beyondbrics

The embattled Indian aviation industry was handed a lifeline by the Indian government on Tuesday when the aviation minister announced that domestic carriers will be allowed to import jet fuel directly, thereby avoiding hefty sales tax that has helped to drive the companies into debt.

The move – announced by aviation minister Ajit Singh but yet to be approved by the cabinet – sent shares in domestic carriers soaring, with Kingfisher Airlines, Jet Airways and SpiceJet closing up 13.20, 14.48 and 10.98 per cent, respectively, compared to a 0.48 per cent drop in the Bombay Stock Exchange’s benchmark Sensex.

Analysts told beyondbrics that the new rule was a “game-changer” for the aviation industry which, as beyondbrics has reported, has been faced with a cash crisis over the last two years. This was caused mainly by a price war initiated by state-owned Air India – for which the government also approved a debt restructuring plan – and hefty sales taxes that vary by state but add an average of around 24 per cent to the cost of jet fuel.

“It is a big deal because… aviation companies, out of their overall costs, 50-52 per cent is on fuel. And if you save one-fourth of that, then you end up saving 10 or 12 per cent,” Deven Choksey, managing director of KR Choksey, told beyondbrics. “This cost savings on [jet fuel] is a lifeline for aviation companies.”

But some Indian airlines are taking a more cautiously optimistic tack on the news, mindful that directly importing fuel will throw up a series of logistical problems, including charges from oil companies for the use of their infrastructure, transportation costs and customs duties.

M Shivkumar, head of finance at Jet Airways, India’s biggest carrier, told CNBC about his concerns on Tuesday.

“We do not have the infrastructure to import [aviation turbine fuel],” he said. “Also, investing in importing fuel will be expensive.”

But, he added, across India the company pays around 22 per cent in sales tax, and “if we were to import it, based on whatever customs duties that are currently prevalent, including storage, transportation to take care of even evaporation losses, it could give a good amount of savings of up to 13-13.5 per cent.”

The savings may also make Indian airlines more attractive as investments to foreign carriers which, as beyondbrics reported, may soon be allowed to invest up to 49 per cent in the industry, according to Choksey.

“Ultimately it will help the foreign investment to come into India, because high fuel costs was one of the things keeping foreign players out,” he said. “Now that aviation fuel [prices are] coming down, it is more of a conducive environment for them to come into this market.”

Sharan Lillaney, aviation analyst at Angel Broking, agreed.

“This is a game-changer for the industry,” said Lillaney. “Although this might not have an immediate impact on their profitability, as they will have to get the infrastructure in place to import the fuel, in the long term it will make them more attractive to potential foreign buyers.”

Even without such infrastructure of their own, aviation companies will be able to utilise that of the state oil companies, said Choksey.

“Infrastructure is available – the oil marketing companies are storing fuel which has been imported,” said Choksey. “That same infrastructure can be made available to them at a cost.”

Still, one Mumbai-based analyst who did not wish to be named told beyondbrics that the Indian oil companies were unlikely to offer up their infrastructure at a low rate, especially considering that aviation companies that import fuel directly will essentially be depriving the domestic companies of profit.

“When an oil company see that a company is directly importing [fuel], they will work out the storage and transportation costs so the savings will not be that high,” he told beyondbrics. “Also, oil companies first need to agree that they can and will transport the oil on behalf of aviation companies all over India.”

Whether the companies are keen to help their clients save money by going to other suppliers remains to be seen, but Shivkumar seems to be counting on the fact that the oil companies are state owned.

“We certainly will have to go to oil companies and seek their cooperation,” he told CNBC. “If the government has taken this initiative, we would also expect oil companies to cooperate to ensure that this materialises.”

A lifeline, perhaps.

Related reading:
Air India: state to the rescue, again, beyondbrics
Indian airlines: a bad year, for most, beyondbrics
Time running short for Kingfisher Airlines, FT
A dogfight over Delhi, FT