Airlines Warn of Shutdown Risk amid Fuel Crisis

General Studies Paper II: Government Policies & Interventions, Energy

Why in News?

Recently, the Federation of Indian Airlines (FIA), representing major carriers like Air India, IndiGo, and SpiceJet, has issued an “SOS” letter to the Ministry of Civil Aviation, warning that the sector is under “extreme stress” due to a severe fuel crisis.

Core Drivers of Severe Fuel Crisis

Record-High Aviation Turbine Fuel (ATF) Prices: The primary driver is the unprecedented surge in ATF prices, which have crossed the ₹2 lakh per kilolitre mark in some regions.
- Historically, fuel accounted for 30–40% of an airline’s expenses; however, it now consumes 55–60% of total operating revenue.
- This shift has completely eroded the profit margins of major carriers like IndiGo and Air India.
Destabilising West Asia Conflict: Escalating tensions in West Asia, particularly near the Strait of Hormuz, have caused severe disruptions in global oil supply chains.
- This geopolitical instability has pushed Brent crude oil prices from approximately $72 to over $118 per barrel.
- The volatility makes long-term fuel budgeting nearly impossible for Indian airlines.
Operational Strain from Rerouting: Due to conflict-related airspace closures over parts of the Middle East, airlines are forced to take longer, circuitous routes.
- These diversions add between 35 to 70 minutes per flight leg for international operations.
- The resulting increase in fuel burn and cockpit crew hours significantly inflates the cost per available seat kilometre (CASK).
Sharp Currency Depreciation: The weakening Indian Rupee (INR) against the US Dollar has amplified the crisis.
- Since roughly 35% of an airline’s costs—including aircraft leases, spare parts, and maintenance—are dollar-denominated, the depreciation acts as a hidden tax, making every litre of imported fuel more expensive in local terms.
Domestic Taxation and GST Exclusion: Airlines are burdened by a “cascading effect” of taxes because ATF remains outside the GST regime.
- Carriers currently pay an 11% central excise duty plus state-level VAT as high as 29% in certain states.
- The inability to claim input tax credit (ITC) on fuel under the current system significantly hinders financial recovery.
Expanding Refinery Crack Spreads: The “crack spread”—the difference between the price of crude oil and the refined Aviation Turbine Fuel—has reached historic highs.
- High global demand for middle distillates and limited refinery capacity have kept refining margins elevated, ensuring that even when crude prices slightly dip, the final price of ATF remains prohibitively high for the aviation sector.

Aviation Turbine Fuel (ATF):

Aviation Turbine Fuel (ATF) is a highly refined petroleum-based kerosene, specifically designed to power gas-turbine aircraft engines.
It is a specialized blend of hydrocarbons with a high calorific value and low freezing point (typically -47°C for Jet A-1) for high-altitude performance.

It is formulated with anti-static agents, corrosion inhibitors, and fuel system icing inhibitors (FSII) to ensure safety at 35,000 feet.

- Pricing Mechanism:
  - Market-Determined: Since April 2001, pricing has been de-regulated and determined by Oil Marketing Companies (OMCs).
  - Import Parity Principle: Domestic prices are linked to international benchmarks (like Brent crude) and revised fortnightly or monthly based on global rates and exchange rate volatility.
Taxation:

Dual Taxation: It attracts 11% Central Excise Duty and varying state-level Value Added Tax (VAT), which rangers from 0% to 30% (e.g., 29% in Tamil Nadu).
GST Exclusion: Unlike most goods, ATF is currently outside the Goods and Services Tax (GST) ambit. This prevents airlines from claiming Input Tax Credit (ITC), leading to a cascading effect of taxes.

Demands For Interventions

The Federation of Indian Airlines (FIA) has presented a comprehensive set of demands to the Ministry of Civil Aviation to prevent a widespread collapse of the aviation sector.

Fiscal Relief Demands: The Federation of Indian Airlines (FIA) has demanded urgent government intervention through fiscal relief measures, particularly the temporary suspension of 11% excise duty on ATF and reduction of high state VAT (up to 25–29%).
- These taxes significantly inflate fuel costs, which have already surged beyond ₹2 lakh per kilolitre, worsening airline cash flows.
Reform of ATF Pricing Mechanism: Airlines have strongly criticised the current “ad hoc pricing system”, demanding a transparent and predictable pricing framework.
- They proposed reintroducing the “crack band mechanism” (USD 12–22/barrel) to cap refinery margins, as current crack spreads surged to $132.59/barrel, artificially inflating fuel prices beyond crude oil trends.
Uniform Pricing for Domestic and International Operations; The FIA highlighted a major imbalance where domestic ATF price hikes were capped (₹15/litre) while international fuel prices increased sharply (₹73/litre).
- This dual pricing system has made international routes financially unviable, distorting airline network economics and causing heavy operational losses.
Financial Support and Survival Assistance: Airlines have sought direct financial assistance and policy support to sustain operations, warning that the industry is under “extreme stress” and nearing shutdown.
- Rising fuel costs now account for 55–60% of total operational expenses, severely compressing profit margins and threatening viability.
Long-Term Structural Reforms: Beyond immediate relief, airlines demand structural reforms in fuel taxation and pricing linkage (MOPAG benchmark) to reduce volatility.
- They emphasize aligning ATF pricing with global best practices and ensuring stability to support India’s aviation growth, connectivity goals, and long-term sustainability of the sector.

Government Response

₹5,000 Crore Emergency Credit Line (ECLGS): The Union Cabinet is fast-tracking a ₹5,000 crore relief package under a new version of the Emergency Credit Line Guarantee Scheme (ECLGS).
- This facility, projected to run for five years, offers up to a 90% sovereign guarantee on loans to provide liquidity.
- Individual airlines like Air India and SpiceJet can access up to ₹1,500 crore each to meet critical statutory obligations like salaries and tax deductions.
Approval for Ethanol Blended Aviation Fuel: In a historic shift on 17 April 2026, the Ministry of Petroleum and Natural Gas amended the ATF Regulation Order to officially permit blending ethanol and synthetic hydrocarbons with jet fuel.
- This move aims to slash 87% import dependence on crude oil. While domestic targets are not yet mandatory, India has set a roadmap for 1% SAF blending on international flights by 2027, rising to 5% by 2030.
Hotan Route & China Airspace Negotiations: The Ministry of Civil Aviation is negotiating with China to operationalise the Hotan route for west-bound flights.
- This alternative path via Leh would allow Air India to bypass Pakistani airspace and conflict zones, potentially saving ₹6–12 million per flight by reducing massive fuel-intensive detours to the US and Europe.
Capping Fuel Price Hikes: To protect passengers from surging airfares, the government has capped domestic ATF price increases at 25%, regardless of international spikes.
- This precautionary cushion ensures that even if Brent crude remains volatile, domestic carriers are not forced to pass the entire burden to travelers.
Landing and Parking Charge Relief: A 25% reduction in landing and parking charges was implemented at 34 major airports for a three-month period starting 8 April 2026.
- This direct operational subsidy aims to lower the Cost per Available Seat Kilometre (CASK) for struggling carriers during the energy crunch.
Regulatory Flexibility on Flight Duty: The DGCA has temporarily relaxed Flight Duty Time Limitations (FDTL) for pilots on long-haul routes.
- This allows airlines to manage crew shortages caused by longer flight durations from rerouting, ensuring operational continuity.