SpiceJet, Reliance and the direct jet fuel import farce

by R Jagannathan

SpiceJet, the private airline owned by the Marans of Sun TV, appears to have been first off the block to attempt direct imports of aviation turbine fuel (ATF).

According to BusinessLine, the airline has approached the Directorate General of Foreign Trade for permissions, and a private oil company has reportedly been approached to help with the infrastructure. Since Reliance and Essar Oil are the only two private players in the oil business, one of them is clearly going to provide the fuel and logistical support.

The question is this: how is buying fuel from (or through) Reliance (or Essar) an import of aviation fuel? Both of them produce the fuel in Gujarat, and they are unlikely to import the fuel just to give it to SpiceJet on the cheap (or Air India or Kingfisher), especially if their own fuel is cheaper.

It would make economic sense to export the stuff out of Indian territorial waters, and then ship it right back to the port from which SpiceJet or Kingfisher would like to take deliveries.

If this was such a great idea, why didn't the airlines do this earlier? And why is domestically produced jet fuel more expensive anyway?

Either Reliance or Essar, the only two private players in the oil business, is clearly going to provide the fuel and logistical support. AFP

Answer: it was only in February that the cabinet allowed airlines to directly import the fuel - partly because Kingfisher was in a death-rattle. Jet fuel accounts for 40-50 percent of an airline's operating costs, and importing it is cheaper since it can then avoid paying state taxes.

State-level taxes are currently in the range of 4-32 percent, and the average tax on jet fuel is around 24 percent. Importing the stuff saves you big money.

This is the catch. What the centre has essentially done is shift the burden of rescuing aviation to states - who stand to lose Rs 2,500 crore by way of sales tax annually on imported fuel.

The other losers will be the oil marketing companies - Indian Oil, Bharat Petroleum and Hindustan Petroleum - since Reliance and Essar may take their market over.

But what is to stop the state-owned marketing companies from doing a Reliance - exporting their own aviation fuel, and then re-importing it for a fee for Air India or any other airline that wants it?

In theory, this should be possible. One hopes, they do so - for their own sake, given the losses they are steeped in due to diesel, cooing gas and kerosene subsidies.

However, what is clear is this.

The aviation rescue package is about robbing Peter to pay Paul. The states will be robbed of revenues to help airlines. The centre pays nothing - unless the losses incurred by state-run banks lending to aviation force it to inject more capital into them.

It will only be a matter of time before states figure out how to tax aviation to get back their revenues.

Direct import of fuel is a non-solution.