Jet Airways, Kingfisher Airlines and Air India will have till March to settle the Rs 2,900-crore fuel bill they owe the state-owned refiners even as the oil companies today agreed to increase the credit limit for the airlines to 90 days.
It is not clear whether this roll-over will attract interest. The airlines have been lobbying for a waiver but the oil marketing companies want interest to be charged. A decision, said a senior government, will be taken once the minutes of today's meeting are prepared.
The relief by petroleum companies will help airlines to improve their precarious cash flow position. But it will put further pressure on oil companies, which are finding it difficult to secure funding from banks.
The decision, was reached during a meeting between Petroleum Minister Murli Deora, Civil Aviation Minister Praful Patel and top officials of oil companies and airlines in Delhi today.
"The meeting has been very fruitful.We have got some much-needed relief from the oil companies. Now, we need to see practical implementation of that," said Vijay Mallya, chairman, Kingfisher Airlines.
When asked about importing aviation turbine fuel (ATF) that the carrier had mulled, Mallya said, "With the benefits the oil companies are giving us, there will be no need to import ATF."
SpiceJet Director Ajay Singh added: "This will surely help us improve our cash flow position but the high taxes that we pay need to be reduced as that will push down ATF fuel prices and bring them to international levels." Domestic ATF fuel is about 50 per cent higher than global ATF.
Some analysts, however, are sceptical. Kuljit Singh, partner with Ernst &Young, said: "It is a cosmetic change as it restructures the past overdue fuel payments but nothing to resolve the problems that airlines will face in making future payments. After 90 days where will airlines get the money to pay? The restructuring has to come in ATF prices that can take place only after a correction of taxes."
Responding to the need to reduce ATF prices Patel is also meeting Finance Minister P Chidambaram to discuss a solution. ATF attracts average sales tax, which is levied by the states, of 25 per cent. Airlines have asked for ATF to be given declared goods status, which would limit sales tax to 4 per cent and help cut overall airline costs by almost 10 per cent.
The oil companies -- Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation -- will, however, face a larger liquidity crunch with today's extension.
"The outstanding bills of the airlines will be cleared in six monthly installments till March 2009," said Patel, who has been lobbying with the finance and petroleum ministries for a solution to the problems the airlines find themselves in.
Criticising high ATF prices, Patel said fuel companies are charging more than costs, and that they should just keep a 10-11 per cent margin on the base prices.
"The oil companies charge Rs 10,000 per kiloliter extra and excise and customs duties and sales tax add to the price," Patel is believed to have said in the meeting.
Defending the airlines Patel said that they have always been good customers to the oil companies and the problem of defaults only started in 2008.
The airlines are making losses as aviation fuel prices rose over 56 per cent between January and August this year. It has since dropped 20 per cent in the last two months. The higher fuel prices forced airlines to raise fares which resulted in a fall in passenger traffic.
Domestic air traffic dropped 20 per cent in September. The airline industry is estimated to lose around $2 billion for this financial year.
The oil companies have also agreed to revise prices of aviation fuel every 15 days instead of the monthly revisions earlier.
"This is because prices have been very volatile in the recent past and the airlines can benefit longer from lower fuel prices," Patel said.
Petroleum Secretary R S Pandey said aviation fuel prices are likely to be cut in November as lower prices have been lower this month than September.
Patel and Deora, however, said that the longer credit period and the fortnightly revision of aviation fuel prices is an "accommodation arrangement". After March 2009, the airlines and the oil companies will have to go back to to the commercial arrangements they currently have.
Kingfisher and Jet currently get 60 days days, while National Aviation Company of India Ltd (Nacil), formed after the merger of state-owned Air India and Indian Airlines, does not get any credit.