Presentation by SAROJ K. DATTA EXECUTIVE DIRECTOR JET AIRWAYS (INDIA) PRIVATE LTD.

1. Presentation by SAROJ K. DATTA EXECUTIVE DIRECTOR JET AIRWAYS (INDIA) PRIVATE LTD. 13th MAY 2004 JET FUEL PRICING AND SUPPLIES SCENARIO IN INDIA AND ITS IMPACT ON THE ECONOMICS OF THE CIVIL AVIATION INDUSTRY MIDDLE EAST JET FUEL CONFERENCE 12th – 13th MAY 2004 BAHRAIN

2. Aviation Scenario – Worldwide • Last few years have once again clearly highlighted the highly cyclical nature of the Aviation industry worldwide. • Decade ending with 2000 showed promise of a bright future for the industry: both in traffic growth and financial results. • However, following the • Dot-com bust and cascading economic fallout • September 11 terrorist attack; • Followed by events such as the SARS epidemic and the Iraq war; • Traffic decline; and • Resultant Increases in costs and expenses; Post 2001, the industry experienced severe downturn from which it is only now beginning to slowly recover • Recent events as also declining yields and competitive pressures have highlighted the importance of controlling costs and effecting improvements in productivity

3. Aviation Scenario – India • Indian Aviation industry also followed the worldwide trends during this period. • Passenger traffic on domestic sectors declined by around 7% in 2001-02 accompanied by a significant drop in yields. • 2002-03 saw a reversal in the trend but the burden of the previous years continued to be reflected in the bottom lines of the airlines. • Assisted by an improved economic climate and favourable policy changes, 2003-04 saw a growth of over 7.5% in domestic passenger traffic.

4. Aviation Scenario – India • Indian Air Travel Market: witnessing dramatic changes due liberalized Government policies. • Some of the recent Government announcements are • Private airlines permitted to operate to neighbouring South Asian countries, namely Sri Lanka, Nepal and Bangladesh. • Input costs have been lowered through • Reduction of Tax burden on air travel by abolishing Inland Air Travel Tax and Foreign Travel Tax. • Reduction in domestic Landing Charges for jet aircraft by 15% and removal of Landing Charges for aircraft lower than 80 seats. • With a forecasted 8% plus growth in GDP per annum air travel is also estimated to grow by around 8% per annum over the next 5 years.

5. Jet Airways – A decade of Successful Operations • Started operations on 5th May 1993 with a fleet of 4 B737-300 aircraft. • 1993-94 : 28 Daily Flights covering 12 cities in India. • Currently : Flies to 41 cities in India and to Colombo, Sri Lanka with a fleet of 41 aircraft and operating more than 255 flights a day. • Will be starting operations to Kathmandu and Dhaka shortly. • Carried 6.9 million passenger in financial year 2003-04 and estimates to carry around 7.5 million in 2004-05. • Launched innovative schemes aimed at leisure traveller – APEX Fares in August 2001. • Current Market Share: 46%-47%. • Has received numerous accolades as India’s best domestic airline.

6. Aviation Turbine Fuel (ATF) • Aviation Turbine Fuel is one of the most important constituents of any airline’s costs. • In India it is even more so because of the huge disparity in ATF prices applicable in India and elsewhere in the world.

7. ATF Pricing Scenario: INDIA • Until April 2001 ATF prices in India were determined by Government through an Administered Price Mechanism (APM). • This was based on a system of cross-subsidy – for socio-economic reasons prices of some petroleum products such as kerosene and diesel were “subsidized” by setting higher prices for ATF. • In April 2001, the APM was dismantled and the Oil Companies given freedom to price ATF based on input costs and world market prices. • Thereafter ATF prices in India have fluctuated widely depending on movements in world prices.

8. ATF Pricing Scenario • Despite withdrawal of APM and linkage of ATF pricing with international market prices, price of ATF in India continues to be much higher than the prices prevailing worldwide. • Despite being competitors with possibly differing input and refining costs, the three Government owned oil companies effectively work as a cartel; prices charged by the three oil companies are identical.

9. ATF Pricing Mechanism • ATF supplied by Indian oil companies is basically from imported Crude refined by them. There is no direct import of ATF. • Import Duty on Crude is 10% whilst on ATF is 20%. • Oil Companies, however, follow an import parity principle and levy a 20% add-on to the Refinery Transfer Price. • Apart from the import parity principle, the Oil Companies also include a 16%-49% add-on towards marketing margin and contingencies on the Refinery Transfer Price after the addition of the import parity add-on. • The add-on varies between the various cities.

10. ATF Pricing Mechanism • On this, the Central Government levies an Excise Duty of 8%. • On the resultant price, the various State Government levy local Sales Taxes ranging from 4% to 39%: which on an average works out to 25% countrywide. • The Government levies thus works out to an add-on of 35%.

11. Refined ATF Refinery Transfer Price(RTP) ATF Price to airlines ATF Price ATF Pricing Mechanism A T F Add-on of 20% - Import parity Marketing margin add on 21% Government levies of 35% - 8% Central Sales Tax plus 25% State Sales Tax Nearly double the world-price

12. Impact of high ATF Prices • ATF Expenses: Constitute around 30% of the total operating costs for domestic Indian carriers. • In comparison, for Association of European Airlines (AEA) members: Aircraft Fuel & Oil Expenses:Constitute 13.3% of Total Operating Expenses.

13. ATFOperating Cost Comparison Fuel & Oil Expenses as a % of Total Operating Expenses (Comparison with Association of European Airlines) India Average: ~30% AEA Average: 13.31% Prices as of July, 2003

14. Impact of High ATF Prices • Thus, Domestic carriers in India pay nearly double the prices vis-a-vis elsewhere in the world. • Reasons for this have been explained earlier. • A graphical presentation of this difference follows.

15. ATFInternational Price Comparison Indian Average (Rs. 22,985 per Kilolitre) + 83% International Average (Rs. 12,569 per Kilolitre) Exchange Rate: 1 USD = Rs. 46 Prices as of December, 2003

16. Impact of High ATF Prices • Even for international operations, the price applicable to Indian carriers’ uplifts is higher than those applicable to foreign carriers by 25%. • Domestic operators pay a 51% higher price than what is paid by International carriers in India. • A graphical presentation follows.

17. +51% +25% International Operators AI / IC (International) Domestic Operators* ATFLocal Price Comparison Price of ATF for different operators * Domestic Operators include domestic operations also of IC

18. ATF Supply Scenario • The three Government owned oil companies viz. Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum jointly fix prices. Also, • Airlines cannot source supply of ATF from any other supplier. • Airlines are offered common terms by the three suppliers, with no competition amongst themselves. • Government still has a role in determining the applicable prices even though APM has been abolished. • The infrastructure – Hydrants & Storage facilities– are owned by Oil Companies, who are unwilling to share these facilities with private suppliers e.g. Reliance who as a result export the ATF they produce.

19. ATF Supply Scenario • Direct import of ATF by Indian carriers is not permitted. • Common carrier principle not applicable for infrastructure facilities. • Indian carriers are also not permitted to hedge ATF prices – Air India is permitted to hedge to a limited extent on Fuel uplifted outside India. • Worldwide, airlines have derived significant financial benefits by hedging ATF.

20. Way Forward • ATF is the most important constituent of the operating cost of an airlines in India. • For successful operations of domestic airlines in India, it is imperative that ATF costs / prices be brought down to international levels.

21. Recent Policy Developments: ……. • Policy makers and aviation specialists have recognized the distortions created in economics of Indian civil aviation industry because of current high prices of ATF and present pricing policy • A Committee appointed by the Government to review the Indian civil aviation scenario and make recommendations about future civil aviation policy has made several recommendations about ATF in its report.

22. Policy Recommendations …. • These include: • Reduction of State level Sales Tax countrywide to 4%; • Allow airlines to source ATF from supplier of their choice; • Allow airlines to import ATF; • Allow airlines to Hedge fuel prices.

23. Policy Announcements…. • Based on the recommendations of the review Committee and with a view to further improve economics of Indian aviation industry, the Government has already announced • Reduction of Central Excise Duty on ATF from 16% to 8%. • This however has marginal impact on price reduction of ATF. • However, further steps are likely to be taken vis-à-vis ATF pricing whilst framing new Civil Aviation Policy by the new Government to take office shortly.

24. Policy Announcements…. • The purpose of above decisions is to make the industry viable and to make air travel is affordable and expand market. • As recommended by the Policy review Committee, similar decisions have been taken and are being taken in other areas such as: • making international routes available to privately owned domestic carriers; • abolishing travel taxes such as the the Inland Air Travel Tax and Foreign Travel Tax thus lowering air fares; • replacing onerous requirements about operations on socially important but largely unprofitable routes by a more equitable subsidy bidding system;

25. Policy Announcements…. • reducing airport charges to bring them in line with charges payable in other South East Asian and Gulf countries; • encouraging operations with smaller aircraft and providing connecting to emerging interiors markets; • liberalizing norms for foreign equity participation; • privatizing major airports like Mumbai and Delhi. A lot more needs to done but a beginning has been made in the right direction to make the industry in India competitive and viable.

26. Thank You