Oil on a wing

Based on the fast growth in the aviation sector, the demand for jet fuel is expected to grow at 15-20 per cent in the next five years.

On the back of the booming aviation sector, the aviation turbine fuel (ATF) industry is also witnessing positive growth.

As of now, India is self-sufficient in catering to the increasing demand for jet fuel. However, in future, oil companies may have to opt for imports to meet the rising demand.

In the last five years, the compounded annual growth rate in passenger traffic volume has been 15 per cent, and in 2005-06, it peaked at almost 28 per cent. The ATF industry, which is almost 100 per cent corelated with the airline industry, had also enjoyed a similar growth.

In 2006-07, global consumption of ATF was 3.5 billion tonnes. Compared to this, the consumption in the Indian market was around 5 million tonnes.

Between 2004-05 and 2005-06, the demand for ATF had grown 16 per cent and the growth is expected to be sustained at 15-20 per cent over the next five years.

Indian Oil Corporation (IOC) is the market leader in the Indian ATF market with 64 per cent share. However, ATF sale volumes "" at 3 million tonnes "" were only a small fraction of the 49 million tonnes of petroleum products IOC sold in 2006-07.

It is noteworthy that for oil companies, the margin on sale of ATF is between Rs 1-1.50 per litre. For public sector units, which incur considerable under-recoveries and negative retail margins on sale of other petroleum products like petrol, diesel and kerosene, ATF is positively a revenue earner. But refining companies feel that this cannot be reason enough for them to expand their refining capacities for ATF alone.

ATF's corelated refinery product is kerosene. As kerosene is a government regulated product, chances are that its production would not be allowed to be affected due to increased production of ATF, industry officials explain.

Crude refiners like IOC or Bharat Petroleum feel that at present, India is self-sufficient in catering to the market demand for ATF within the country. So far, imports have not been required. However, with the increase in demand and a possible saturation of refining capacity, imports might be required in future.

What needs to be considered, however, is the fact that the aviation industry is on a high growth trajectory. While there are 300 aircraft in operation within the country at present, 400 more are expected to be added over the next five years. This would only broaden the base for the growth of the ATF business.

SNIPPETS

Price worries
The increasing prices of ATF have been plaguing the aviation industry for some time. In Delhi, ATF prices have risen 6.37 per cent from Rs 33,982.95 per kilolitre in February to Rs 36,149.04 in April.

The increase in ATF prices leads to repeated increase in fuel surcharges that are levied on passengers buying air tickets.

The current ATF surcharge stands at Rs 750 and the current rate of state taxes on ATF ranges between 20-40 per cent, although airlines want them to be reduced to less than 5 per cent.

The Reserve Bank, in its recent Monetary Policy, has considered permitting actual users of ATF to hedge their economic exposure in the international commodity exchanges, based on their domestic purchases.

ATF prices are internationally linked, and the advent of private players like Reliance Industries is not likely to make a dent in the ATF business of public sector players like IOC or Bharat Petroleum.

"Although Reliance has the ability to process cheaper crude at its highly complex refineries, given its overall ATF market share, it would not be in a position to undercut prices. Also, it would not make business sense for them to do so, as the demand side is not constrained, and hence there is no incentive for Reliance to engage in a low realisation and market share gain," explains Kaushik Guha Thakurta of KPMG Advisory Services, when asked whether private players could bring down prices in any way.

Fuel efficiency
Aircraft manufacturers are focusing on making new aircraft that are more fuel-efficient than the models already in operation.

The A380 from the stable of aircraft major, Airbus, is a big bird. But it is touted to be 26 per cent more fuel efficient than other wide-bodied aircraft like the Boeing 747.

Even though the A380 has a passenger capacity of up to 40 per cent more than its competitors, the aircraft's fuel consumption per passenger would be low at 2.9 litre per passenger. Most passenger cars in India burn 6 litres of fuel per passenger for 100 km.

For a country like India, where the airline sector growth has been fuelled by the proliferation of budget airlines, and where fuel surcharges increase quite often due to the increasing ATF prices, fuel-efficient aircraft like the A380 could delay the chances of possible ATF imports in future.