Letter by Amitabh Khosla,
IATA’s Country Director, India
Published in the Business Standard on 14 February 2012
India’s carriers are hurting. This is partly a result of the lack of joined-up policies across government ministries. Indian aviation has deep-rooted problems that need comprehensive and coordinated solutions, and high
aviation turbine fuel (ATF) pricing is certainly the
most urgent.
Hence, the proposal of the Group of Ministers (GoM) to allow domestic Indian carriers to directly import ATF is certainly a welcome development. Airlines need to be allowed to function as normal businesses which have the same commercial freedoms as any other business entity. But the GoM proposal is only a first step, albeit small, towards untangling the maze of regulations which confounds India’s airline industry.
There are two main causes for the high fuel price which need to be addressed:
• The high state sales tax which is 20-30% on the base price of ATF; and
• The lack of effective competition among the ATF suppliers.
On average fuel accounts for 30% of an airline’s operating costs. For Indian carriers it is 45%. Even in a good year—as aviation experienced in 2010, airlines struggled to make a 2.9% margin on an industrywide basis. For India’s airlines, carrying the cost burden of an extra 25% on average, on fuel is simply not sustainable in a ferociously competitive industry. It is akin to sending a boxer into the ring with his hands tied. There is indeed no public policy benefit to the Indian economy by keeping aviation fuel prices high.
The GoM’s proposal to allow Indian carriers to import ATF is though not the silver bullet that will solve the woes of the carriers. Nonetheless, it can potentially bring relief to the high price of ATF, provided the imported ATF is not subjected to state sales tax, or any other similar new tax.
But one other important step that is needed for India is to introduce effective competition among ATF suppliers. The three Public Service Undertaking (PSU) oil suppliers in India have market dominance, primarily because they control key ATF supply infrastructure at airports, such as fuel storage facilities and pipelines. The barrier to entry for another ATF supplier is high as it is not economically feasible to have duplicated supply infrastructure. The result is limited or no competition as the PSU oil companies are unlikely to allow airlines or other competitors access to the infrastructure, or do so at a reasonable price, unless the government or the Competition Commission of India (CCI) mandates this.
We see this at two of India’s largest airports. Delhi Airport still does not have any new ATF suppliers despite seemingly providing open access and having a common-use facility at the airport, while new entrants at Mumbai Airport have not gained access (at efficient prices) to the fuel pipelines owned by oil PSUs. The experience in India’s power and telecom industries tells us that fair and reasonable access for third parties to essential infrastructure facilities can promote effective competition. This can be the same for ATF supply. But the government needs to establish a right of access by third party suppliers to ATF infrastructure in order to inject a more competitive ATF supply market at Indian airports.
India has enormous potential for growth and for aviation to play an even bigger role in the economy. But as we have seen over these last months it faces many challenges. India can be a great market for aviation and that aviation can contribute tremendously to India’s economic development. But this will only happen if some big hurdles are overcome. Much could be overcome by developing government policies that allow airlines simply to get on with the business of providing connectivity.
No matter how you look at 2012, it will be a difficult year—for airlines and for the economy in general. Managing through these difficult times would be made a lot easier if government’s—including India’s—better-appreciated aviation’s role as an economic catalyst. Then decisions on aviation policy could be taken with full-knowledge of their impact beyond the industry to the overall economy.
In a nutshell, the GoM’s proposals are a step in the right direction. But let’s take bolder steps: ‘declare’ the key fuel infrastructure currently owned by the PSU suppliers. And urgently establish a National Access Regime for ATF to allow users, including airlines, access to critical fuel infrastructure at a reasonable price.
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