Impact of High Fuel Price on the Aviation Final.

8/2/2019 Impact of High Fuel Price on the Aviation Final.

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A CONTEMPORARY ISSUE ONIMPACT OF HIGH FUEL PRICE ON THE AVIATION SECTOR

Prepared by :Vishal Tilwani

Roll no. :18 (GIA)

Guided by :Dr. Butalal Ajmera

Submitted to :department of business administration

faculty of management

Bhavnagar universityBhavnagar


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GENESIS OF THE INDIAN AVIATION INDUSTRY

1932: Mr. J.R.D.TATA flies a De Havilland Puss Moth from Karachi to

Bombay as part of the first Tata Sons Ltd. flight to deliver mail carried byBritish Imperial Airways.

1948: Govt. of India acquires 49% stake in Tata Airlines, designates it a flag

carrier and renames it Air India International (AII)

1953: Jawaharlal Nehru, in friendly transaction, convinces the Tata Group to

let the Government of India acquire a majority stake in AII and nationalizes

air transport.

In 1953, the government nationalized the airlines via the Air Corporations

Act, 1953, which gave birth to Indian Airlines and Air India. Indian Airlines

came into being with the merger of eight domestic airlines to operate

domestic services, while Air India International wasto operate the overseas services.


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CONTI

Eventually, by 1998, at least six private airlines, East- West, Modi-Luft,NEPC, Damania, Gujarat Airways and Span Air were closed and according

to an estimate, the capital losses implicated after these closures were to the

tune of Rs 10 billion.

By 2003, only two private carriers survived to see the sunrise of the new

century, i.e. Jet and Sahara. But the duopoly of Jet and Sahara as privatecarrier was challenged in 2003 by Air Deccan.

Air Deccan gave India its first Low Cost Carrier (LCC) or no frills Airline

which was a turning point in the history of Indian Aviation Sector.

Another milestone in the history of the Indian Aviation sector came in the

year 2007. This was the year of mergers and collaborations in the Indianskies. In the year 2006, the merger of Jet-Sahara & IA-AI was announced

but it materialized only in 2007.


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AIRPORTS AUTHORITY OF INDIA (AAI) This Airports Authority of India which is under the control of Ministry

of Civil Aviation is in charge of managing all the airports in India. The

AAI is involved in the management and operation of 126 airports in

India which include:

11 international airports

89 domestic airports 26 civil enclaves

The organization is headquartered at Rajiv Gandhi Bhawan in

Safdarjung Airport of New Delhi. Presently the chairman of AAI is K

Ramalingam.


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OPEN SKIES POLICYOpen skies is an international policy concept which calls for

the liberalization of rules and regulations on international aviationindustry most especially commercial aviation - opening a free

market for the airline industry. Its primary objectives are: to

liberalize the rules for international aviation markets and minimize

government intervention the provisions apply to passenger, all-

cargo and combination air transportation and encompass both

scheduled and charter services; or to adjust the regime under which

military and other state-based flights may be permitted. For open

skies to effect, a bilateral (and sometimes multilateral) Air Transport

Agreement has to be concluded between two or more nations.


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CIVIL AVIATION POLICY IN INDIAIn the context of a multiplicity of airlines, airport operators

(including private sector), and the possibility of oligopolisticpractices, there is a need for an autonomous regulatory authority

which could work as a watchdog so the CAA was commissioned to

maintain a competitive civil aviation environment which ensures

safety and security in accordance with international standards,

promotes efficient, cost-effective and orderly growth of air transportand contributes to social and economic development of the country.


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OBJECTIVES OF CIVIL AVIATION MINISTRYa) To ensure aviation safety, security

b) Effective regulation of air transport in the country in the liberalized

environment

c) Safe, efficient, reliable and widespread quality air transport services

are provided at reasonable prices

d) Flexibility to adapt to changing needs and circumstances

e) To provide all players a level-playing field

f) Encourage Private participation

g) Encourage Trade, tourism and overall economic activity and growth

h) Security of civil aviation operations is ensured through appropriatesystems, policies, and practices


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RISE IN THE PRICE OF AVITION TURBINE FUEL (ATF):

Aviation Turbine Fuel (ATF) prices in India are higher than the

global market. The ATF price accounts for almost 45% of the

operational expenses. The industrys operational cost component is

dominated by the cost of the ATF. A 10% increase in fuel price

would push up costs by at least 4%, thus affecting the financial

health of an airline business.


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Year 2007 2008 2009 2010 2011 2012

Month Price Change

%

Price Change

%

Price Change

%

Price Change

%

Price Change

%

Price Change

%

JAN 15,779.60 - 24,503.54 0.93 16,404.63 5.35 19,033.22 1.69 23,665.28 6.91 28,106.65 7.64

FEB 16,916.66 7.21 25,046.18 2.21 14,922.61 -9.03 18,592.28 -2.32 25,314.03 6.97 28,944.14 2.98

MAR 18,522.61 9.49 28,693.77 14.56 15,025.23 0.69 19,343.11 4.04 27,376.49 8.15

APR 18,092.06 -2.32 30,987.06 7.99 15,093.36 0.45 20,248.31 4.68 28,263.80 3.24

MAY 18,856.68 4.23 34,729.01 12.08 15,464.26 2.46 18,945.33 -6.43 26,395.72 -6.61

JUNE 19,376.47 2.76 36,064.82 3.85 18,431.71 19.19 18,827.33 -0.62 26,103.07 -1.11

JULY 19,595.10 1.13 35,609.18 -1.26 17,320.62 -6.03 18,279.62 -2.91 26,719.33 2.36

AUG 21,086.92 7.61 29,734.70 -16.50 18,807.78 8.59 18,688.18 2.24 25,664.26 -3.95

SEPT 21,601.94 2.44 31,524.69 6.02 17,316.36 -7.93 18,973.38 1.53 25,875.84 0.82

OCT 24,763.40 14.64 23,261.93 -26.21 18,415.46 6.35 20,070.26 5.78 26,374.41 1.93

NOV 24,276.69 -1.97 22,016.96 -5.35 18,807.32 2.13 20,748.13 3.38 27,449.18 4.08

DEC 15,779.60 - 15,571.66 -29.27 18,716.89 -0.48 22,136.36 6.69 % 26,111.19 -4.87


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0.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

35,000.00

40,000.00

Feb-07

Apr-07

Jun-07

Aug-07

Oct-07

Dec-07

Feb-08

Apr-08

Jun-08

Aug-08

Oct-08

Dec-08

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Feb-10

Apr-10

Jun-10

Aug-10

Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

PR

ICE

ATF

Price


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IMPACT OF HIGH ATF PRICES

1.PERFORMANCE

The economic slowdown which began in 2008 hit the globalaviation industry severely, with many airlines such as United and

British Airways in the red. This was due to falling passenger numbers

and increasing competition from low-frills airlines coupled with

rapidly rising fuel costs. Despite passengers now resuming air travel,

the increase has been very gradual. In fact, International Air TransportAssociation (IATA) Director General and CEO, Giovanni Bisignani, in

December 2009, stated the global economic crisis has cost the

aviation industry 2 years of growth as the improvement that has

started since passenger traffic hit rock-bottom in March 2009 is

similar to the pace of growth in 2006-2007.


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2.MULTIPLE TAXATION The operational cost of an airline significantly depends on the fuel prices. Rising

fuel prices affect the airline portability and have a cascading effect on the other

supporting services of the aviation industry. Analysis of issue Multiple taxation

In India there is no direct import of ATF and the ATF supplied by the Indian oil

companies is from imported crude refined by them.

The import duty for ATF is 20%. Oil companies thereby follow an import parity

principle and levy a 20% add-on to the refinery transfer price.

Apart from the import parity principle, oil companies also include a 16% to 49% add

on towards marketing margin and contingencies on the refinery transfer price (theadd on varies between various cities).

On this central government levies an excise duty of 8%.

On the resultant price, the various state government levy local sales tax ranging from

4% to 39% which on an Average works out to be around 25% countrywide.

The Government levies thus work out to an add-on of around 35%.Due to thediscrepancy in the sales tax charges at various states, the airlines tend to fill up more

fuel than required at the state where the sales tax is minimal. By doing so, the

aircraft weight increases and this leads to burning of more fuel thereby contributing

to operational inefficiencies.


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3.CONGESTIONPresently capacity limitations are there at many airports like

Delhi and Mumbai airports. Overcrowding leads to a huge wastage

of fuel. It is estimated that if a flight hang around in the sky for anadditional half an hour due to delay in allocation of landing slot, itcan consume between 25 to 30 percent extra fuel thereby increasingthe operational cost of the airline. Half an hour of hovering costs anairline anywhere over Rs. 50,000 /-. Suppose, all the flights coming

on Mumbai and Delhi have an average circling time of 30 minuteseach, around Rs 40 lakhs of fuel is wasted in a day

The congestion also influences the turnaround time of theaircraft and reduces the average aircraft utilization. Hence there is a

need to address the congestion issue to facilitate savings on fuel andhigher utilization of the aircraft. The importance of time is at apremium, the delays caused to passengers due to congestion issuesnot only cause a trouble but also upset thepassengers time schedules.Wastage of man-time has a huge cost and is almost incalculable.


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4.HIGH AIRPORT (AERONAUTICAL) CHARGES

The airport charges payable at the International airports are higher

than those payable at the airports nominated as Domestic airports for

domestic flights. As an outcome, the domestic airlines in India are

incurring additional costs at the international designated airports

without benefiting any additional facilities. The airport charges levied

by the Indian airports are amongst the highest in the Asian and the Gulf

countries. India at present does not have any secondary airports forLCCs and the Indian LCCs have to shell out comparatively higher

airport charges than its international peers.


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5. LOW PERCENTAGE OF NON-AERONAUTICAL REVENUENon-aeronautical revenue stream has not yet been fully tapped by the

Indian aviation industry. Globally non aeronautical revenuescontribute 50 to 70 percent of the total airport revenues, whereas in

India these contribute to a mere 20 percent of total revenues. With the

proportion of non-aeronautical revenue being very low, the airport

operators are forced to levy higher aeronautical related charges on

airlines.


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PILOTS SUPPLY SCENARIO IMPACT DUE TO HIGH FUEL PRICES


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CONCLUSION

Thus from the above contemporary issue on The impact of high fuel

price on the aviation sector we can come to a conclusion that the price

of Aviation Turbine Fuel (ATF) puts a clearly visible mark on the body

of aviation sector.

Even though India has been amongst one of those countries who haveprogressed in the aviation sector immensely in comparison to those of

the other countries, it has felt the jerk due to the high fuel price and the

burden of the tax imposed by the government

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Impact of High Fuel Price on the Aviation Final.

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