By Jessica Jaganathan and Nidhi Verma
SINGAPORE/NEW DELHI (Reuters) - India's record jet fuel exports may fall this year as an expanding middle class and cheaper air travel boost local consumption, refinery executives and analysts told Reuters, potentially raising ailing profit margins for the fuel.
Prime Minister Narendra Modi last month launched the first flight under the Regional Connectivity Scheme that is designed to spur air travel between smaller Indian cities that are currently under-served and to make flying more affordable. The government will cap fares under the scheme and offer airlines incentives to fly less traversed routes.
The plan should eat into the country's jet fuel exports, which rose to a record of 741,000 tonnes in March, according to preliminary government data. The expected decline in exports could help raise jet fuel margins, which plunged to a nine-month low earlier this month, said three middle distillate traders.
India's efforts to connect regional routes and the expansion of aircraft fleets will continue to boost local demand for jet fuel, said Sri Paravaikkarasu, head of East of Suez Oil at energy consultants FGE.
India's jet fuel demand is expected to rise by 11 percent in 2017 after rising last year by 13 percent, or about 15,700 barrels per day (bpd), she said.
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"In the domestic market, we are expecting double digit growth in jet fuel because of regional connectivity and enhanced air travel," said Indian Oil Corp chairman B. Ashok last week.
According to the International Air Transport Association (IATA), India is the world's fastest growing aviation market, with passenger numbers rising by more than 20 percent a year.
IATA expects India to displace the United Kingdom as the third-largest market in the world in 2025, with passenger numbers more than doubling to 278 million a year from more than 95 million today.
Enticed by the growing size of India's aviation market, BP last year obtained a licence to sell jet fuel in the South Asian nation.
The firm local demand, coupled with weaker profit margins for refining jet fuel compared with gasoil, could slow jet fuel exports this year, said L.K. Gupta, managing director of Essar Oil.
Refiners typically adjust the yield of middle distillates, which include jet fuel, kerosene, gasoil and diesel, according to the margins.
Last year, India's jet fuel exports were high due to better margins compared to gasoil, Gupta said.
(Reporting by Jessica Jaganathan in SINGAPORE and Nidhi Verma in NEW DELHI)