New Delhi / Hyderabad: The country’s bleeding airline firms such as Jet Airways (India) Ltd, Kingfisher Airlines Ltd and National Aviation Co. of India Ltd (Nacil) owe the country’s oil firms, themselves suffering losses on account of retailing fuel at government mandated rates, at least Rs1,800 crore.
This number is the amount owed by the airlines in excess of their credit limits with the oil companies. “The airlines should have honoured the credit limit, but some airlines are not honouring it,” Murli Deora, Union minister for petroleum and natural gas, said.
Union oil secretary R.S. Pandey named the three airlines as defaulters on Thursday. The country’s airlines are suffering significant losses on account of higher fuel prices and lower passenger traffic. Aggregate losses are expected to touch $2 billion (Rs9,780 crore) this year.
Two of the airlines, Jet and Kingfisher announced an alliance on Tuesday that would rationalize routes, workforce and costs for both.
Of the total amount owed by the airlines, 60% has to be paid to Indian Oil Corp. Ltd (IOC) and the balance to Hindustan Petroleum Corp. Ltd and Bharat Petroleum Corp. Ltd.
A Jet executive, who did not want to be named, admitted that the airline owed Rs850 crore for fuel purchases.
A spokesperson for Kingfisher Airlines said the airline did not want to disclose the amount it owed towards fuel purchases and said the airline was “in compliance with the settlement terms made between oil marketing companies as agreed (to) time to time”.
Jitendra Bhargava, Nacil’s executive director for corporate communications, declined comment on the subject.
Jet fuel, or aviation turbine fuel, accounts for 45% of the operational costs of Indian carriers and is 70% more expensive than in foreign markets because of multiple taxes, including one levied by the states.
“Jet has overshot the credit cycle by 30 days. They have to pay us the interest on delayed payment, arrange for secured credit and take other measures like any other business. They have to repay,” said Sarthak Behuria, chairman and managing director, IOC.
Around 4.7 million tonnes of jet fuel is sold every year and domestic airlines buy half of this.
An IOC executive, who did not want to be named, said the company had “no issues with international airlines”.
He added that while the local airlines had been the oil company’s customers for some time, “beyond a time frame and amount, we cannot stretch our credit terms”.
According to IOC, Jet Airways has exceeded its credit limit of Rs600 crore by Rs330 crore, Nacil has no credit limit in place with the company and owes it Rs606 crore, and Kingfisher, which has a credit limit of around Rs60 crore, has breached the limit by around Rs40 crore.
Despite falling crude prices, oil firms are expected to register significant losses because they continue to sell below cost at government mandated rates, and because the weakening rupee increases their cost of servicing dollar debts.
IOC alone expects to end 2008-09 with Rs70,000 crore in losses.
“These are difficult times for them (airlines) and oil companies. Indian Oil, Bharat Petroleum and Hindustan Petroleum practically live on borrowings and so the airlines have to clear their outstanding (at the earliest)... If there are demands for reduction in taxes (on jet fuel), the issue is to be addressed by the finance ministry and the respective state governments,” said Pandey.
“Notwithstanding the current situation, airlines would want to settle the dues with oil marketing companies since that is their commitment. However, with the ongoing financial turmoil, some inter-ministerial interventions from the ministry of civil aviation and ministry of petroleum is possible,” said Kapil Arora, an aviation analyst with audit and consulting firm Ernst and Young.
Arora expects the issue to be settled “amicably”.
India’s airlines have been lobbying for a bailout package from the government.
utpal.b@livemint.com
PTI contributed to this story.
The Indian aviation sector looks set to shrink amid financial turmoil, with the nation's air carriers in schemes to try and ride out the problems and domestic air traffic at a five year low.

Air traffic has fallen by 19% in September, the fourth month in a row of negative growth. The news comes as a joint result of the current financial crisis and high jet fuel prices, with Indian airlines in debt to the tune of Rs1,800 crore after surpassing their credit limits with oil companies, who are themselves making losses due to government controls on the price of jet fuel.

Kingfisher Red - originally known as Air Deccan, India's first budget carrier, until Kingfisher Airlines bought the company out - suffered the biggest drop in passenger numbers at 20% of their load factor. Flag carrier Air India is running at 53% of capacity after a 10% fall, and the average for airlines is now 55% as opposed to 65% this time last year.

Kingfisher Airlines has decided to enter an alliance with Jet Airlines that will see them collectively control half the Indian aviation market. Both airlines are in debt over fuel payments with Jet owing Rs850 crore while Kingfisher refused to disclose the amount they needed to pay. The money is owed mainly to the Indian Oil Corporation, with the rest owed to the Hindustan Petroleum Corporation and the Bharat Petroleum Corporation. 45% of costs for Indian carriers is fuel, which is 70% more expensive than abroad due to multiple taxes.

Air India's head Raghu Menon expressed concern about what the Kingfisher-Jet alliance meant for his own airline. "We were competing with both these airlines separately. Now we'll be competing with them perhaps as one entity. It'll be a challenge," he said.

Kingfisher have cancelled an order for three A340 aircraft from European airframer Airbus. Airbus executive John Leahy said that Airbus had discussed the issue with Kingfisher before the choice was made and that this was the only cancellation from India. He also maintains that India will be an important area for Airbus, with the firm predicting Indian aviation growth will be at 9.7% compared to a global rate of 5.4%. Airbus predict that 1,000 new aircraft will increase the Indian fleet fivefold by 2026. Airbus have also welcomed the partnership between Jet and Kingfisher, saying it will help consolidate the carriers.

Airlines are cutting capacity to reduce costs, with around 20% gone already. Average flight movements are down to 8,000 a week compared to 10,500 in the period from April to June. The aviation industry in India is expected to post a collective loss of US$2 billion.

One executive at Boeing, Dinesh Keskar , predicted the downfall to be brief. “The current downturn in the sector is temporary and may not prolong for more than 6 to 9 months,” he said. Airlines, however, feel that the risk is very much immediate; Jet and Kingfisher are requesting a government bailout package worth Rs 40.7 billion. They are currently losing a combined US$1.3 billion.