Airlines question fuel price hike, cite drop in crude rates

Four major domestic airlines have escalated their protest over the 12 per cent increase in aviation turbine fuel (ATF) prices effected this month, refusing to pay the revised prices and seeking a Rs. 2,500-crore refund from oil marketing companies for failing to pass on the benefits of falling crude oil prices since 2014.

“Without prejudice…kindly note that the payments that are being currently made are to be treated as ‘under protest’ and thus our member airlines reserve the right to pay as per the rates prevailing in February 2016,” said a joint letter to oil companies signed by airline promoters Nusli Wadia (GoAir), Naresh Goyal (Jet Airways), Ajay Singh (SpiceJet) and Rahul Bhatia (Indigo).

The joint letter to Hindustan Petroleum Corporation chairperson and managing director Nishi Vasudeva, Indian Oil Corporation chairman B. Ashok and Bharat Petroleum Corporation Limited CMD S. Vardarajan was sent on March 16 on behalf of the Federation of Indian Airlines (FIA).

“FIA seeks your co-operation and support to allow our member airlines to withhold payment of increased amounts due to the recent increase in ATF prices by 12 per cent, until the matter is conclusively determined in a transparent manner,” the promoters said in their letter seen by The Hindu.

The airlines have urged oil marketing companies to disclose the “ambiguous” and opaque price discovery mechanism they used for setting ATF prices. They argued that air fares have remained high as oil companies had not passed on the benefits of the continuous fall in global crude oil prices since 2014. “… As a result, you profited… wherein the airlines are still struggling,” they alleged, and sought a Rs. 2,500-crore refund.

Aviation fuel costs account for over 40 per cent of an airline’s cost of operations, and hence an increase or decrease in ATF prices has an impact on air fares.

The airlines argued that average crude prices declined 69 per cent from April 2014 to February 2016, and during this period, the exchange rate went up by 12.7 per cent.

It said the ATF prices should have been 25 per cent lower than Rs. 34,284 a kilolitre (in Mumbai) announced in February 2016.

“The difference of Rs. 8,650 a kilolitre has been pocketed by oil companies as it is a case of profiteering. According to our estimates, the annual ATF bill for airlines is around Rs. 10,000 crore,” the promoters said, and this translated to a higher cost of Rs. 300 a ticket for passengers.

Recent revision

On March 1, the ATF prices were revised up by 12 per cent to Rs. 38,425 a kilolitre. While airlines had threatened to move the Competition Commission of India at that time, the government said five per cent of the increase could be accounted for by a rise in ATF input costs and the rest was attributable to an increase in excise duty in the Union Budget.

While the airlines said they were ready to pay the increase in excise duty on ATF prices, the letter demanded “a quick rollback in the unreasonable prices” effective from March and a reduction in the base price of the fuel on which duties are calculated, stressing that ATF is a “de-regulated product.”

“ATF in India is subject to a multiplicity of taxes and fees, the result of which is that domestic carriers pay up to 50 per cent more for fuel than in Dubai or Singapore… It is further imperative that oil companies realise that the benefits of a lower-cost environment will stimulate business and tourism,” the promoters said.

Read More

Air India changes stand on 5/20 rule to allow private airlines to fly abroad

National carrier Air India, marking a major shift in its stance, has dropped its resistance to abolish five years and 20 aircraft norms, also known as 5/20 rule, for Indian carriers to be able to fly abroad.

Air India, which is struggling to return to profitability has conveyed to the government in a recent meeting that it will not oppose the ‘5/20 rule’ if it is abolished, a senior AI official said.

“We have not opposed the abolition of 5/20 rule. We have told the government we will support it in its policy decisions if it’s in the national interest,” said the official.

According to the ‘5/20 rule’, all airlines in India are permitted to fly abroad only if it has five years of domestic flying experience and at least 20 aircraft in its fleet.

The Union government has drafted a ‘civil aviation policy,’ that is yet to go to the Cabinet for its approval, in which it is evaluating abolishing the ‘5/20 rule’.

The industry is divided over the issue of ‘5/20 rule’. The private airlines which are allowed to fly abroad — IndiGo, Jet Airways, SpiceJet — have all opposed the proposal to abolish the rule as it will impact their market.

However, the new airlines — Vistara and AirAsia India — are in favour of scrapping the decade-old rule which is restricting them to fly to international airports from India.

This tug of war between the old and the new airlines has put pressure on the Union government to do away with the rule.

In fact, the draft civil aviation policy has been delayed mainly due to the government’s unclear stand over the ‘5/20 rule.’ The government is evaluating three options — keeping the rule, completely doing away with it or replacing it with a credit-based system.

The shift in stand by AI will give more room to the government to abolish the rule thereby helping Vistara and AirAsia India to fly abroad.

The present AI management, under its new Chairman and Managing Director Ahwani Lohani, is believed to have told the government in a recent meeting that the 5/20 rule is an “external factor” which will not have much impact over the airline’s performance.

“The management is more focussed on addressing the minor internal issues that have affected the airline’s performance in the past. We have conveyed to the government that their decision to keep the 5/20 rule or abolish it will have no impact on us,” said a senior AI official.

Apart from AI officials, the meeting, held on December 30, was attended by the Chief Executives of Vistara and AirAsia India.

All the previous AI managements had expressed strong reservations over the idea to ease the 5/20 rule. The previous management had said “the sudden withdrawal of the protection of 5/20 rule, might be the proverbial last nail in the national carrier's coffin without bringing any significant benefit to the nation.”

The ‘5/20 rule’ was approved by the Union Cabinet in December 2004 when many decisions were taken to protect national carrier Air India. At that time, along with Air India, Indian Airlines, Jet Airways and defunct airline Air Sahara were allowed to fly on international routes.

IndiGo, launched in 2006, had to wait till 2011 to begin operating on international routes and SpiceJet, which began operations in 2005, had to wait till 2010 to do so.

In 2004, the government had taken many policy decisions to protect Air India. “To allow growth of its network, it is decided that Government may reserve traffic rights for Air India in accordance with its operational plans for the next two years. A calibrated approach may be adopted so that the national carriers get time to adjust to the new competitive environment,” the Union government had said.

Back then, the operation of flights to the Gulf countries of UAE, Qatar, Oman, Bahrain and Kuwait and Saudi Arabia was kept reserved for Air India and Indian Airlines for the next three years “as most of their operational revenue and profits on international routes accrue from these routes.”

Read More