Jet Fuel: The Biggest Cost in the Sky

Why aviation turbine fuel makes up such a large share of Indian airlines' costs, how taxes on it raise fares, and the debate over bringing it under GST.

For Indian airlines, aviation turbine fuel, or ATF, is often the single biggest cost, frequently around 30 to 40 percent of operating expenses.

Why ATF is costly in India

Crude oil prices: India imports most of its oil, so global prices drive ATF costs.
Exchange rates: a weaker rupee makes imported oil more expensive.
Taxes: ATF is outside GST. It attracts central excise duty and state VAT, which in some states has been very high.

Because ATF isn’t in GST, airlines can’t claim input tax credit on fuel taxes, so these taxes add directly to costs.

State VAT differences

VAT rates on ATF have varied widely across states. Some states cut VAT sharply, especially for regional flights under the UDAN scheme, to attract more flights. Airlines often tanker fuel: buying more fuel in low-tax states to avoid buying in high-tax ones, even though carrying extra weight burns more fuel.

Effect on fares

When ATF prices rise, airlines raise fares or add fuel surcharges. Indian domestic fares are sensitive to oil prices.

Hedging

Some airlines hedge fuel costs using financial contracts, locking in prices. This reduces uncertainty but can backfire if prices fall.

The GST debate

Airlines have long asked for ATF to be brought under GST, which would allow input tax credits and reduce cascading taxes. States resist because ATF taxes are a revenue source, and petroleum products remain outside GST.

Fuel efficiency

Airlines reduce fuel use by:

Buying newer, more fuel-efficient aircraft.
Optimising routes and flight speeds.
Reducing weight on board.
Using ground power instead of engines at gates.

The fuel stop decision

An airline flying from a high-VAT state loads extra fuel at its previous stop in a low-VAT state. Carrying the extra weight burns a little more fuel, but the tax savings outweigh the cost.

Thinking airfares are high mainly because of airline greed

Fuel, taxes on fuel, currency swings and airport charges make up a large part of ticket prices.

Key takeaways

ATF is often 30 to 40 percent of Indian airlines' operating costs.
It is outside GST, taxed by excise and state VAT.
High state VAT raises costs; airlines sometimes tanker fuel to avoid it.
Airlines seek ATF's inclusion in GST; states resist.