Airlines, oil companies in talks to ‘crack’ code on jet fuel price surge

Airlines and oil marketing companies (OMCs) are in talks to revise the aviation turbine fuel (ATF) pricing model to cushion the sector from surging costs due to the West Asia crisis, people aware of the development said.

At the heart of the talks is a proposal to cap the crack spread component in the ATF pricing formula, they said. The crack spread is the difference between the market price of a barrel of crude oil and the jet fuel refined from it reflecting the refining expense. The end price of jet fuel also includes the margin of the companies.

People involved in the discussions say airlines and OMCs are working toward fixing the crack spread component used in the ATF pricing formula within a band — a cap of $22 per barrel and a floor of $10.


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The discussions involve officials from both the ministry of civil aviation and the ministry of petroleum and natural gas, alongside the three state-owned OMCs — Indian Oil, Hindustan Petroleum and Bharat Petroleum.

Airlines and the petroleum ministry did not respond to queries.

The ruling NDA government is keen to prevent a significant price spike ahead of assembly elections in four states next month.

Indian OMCs revise ATF prices on the first of every month, based on a weighted average of international benchmarks like crude oil prices and the crack spread component, plus logistics costs.

While crude prices have risen following the conflict in West Asia, the crack spread has climbed sharper as supply disruptions intensified after Iran threatened to close the Strait of Hormuz. From $24.28 per barrel in the last week of February, the spread shot up to $86.22 by March 20, a jump of over 250%, according to the International Air Transport Association (IATA).

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"This is essentially hedging the price," a government official said. "If the crack spread falls below $10, OMCs can gain. If it exceeds $22, the oil companies will have to sacrifice some of the margin but airlines are protected from an abnormal cost spike."

The crack spread has historically averaged around $14 per barrel over the long run.

Without an agreement, the consequences could be severe, said an airline executive.

"If the normal pricing model prevails, jet fuel will cost over Rs 2 lakh per kilolitre from April 1 — a level airlines simply cannot absorb," he said.

ATF in Delhi was priced at just over Rs 96,000 per kilolitre in March. "Passing on such a hike to passengers beyond a point is impossible. It will severely dent demand," the executive said.

An OMC executive cautioned that any decision on fixing the crack spread component in the pricing formula must account for operational realities — the crack spread, as a market signal, does not capture actual refining costs.

"Jet fuel requires highly specialised tank storage," the executive said. The government has also levied additional export duties on ATF to ensure domestic supply, which the executive said would further compress actual refiner margins beyond what the crack spread alone reflects.

OMCs are also increasingly facing the brunt of higher crude oil prices as the government stays reluctant to change retail fuel prices due to the upcoming elections leading to further squeeze in margin.