Why you’re paying for flights you never took

**SPEAKER_1** (0:01)
Hello folks, you're tuned in Finshots Daily. In today's episode, we talk about the government's 10,000 crore rupees ATF price stabilization fund aimed at protecting aviation and passengers, but one that may still end up costing you indirectly.
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Now, back to the story.
Fuel prices, as you know, are wrecking havoc globally as the West Asia crisis has pushed crude oil prices higher. And India, which heavily depends on crude imports for its fuel and energy needs, isn't immune. That's why the government has had little choice but to let fuel and LPG refuel prices rise for people like you and me. But there's one place where this pain is hitting even harder. We're talking about aviation. The context, over the past few weeks, India's two dominant airlines, Indigo and Air India, which together control over 90% of the domestic market, have quietly been doing three things. They've been hiking fares through fuel surcharges just to stay afloat. They've temporarily suspended flights on certain routes. Some airlines have even put non-technical employees on unpaid leave to cut costs. And that's because fuel makes up anywhere between 25 to 40% of an airline's operating costs. But with jet fuel prices nearly 2.5 times higher at around 142 rupees per litre in just the last 3 months, fuel alone could now account for nearly 60% of operating expenses for Indian Airlines. Now, that's a problem as airlines can only absorb so much pain. Rays fares too much and passengers may stop flying, cut too many routes and revenues take a hit, slash too many jobs and well, that comes with its own consequences. So now, the government seems to have a 10,000 crore rupees plan up its sleeve. It's called the ATF Price Stabilization Fund, that is Aviation Turbine Fuel Price Stabilization Fund. Now, what's that you ask? Well, we'll get to that in a little bit. But first, some quick context. Most Indian airlines buy jet fuel or ATF from oil marketing companies like Indian Oil, BPCL and HPCL. And since fuel prices are deregulated in India, OMCs that are oil marketing companies can raise prices when global crude prices climb, which means airlines end up bearing the pain of costlier fuels. And eventually, passengers like you and me pay for it through higher ticket prices. But there's a small nuance here. Even though OMCs have hiked ATF prices, they still aren't selling fuel at levels that make them a profit or even help them break even for that matter. In fact, they've been selling ATF at a loss with under recoveries of nearly rupees 30 per litre.
So, now you have two-sided problem. Airlines are struggling with soaring fuel costs while OMCs are bleeding money.
That's where the government's 10,000 crore rupees ATF price stabilization fund comes in. In simple terms, it's a one-time interest-free loan to OMCs so that they don't have to fully pass on soaring fuel costs to airlines. In return, OMCs will supply jet fuel to airlines at fixed prices of about 86 rupees per litre for domestic flights and 104 rupees per litre for international operations, even if actual market prices are much higher. So, instead of airlines buying fuel at today's elevated prices, they get access to cheaper ATF for a while. That gives airlines some breathing room and reduces the pressure to sharply hike ticket prices or cut routes. But this doesn't mean that the government is simply handing over 10,000 crore rupees upfront. Instead, OMCs will be compensated whenever global ATF prices rise above a benchmark set by the government. And once fuel prices cool down, this money will gradually be recovered and returned to the government's coffers. And this, you can imagine, has made the avish industry happy as it could help flights running without fare spiraling out of control.
But like always, there are two tiny problems here. To begin with, this sounds like great news for passengers. After all, airlines get cheaper, ticket prices shouldn't spiral out of control, right? Well, not necessarily. There's no rule saying airlines must pass on all those savings to passengers. Sure, the scheme could prevent fares from exploding overnight, but moderate fare hikes may still continue, especially if airlines choose to keep some of the benefit to protect their profit margins. So while the fund may soften the blow, it doesn't guarantee cheaper tickets. But the second problem is slightly trickier. See, petrol, diesel and ATF prices in India are technically deregulated, meaning markets are supposed to decide prices. In fact, ATF was deregulated way back in 2001 and is revised monthly based on global benchmarks. But fuel has always been a politically sensitive issue. Rapid price spikes hurt inflation, consumers' sentiment and, well, government's image too. So while fuel prices are deregulated on paper, reality has often looked different. As Brookings once described it, India has operated in a strange middle ground of de-jure free markets but de facto government control. To put it more plainly, ATF may have been deregulated two decades ago, but it was never fully left the market, which is exactly how you end up with a 10,000 crore rupees rescue package when things go sideways. And that simply means that whether you fly or not, you still end up paying for aviation fuel indirectly because cushions like these are ultimately funded by taxpayer money. But hey, Finshots, what else could the government do? You might ask. We're already in a tough spot. At least this helps prevent immediate pain from spilling into inflation. And that's a fair point, because while this fund may not be perfect, it does buy some time when fuel prices are spiraling and airlines are struggling to stay afloat. That said, there are still a couple of things that government could do to tackle the problem more sustainably. One option is to nudge airlines to hedge fuel prices. In simple terms, hedging is a way for airlines to protect themselves from sudden fuel shocks by locking in prices ahead of time using financial contracts. Say, an airline signs a deal that no matter what happens to oil prices, it will pay $85 a barrel over the next 12 months. If prices jump to $100, the airline still pays $85 and avoids a financial shock. If prices fall to $60, it still pays $85 and technically loses on the trade. But the upside is that the airline would have budgeted for this, and predictability does carry value. And that's proof this can work. Take Southwest Asia Airlines in the US. It began fuel hedging in the early 1990s, and between 1998 and 2008, reportedly, saved about $3.5 billion compared to what it would have paid at average jet fuel prices. To put that in perspective, that was equal to nearly 83% of its profits during that period. Lower fuel costs also helped it expand routes, jobs, and even add 149 aircraft. Now, of course, hedging isn't perfect. It costs money upfront or a premium, much like insurance. Southwest, for instance, spent about $150 million annually on premiums and eventually stopped the strategy last year, as it wasn't paying off as much when fuel prices weren't so high. Ironically, fuel prices surged soon after. That's why the government could simply push airlines to disclose their hedging plans publicly, creating accountability, because left themselves, airlines may avoid hedging altogether. After all, it costs money upfront and can feel unnecessary when fuel prices are stable, but crises don't announce themselves. The logic here is similar to why banks are required to hold capital reserves or why drivers need third-party insurance. Most wouldn't voluntarily bear the extra cost unless they had to. But when things go wrong, the damage rarely stays contained. In aviation, it spills over to passengers, employees, creditors, and eventually taxpayers. A little sidebar here, Indigo is considering fuel hedging after a recent quarterly loss as surging crude prices squeezed its margins. The second workaround is to let private fuel companies or airlines themselves import ATF directly. Sure, India allowed this in 2013, but poor airport infrastructure to transport fuel and OMC control over fueling meant that it never really took off. So that leaves just one meaningful solution on the table. And arguably, it's the single biggest reform India still hasn't acted on. Bringing ATF under GST. ATF, as you know, sits outside the GST regime right now. Instead, it attracts an 11% center-like size duty along with state-level VAT that can range anywhere from 1 to 29%.