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Bailed Carrier Gets Fuel Discount in State Aid: Corporate India

Air India Ltd., which has received about $1.7 billion in the past four years in government bailouts, is now finding support from state-owned fuel suppliers in its fight for market share.

Indian Oil Corp. (IOCL), the nation’s biggest refiner, has agreed to sell jet fuel to Air India at an 8 percent discount, said an aviation ministry official familiar with the matter. The company is offering the rebate to the state-controlled carrier after discussions initiated by the ministry, an official at the refiner said separately, with both of them asking not to be identified citing rules.

The government discounts may help Air India undercut competitors struggling with fuel prices that are as much as 60 percent higher than in Singapore. The country's aviation industry has reported $6.6 billion of losses in the past five years, and increased benefits for the state carrier may deter foreign airlines from investing, said P. Phani Sekhar, a Mumbai- based trader at Angel Broking Ltd.

“You’ve just caught the tail of the elephant,” Sekhar said. “The larger issue is the bailout of Air India. The government does its best to ensure that this industry doesn’t function in a competitive manner.”

Fuel Rebate

Air India has won a discount of 5,300 rupees ($98) per kiloliter of jet fuel from Indian Oil, the aviation ministry official said. Hindustan Petroleum Corp. and Bharat Petroleum Corp., both state-owned, are offering a rebate of 5,500 rupees a kiloliter, according to the official.

The fuel rates are applicable retrospectively from Jan. 1, Civil Aviation Minister Ajit Singh said in an interview in New Delhi on April 29, without elaborating.

Indian Oil’s commercial deals “are always specific to a customer” and the refiner doesn’t comment or share details of agreements they sign with buyers, Executive Director N. Srikumar said in a text statement. Spokesmen for Hindustan Petroleum and Bharat Petroleum didn’t reply to e-mails seeking comments on the discount.

Air India, which has lost at least 281 billion rupees since April 1, 2007, has been getting state support. The government last year pledged 300 billion rupees worth of bailout for the state-owned carrier through 2020, besides backing its loans with sovereign guarantee. Still, the former monopoly’s market share has slipped to the fourth among India’s five airlines this year, according to data from the aviation regulator.

Cut-Rate Fares

Air India is selling a New Delhi-Mumbai ticket for as low as 3,981 rupees for July 8, according to its website. That’s lower than the 4,115 rupees SpiceJet Ltd. (SJET) charges on the sector the same day. Jet Airways (India) Ltd. (JETIN), the nation’s biggest listed carrier, offers tickets for 4,584 rupees.

IndiGo, the nation’s biggest discount carrier, offers tickets for 4,116 rupees. Airlines need to charge fares of at least $112 on that route to break-even, according to a Boeing Co. estimate in February.

The government-controlled airline has “a level of influence that I’m never going to have,” Neil Mills, chief executive officer of SpiceJet, said in an interview on April 23. The Chennai-based carrier will negotiate with refiners for discounts, he said.

Fuel costs accounted for 60 percent of total expenses for SpiceJet in the year ended March 31, 2012, according to its annual report, compared with 34 percent for Air India in the previous year, according to the latest available data.

Share Performance

Air India owed 43.2 billion rupees to fuel suppliers as of Feb. 28, Panabaka Lakshmi, junior minister for petroleum and natural gas, said in parliament on March 22. Air India will clear dues to refiners of about 30 billion rupees soon, Aviation Minister Singh said Apr. 29.

SpiceJet shares rose 2 percent to 41.30 rupees in Mumbai yesterday, paring this year’s loss to 6 percent, according to data compiled by Bloomberg. Jet Airways climbed 0.9 percent to 612 rupees, extending this year’s advance to 9.4 percent, compared with a 1.3 percent gain in the benchmark S&P BSE Sensex index.

Sakshi Batra, spokeswoman for IndiGo, declined to comment, while Ragini Chopra, spokeswoman at Jet Airways, didn’t immediately respond to two calls to her mobile phone and an e- mail seeking comments on fuel discounts.

Etihad, AirAsia

Fuel costs and cut-rate fares have pushed Indian carriers into losses even after passenger traffic more than doubled in the past seven years. India’s airlines have lost more than 360 billion rupees since the year ended March 2007, according to government data.

Kingfisher Airlines (KAIR) ended operations in October after years of losses and mounting debt. Jet Airways hasn’t made an annual consolidated profit in five years, according to data compiled by Bloomberg. The Mumbai-based company last month agreed to sell a 24 percent stake to Etihad Airways PJSC as it seeks funds to pare debt. That is the only deal signed by a foreign carrier since India changed rules in September to allow a maximum of 49 percent investment by an overseas airline.

Malaysia’s AirAsia Bhd. (AIRA) won approval in March from the nation’s Foreign Investment Promotion Board to hold a 49 percent stake in a new airline venture with Tata Sons Ltd. The company aims to start its Indian operations in September.

“Asking refiners to extend discount to Air India actually explains why despite opening 49 percent FDI in aviation, not many are interested in coming,” said Angel Broking’s Sekhar.

Making Difference

Prime Minister Manmohan Singh’s government last year allowed airlines to directly import the fuel to help them save on local taxes that are as high as 30 percent. Still, airlines including SpiceJet have been holding back on plans to import jet fuel because of lack of storage facilities. Prior to the rule change in February 2012, only state trading agencies were permitted to import the fuel.

The price of jet fuel has risen 132 percent in the past four years in India. Indian Oil sells jet fuel for 64,625 rupees a kiloliter in Mumbai as of May 1, according to the company’s website.

“Any easing of pressure on fuel cost makes a lot of difference to operational economics,” said Harsh Vardhan, chairman of New Delhi-based Starair Consulting that advises airlines. “For operators who are paying a higher price for the fuel, it certainly puts additional pressure.”

To contact the reporter on this story: Karthikeyan Sundaram in New Delhi at kmeenakshisu@bloomberg.net

To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net

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