below the proposed baseline, airlines did not sign up. With prices now rising again, the absence of an operational protection mechanism has renewed calls for intervention.

Civil Aviation Minister K Ram Mohan Naidu said on Tuesday that the government was considering reviving the fund, with inputs from airlines and oil marketing companies, to develop a workable framework.

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What an ATF pricing reset could change

Airlines are seeking a shift towards pricing linked to actual refining costs, alongside more predictable taxation. Such reforms could reduce exposure to international price swings, although the extent of any savings would depend on the pricing formula, crude costs and tax changes.

Meanwhile, higher fuel expenses are already reaching passengers. IndiGo, Air India, Air India Express and Akasa Air have revised or introduced fuel surcharges ahead of the festive season.

The policy challenge is to balance affordable air travel with the financial viability of airlines. Without a predictable pricing framework, fuel volatility could continue to pressure fares, profitability and the sustainability of routes.