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Ministry of Finance may soon ease taxes on jet fuel: Praful Patel
October, 24th 2008

The civil aviation minister Praful Patel has said that the ministry of finance has no objections to the rationalisation of taxes levied on aviation turbine fuel to help the airline industry during these tough times. 

Speaking to the media, Patel said that in around three days the finance ministry would take appropriate measures ''on the tax-side'' to help the airline industry". He was speaking after a meeting with the finance minister P Chidambaram.

Patel said that the finance minister believes that there is a case for the rationalisation of taxes on jet fuel, ''which may not have been the case in the past''. Chidambaram is said to have put a query to the petroleum ministry on taxes on jet fuel, pertaining to the issue of excise duty on jet fuel.

Taxes on aviation turbine fuel constitute around 30 per cent of the cost. The move to cut taxes on jet fuel would have a positive impact on the break-even of airlines in India,

The meeting is subsequent the Prime Minister having called a meeting to end the stand-off between public sector oil companies and airlines over fuel pricing. Subsequent to that call, petroleum minister Murli Deora convened a meeting with the civil aviation minister and representatives of oil companies and airlines. 

At that meeting, a reprieve was granted to the airlines with the government has allowing them to pay up the collective Rs2,962 crore outstanding in terms of the amount they owe to the public sector oil marketing companies for fuel, six monthly instalments. Around 72 per cent of this amount is said to be under default, as in it remains unpaid beyond the expiry of the credit period of 60 days that was allowed as per the original agreement. 

The airlines will now need to pay up these outstanding dues by March 2009, and would get a 90 day credit period on current ATF purchases, supported by bank guarantees. Moreover, to better reflect the trends in the international market, jet fuel prices would be revised every fortnight.

ATF prices likely to drop by 16 per cent
Meanwhile, industry sources have said that it is likely that the price of aviation turbine fuel may fall by around 16 per cent in November 2008 as compared to prices prevailing during October 2008. This would play a significant role in bridging nearly half the gap between the airlines' operational costs and their total revenues.

Jet fuel makes up half the cost of operations for an airline at the present time. The average gap between cost and revenue for the industry is said to be around 15 per cent. Airlines sources were quoted by the media as saying that a price drop of around 30 per cent in the price of jet fuel would be needed to achieve operational break-even. Till now, jet fuel prices have dropped by around 20 per cent.

Reports said that the current average base price of jet fuel, not inclusive of taxes, is Rs44,526 per kilolitre. The expected decrease of Rs6,300 per kilolitre will bring the base price down to Rs38,226 per kilolitre. 

In terms of taxation on jet fuel, the 8.24 per cent excise duty and an average of 25 per cent sales tax makes the price of jet fuel Rs50,931 per kilolitre, which is around 16 per cent lower than the current average ATF price of Rs60,663 per kilolitre. The quantum of decrease, reports quoted industry sources as saying, would have been more had the weaker rupee not watered down the fall of the price of jet fuel.

The decrease, according to industry experts, would have been more had factors like the weaker rupee had not stemmed the fall of ATF prices. They said that though the average price of the Indian crude basket in October was about 24 per cent below the average price in September, the average value of the rupee has also dropped by 5.71 per cent.

Reports suggest that airlines are yet undecided on whether or not to pass on the benefits of the cut in jet fuel prices to the customers. While some opine that a decision on fares would be forthcoming only in the face of some amount of stability in the prices of jet fuel, expected in a couple of months, others say that they would be inclined to pass on a part of the ATF fuel cut in terms of lower fares to regain market share and improve the waning passenger load factors.

The economic downturn impacted load factors on low cost carriers more than they did on full-service airlines. Reports quoted sources in the travel industry as saying that though sales for the full-service airlines have declined around 13 per cent between September and October, sales for low cost airlines have dropped around 37 per cent at the same time.


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