Will oil imports help airlines?

It might not, given the costs of logistics and inventorising

sweta-ranjan

Sweta Ranjan | February 10, 2012



The group of ministers on aviation recommended on Tuesday that airline companies be allowed to import jet fuel.  This has been a long standing demand of some airline companies, Kingfisher in particular. They hope that the direct import of aviation turbine fuel (ATF) will help lower their fuel bill by 10-15 percent. However, ground realities may not support these claims.

While the lifting of restrictions on imports may bring the fuel bills down, the logistics and infrastructure expenses incurred in transportation, inventory and distribution, experts believe, will offset any savings.

High infrastructure and product costs may become a matter of concern later for the airline companies and they may end up paying more as they have to import a minimum parcel size, irrespective of their requirement.

The airlines will be required to build their own infrastructure at various ports and airports or else strike costly deals with oil companies for using their infrastructure. They will also end up paying a hefty amount for manpower and refueling facilities overheads.

There are more than 100 airports used by different airlines and building infrastructure connecting all these ports and airports will run up huge expenses.

Amber Dubey, director, aviation, at global consultancy firm KPMG says, “This move of allowing carriers to import direct fuel will definitely give a boost to the beleaguered airline sector as the sales tax they pay to various states pushes the cost of ATF way beyond the global norms.  At the same time airlines will have to address challenges related to cost, logistics and ATF infrastructure”. 

ATF is costliest in India, even though it priced at international parity, because of the high sales tax (8-25 percent). The first blow to the airlines will be the loss of credit facilities which could go if the new rule on import comes into effect. In India, all airlines enjoy a 60 days credit period. However, with the new rule they might have to pay upfront (cash and carry).

An official from Jet Airways, under the condition of anonymity, says, "Manpower and expertise could be another matter of concern as refuelling the aircraft requires specific skills and equipment. Carriers may end up hiring amenities from oil companies. This kind of a practice could indirectly bring the carriers back to square one. They may end up paying service charges for using their facilities."

While cash-strapped Kingfisher Airlines is in talks with Reliance Industries to use its infrastructure to import jet fuel and transport it from ports to the wind tip of the aircraft, the move also raises various doubts and questions. It may also affect the already troubled oil sector.

The other issue is if a cash-strapped airline like Kingfisher Airlines can pay Reliance for fuel and it can’t pay its bills to oil marketing companies (OMCs), it becomes unclear whether direct fuel imports will actually cut down operating costs for airlines.

The theory of directly importing fuel may sound nice but in reality it can turn out to be a more expensive and cumbersome affair.
 



 

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