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Airlines could save Rs 2,500 cr on ATF import
July, 04th 2008

Domestic airlines will save around Rs 2,500 crore annually if they import aviation turbine fuel (ATF) directly rather than buy it from state-owned oil marketing companies.

This would help them shave off around 14 per cent of their burgeoning fuel bill and cut the industry's projected loss of Rs 8,000 crore for the current financial year by a little less than a third.

Kingfisher Airlines Chairman Vijay Mallya has mooted the idea, saying that the carrier is going to tie up with the Mukesh Ambani-controlled Reliance Industries, which will import ATF and supply it to the company. This, he said, would help the company save over Rs 600 crore in a year.

Such a move, however, could lead to substantial losses for the states, which have made good money from the sales tax on ATF. It would also impact the state-owned oil marketing companies which sell ATF at above global prices.

Under government rules, if a domestic carrier imports fuel directly for its own captive usage, it does not have to pay sales tax. The only tax it needs to pay is a 5 per cent import duty.

The savings in tax are substantial. Sales tax on ATF varies from 20 per cent in Delhi to as high as 29 per cent in Chennai. Only a few states like Andhra Pradesh and Kerala have bought it down to 4 per cent.

According to private oil companies which are negotiating to import ATF on behalf of the airlines and transport it to their destinations, the airlines could save as much as Rs 10,000 per kilolitre. At the moment, the airlines pay at an average Rs 71,000 for a kilolitre of ATF.

These companies said the key constraint in the whole process would be the lack of infrastructure. "Reliance has ATF supply infrastructure in 17 cities in the country. But import of ATF can only be done in the coastal markets like Mangalore, JNPT (near Mumbai) and Chennai. But for places like Delhi, the imported ATF has to be transported over land. The transportation charges would be such that these would negate the benefit earned on zero sales tax," said an industry expert.

Mallya, however, said that this problem can be solved by swapping ATF stocks with other oil companies which have ATF stored in places where Kingfisher cannot transport the fuel. This would save both of them the transportation charges.

"The prime objective is to save the punitive sales tax. If I have a stock of fuel at JNPT, I can easily use this in Bombay and I can swap these fuel stocks at other stations without attracting sales tax," said Mallya.

Industry experts also said since this would work on the basis of a common access system in which the ATF supply infrastructure is owned by the airport operator and is accessible to all companies, instead of just PSUs, though airports like Mumbai would pose a problem.

"While it is easier to have common access systems in greenfield airports like Bangalore and Hyderabad, there would be legacy issues with public sector oil companies in airports like Mumbai. PSUs might show some resistance to the open access system there since it would bring in competition and impact their revenues to a large extent," said an industry expert.

Some observers also said that Mallya might just be pushing for direct imports just to force the state governments to reduce sales tax on ATF. "One has to move cautiously as the states might impose an entry tax on ATF to neutralise their losses," added an oil industry executive.

Private carriers, on their part, said that these problems were not insurmountable. "This seems like a bright idea if it works out. Minds in several airlines will start working," said an executive from a low-cost carrier.

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