India approves fund to shield refiners, airlines from surging jet fuel costs

The Indian government has agreed to provide a one-time financial support of Rupees 100 billion ($1.04 billion) to oil marketing companies as compensation for keeping jet fuel prices at affordable levels for both domestic and international operations, a move aimed at reducing the burden on passengers and airlines, Prime Minister Narendra Modi said and a cabinet statement showed June 3.

"Cabinet approval for a one-time support mechanism to ensure greater stability in aviation turbine fuel prices for Indian airlines will help maintain affordable air connectivity, support airline operations, and reduce the burden on passengers. It will also strengthen connectivity to Tier-II and Tier-III cities, support tourism, and employment," Modi wrote on X after the cabinet decision.

The budgetary support will be in the form of interest-free advances to OMCs through demands for grants of the petroleum ministry, the statement said.

"The support shall be provided to OMCs to facilitate stable ATF pricing for airlines during the ongoing period of exceptional fuel price volatility arising from the West Asia crisis. The corpus shall compensate OMCs for losses arising from elevated international ATF prices whenever the prevailing import parity price exceeds the benchmark price determined under the approved mechanism," it added.

When international jet fuel prices moderate, the differential amount would be recovered from OMCs and returned to the Consolidated Fund of India.

The price stabilization support will be in force for a period of 36 months with provision for annual review or until the advance amount is fully recovered, whichever is earlier. The proposal may be extended beyond that with the approval of the competent authority in case the corpus is not fully utilized within this period.

Fuel cost flexibility

"The mechanism provides greater predictability in fuel costs by adopting a fixed-price arrangement for domestic and international operations, thereby reducing airline's exposure to sudden fuel price spikes. It will shield OMCs from losses arising from volatile and elevated ATF prices during the ongoing West Asia crisis," the statement said.

The measure will help protect and sustain domestic and international air connectivity, ensure continuity of air services and reduce fuel price shocks to passengers, thereby helping to moderate fare volatility, the statement said.

"The measure will have positive spill-over effects on tourism, hospitality, trade, exports, regional development and investment," it said.

International ATF prices surged nearly 2.5 times from Rupees 60.50/liter in March to Rupees 142/liter in May since the start of the conflict.

"ATF accounts for nearly 40% of airline operating costs and during periods of extreme fuel volatility, can constitute up to 60% of total operating expenditure. Therefore, this volatility in ATF prices has resulted in high-cost pressure on airline financials," the statement said.

Short-term relief

Premasish Das, executive director for oil analytics at S&P Global Energy CERA, said the government's move would provide meaningful short-term relief for passengers and OMCs, and effectively put some kind of price cap on domestic jet fuel.

"The recoverable nature of the support makes it fiscally more manageable. But the sustainability challenge remains. With no clear visibility on how long disruptions through the Strait of Hormuz could last, the real question is how long governments can continue to absorb the cost of shielding consumers from global volatility," Das said.

He added that the approach is broadly similar to some of the Southeast Asian countries, where governments are using stabilization mechanisms to manage fuel price volatility. "The key difference is that countries like Vietnam and Thailand are primarily targeting gasoline and diesel to contain inflation, while India in this case is intervening in jet fuel to stabilize the aviation sector."

ATF prices in India were deregulated in 2001 and are revised monthly based on a formula linked to international benchmarks, the ministry said in a previous statement.

Platts, part of S&P Global Energy, assessed the benchmark FOB Singapore jet fuel/kerosene cargo outright price at $148.67/barrel June 3, up from $138.79/b the previous day.

The Platts-assessed outright price for jet fuel/kerosene cargoes loading from Singapore has risen to record highs since the start of the Middle East conflict, hitting a high of $242.71/b on March 30, reflecting the tight aviation fuel supply in Asia and broader supply chain uncertainties amid the war. Restricted exports from China are keeping a floor under prices, even as spot exports from South Korea rebounded, Platts data showed.