PPP in Aviation Fuel Industry

Agenda
INDIAN AVIATION INDUSTRY FACTS ABOUT ATF

NEED FOR PPP OUTCOMES

INDIAN AVIATION INDUSTRY

Indian Aviation Industry

Fastest growing aviation industry in the world (18 % growth per annum, Jan 09 figures) Government's open sky policy -> many overseas players entering the market Growing both in terms of players and number of aircrafts (310 carriers + 480 in order) Private airlines account for around 75 per cent share of the domestic aviation market.

Hindrances to perceived growth

Regulatory uncertainty on aeronautical charges increases level of risk for private investors Significant slowdown in aviation traffic Affect on AAIs capital expenditure plans Increasing aviation turbine fuel (ATF) prices and taxes on the fuel continue to push up costs

FACTS ABOUT ATF

What is Aviation Turbine Fuel?

Used for powering jet and turbo-prop engine aircraft Currently two main grades of turbine fuel in use in civil commercial aviation: Jet A-1 and Jet A - kerosene type fuels. Aviation fuels consist of blends of over a thousand chemicals, primarily Hydrocarbons & additives such as antioxidants and metal deactivators, etc. Principal components include n-octane and isooctane.

Facts of ATF (India)

ATF constitutes 40 per cent of airlines' operating cost in India, compared with 20-25 per cent globally. ATF price per kl averaged between Rs 24,000 to Rs 26,000 from the entire East and Southeast Asia to Dubai, London and New York. Price in states like Andhra Pradesh, which had the lowest sales tax rate of four per cent, ranged between Rs 34,000 and Rs 35,000. In Delhi, it was Rs 38,000, in Mumbai over Rs 40,000 and in Kolkata Rs 46,000 (Aug 09) High ATF costs erode the profitability of a FSC carrier by 10% and that of a LCC by 15%

Indian Aviation Turbine Fuel Market

Highly controlled and monopolized market Pricing traditionally been determined by the Government under the Administered Price Mechanism (APM) In April 2001, APM dismantled and oil companies given freedom to price ATF based on input costs and world market prices. Still, the price of ATF in India continues to be much higher. Due to:
Irrational tax structure Cartelization of oil PSU's and monopoly of pricing

Indian Aviation Turbine Fuel market

Pricing Mechanism for ATF

Source: http://www.scribd.com/doc/3900618/Atf-Document

Prices of ATF
There are no imports of ATF (aviation turbine fuel) and it is a freely priced petroleum product in India The price of domestically produced ATF is based on import parity price factoring in the basic customs duty. There is a continued monopoly of the three state-owned oil companies: Indian Oil Corp., Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd. These PSU Oil firms, revise jet fuel rates every fortnight based on trends in international markets High rates of sales tax are imposed by various state governments on aviation turbine fuel (ATF)

Prices
45000 40000 35000 30000 25000 20000 15000 10000 5000 0

State Taxes

Source: http://www.scribd.com/doc/3900618/Atf-Document

Global Price Trends

Source: Airline industry outlook remains fragile-www.iata.org/economics

Global Price Trends

Source: http://www.scribd.com/doc/3900618/Atf-Document; http://www.iata.org/whatwedo/economics/fuel_monitor/price_analysis.htm

Current Players in ATF Market

Before 2005, ATF marketing was a monopoly of the stateowned oil companies like Indian Oil, Hindustan Petroleum, Bharat Petroleum, Oil and Natural Gas Corporation (ONGC) Private oil companies Reliance Industries Ltd, Essar Oil and Shell India entered aviation turbine fuel (ATF) marketing after 2005 Reliance already had started marketing ATF abroad and is presently exporting premier quality ATF to various countries Reliance has 3.6 million metric tonne per annum (MTPA) ATF production capacity at its Jamnagar refinery in Gujarat and Essar Oil has a 10.5 MTPA refinery at Vadinar in Gujarat that produces ATF Reliance currently produces about 2.95 million tonne per annum of ATF at its Jamnagar refinery, most of which is exported. Essar Oil, which also has also been exporting its entire 1.44 million tonne of ATF production, started marketing it in the domestic market from 2008

NEED FOR PPP

What brought us here?

Supply of jet fuel in all of India has been the monopoly of three stateowned oil marketing companies and they typically priced the fuel at about 65% higher than it is available in many airports outside India. With new private players entering the market, the hold of the three giants seems to be wavering.

Need for PPP

State-Owned Oil Giants Exploration and extraction of ATF Technological advances Newly created facilities to supply fuel at many Indian airports.
.

Need for PPP

Private players
Easy Government approvals for expansion plans Better profit margin in domestic sales compared to exports No setting up new infrastructure costs on airports that amounts to saving 115 crores

Aviation Industry/ Consumers

Public players monopoly ends ATF prices might soften for the industry, making air travel cheaper.

OUTCOMES

Current PPP
Buy Build Operate (BBO) Model to be used for a JV between the public and private partners
E.g. IndianOil Skytanking (IOSL), a consortium of Indian Oil Corporation, Indian Oiltanking and Germanys Skytanking

Wraparound Addition
E.g. ONGC-subsidiary Mangalore Refinery tie up with Shell Aviation

Advantages of PPP
Efficient Asset Utilization
Government run companies not working to their full capacity Use of airport infrastructure for storage and machinery for fuel transportation at airports

Dilution of Monopoly

No Monopoly ensures optimization of prices Regulatory framework emerging

Accountability

Private entities more accountable to stakeholders than public This leads to better dealings of issues and better efficiency and productivity with the private sector.

Current Scenario
States are opposed to bringing ATF under the declared goods category, as demanded by airlines. If ATF brought under declared goods, no state would be able to impose more than four per cent sales tax on jet fuel. The sales tax rates, which vary from state to state, range from a mere four per cent in Andhra Pradesh to over 30 per cent in several other states. The airport economic regulatory authority (AERA) is formed by the Civil Aviation Policy to regulate air tariffs and performance standards for domestic aviation sector.

Measures by the Government

A Group of Ministers (GoM) was set up in August 13, 2009 to study the impact of high jet fuel prices on the aviation industry and recommend measures to bring down its burden on the operational costs of the airlines (Aug 2009) Focus is on the "very high nature" of sales tax being imposed on aviation turbine fuel (ATF) by various state governments as also its base price, which was "much higher" than most countries the prices of jet fuel had increased by as much as 99.6 per cent in one year

http://news.outlookindia.com/item.aspx?664294

References
http://news.outlookindia.com/item.aspx?661953 http://www.iocl.com/Products/AviationTurbineFuel.aspx http://www.financialexpress.com/news/ril-essar-shelleye-domestic-atf-business/135436/ http://www.jsalaw.com/files/OG%20April%202005.pdf http://economictimes.indiatimes.com/News/News-ByIndustry/Transportation/Airlines-/-Aviation/Aviation-fuelsupply-Private-refiners-ready-for-takeoff/articleshow/2771958.cms?curpg=2 http://www.dancewithshadows.com/aviation/aviationturbine-fuel-prices-up-by-67-per-cent-in-india/