India earmarks US$1 billion to guard airlines from fuel shocks

[NEW DELHI] India will provide 100 billion rupees (S$1.3 billion) to support oil retailers for capping jet-fuel prices and shield local airlines from mounting cost pressures.

The government has capped jet-fuel prices at 75.60 rupees a litre for domestic airlines. That is lower than the 104.90 rupees a litre charged at New Delhi’s airport currently.

The price limit will provide relief to airlines, but can aggravate refiners’ losses.

The fund will be used to reimburse state-owned refiners for losses from the sale of jet fuel below market rates.

On Wednesday (Jun 3), Information Minister Ashwini Vaishnaw said that this will help stabilise prices for carriers, prevent disruptions in operations and shield passengers from fare hikes.

Fuel accounts for around 40 per cent of airlines’ costs in India.

The industry recently warned of potential flight suspensions without government intervention on prices.

Airlines are also grappling with a weakened rupee, which makes it costlier for them to pay in US dollars for aircraft leases and overseas airport charges. 

Spicejet said that the measure will provide greater predictability and stability at a time when the aviation industry continues to grapple with geopolitical uncertainties and elevated fuel costs.

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India’s biggest airline IndiGo called the intervention a timely and welcome relief for the sector.

Sahil Mahajan, partner at PwC India, said: “This is not a permanent fix, but at times like this, a well-timed intervention is exactly what the industry needs to stay on course.”

The move will give airlines critical breathing room to rebuild and protect their profitability while also keeping fares more predictable, he added.

State-run Indian Oil briefly doubled domestic jet-fuel prices in April, only to retract the measure within hours amid airline protests. Refiners have kept prices frozen for May and June. 

Financial support to refiners will come as an advance to retailers, which will then return the amount that is left when prices stabilise interest-free, the government said.

Under the arrangement, airlines will buy jet fuel exclusively from state refiners for as many as three years. 

Further details of the plan will be announced at a later date, the minister said.

Since the start of the Iran war, India has announced a slew of measures including rebates on plane landing and parking charges, regulating increases in jet-fuel prices, and tax reductions on fuel for flights operating from Delhi and Mumbai, which have the nation’s biggest airports. BLOOMBERG