The price of kerosene for domestic use is controlled under the Administered Pricing Mechanism (APM) with a large subsidy. The subsidies are paid for, in part, by artificially hiking the price of aviation turbine fuel (ATF). ATF is precisely the same substance as kerosene – the only difference is that it is used to power jet engines rather than household kitchens.
So, the logic is, one set of users (the aviation industry) shoulders part of the burden for another set (households availing kerosene under the Public Distribution System).
An additional burden for the aviation industry is that there are central and state taxes imposed on ATF. Different states charge different rates of excise, leading to significant differences in price across states.
This can lead to absurdities where airlines deliberately keep seats vacant on certain sectors in order to save on fuel costs.
ATF costs are an important component of airline costs everywhere. In India, the fuel costs averages out at about 40 per cent of all operating costs.
This is much higher than the global average of around 22-25 per cent. It is one reason why the entire Indian aviation sector is sick.
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However, there are other reasons why the aviation sector is sick. One is the presence of a large white elephant in Air India.
It bleeds huge quantities and it will never go out of business due to government support. It has significant capacity and that is available at a discount. While healthy competition keeps prices low, the presence of a subsidised operation uninterested in profits causes instability and contributes to making the entire sector sick.
The Budget offered multiple sops to the sector. One of these was allowing the direct import of ATF. This would reduce the tax burden on ATF and perhaps, help some airlines to turnaround. It could slice 10-15 per cent off operating costs, and that is huge.
But the sector is inherently risky. High occupancy is a must for profitability. That occurs only during booms when fuel prices also tend to be high. The “sweet spot” of high occupancy and relatively low fuel prices doesn’t occur very often. So, the industry is highly cyclical and loss-making under most circumstances.
Around the world, very few airlines have made profits consistently. Given high international crude oil prices and an economic situation somewhere between slowdown and recession, the sops won’t be enough.
The sops will, at best, introduce an element of volatility to prices that were heading south with an unbroken trend. This could be useful.
A clever trader will now find opportunities to take both long and short positions in the trio of listed airlines.
The author is a technical and equity analyst