Analysts call for competitive pricing policy on jet fuel | Sunday Observer

Analysts call for competitive pricing policy on jet fuel

19 August, 2018

Sri Lanka’s aviation sector analysts last week called on policymakers to adopt a competitive market-based pricing policy on aviation fuel given that steep prices quoted by the state-run Ceylon Petroleum Corporation (CPC) is adversely affecting the national carrier whilst driving away foreign airlines. Speculating that CPC could be maintaining a higher margin on aviation fuel to compensate for the losses suffered by retailing petroleum to the domestic market at subsidised prices, experts called on the Government to introduce a separate fund allocation to channel the subsidy provided to the domestic petroleum sector. Currently, the provision of fuel for aircraft in Sri Lanka is done entirely by the CPC and is the main source of foreign exchange for the Petroleum Corporation.

“You can’t blame SriLankan Airlines for incurring higher costs for fuel nor CPC for quoting higher prices as CPC also has to manage its finances. So, they (CPC) have found a way to manage it but it is affecting SriLankan. These are issues that should be sorted out at Cabinet level,” the analyst told The Sunday Observer.

Speaking on condition of anonymity, the expert noted that the Government whilst advocating to the CPC to quote competitive prices should implement a straightforward system so that they could directly fund the ‘subsidy burden’ of the CPC. The current practice of not sticking to a straightforward policy was not only affecting SriLankan Airlines but the aviation sector in general, experts pointed out.

“If the Government wants CPC to retail petroleum to the local market at subsidised prices, then it is only fair that the burden is directly taken care of by the Government. They should fund it off the budget and not get SriLankan Airlines to pay for it,” he highlighted, adding that while the country’s national carrier is being blamed for its heavy losses, this was one of the issues that contribute to it.

“How can we promote ourselves to be an aviation and a logistics hub if our pricing is not competitive? If it is not competitive, at least we have to offer some other advantage where people could overlook your pricing. But we are also not able to do that,” the analyst added.

Sri Lanka has one of the highest aviation fuel costs in the region as the country uses aviation fuel to counter-subsidise diesel and kerosene fuels offered to the local market.According to the International Air Transport Association (IATA), the trade association for the world’s airlines, it is 21% higher than in Singapore, 13% above Hong Kong and around 8% higher than in Bangalore. This has given rise to fuel tankering, a method by which airlines reduce their purchasing of fuel at airports where fuel prices are high and instead carry fuel from airports with lower fuel prices.

However, the increased weight as a result of extra fuel carried causes extra fuel burn and engine wear, officials said.

“If an airline is doing a run from Singapore to Colombo and then Colombo to Chennai, at the moment, the airline chooses to pump fully in Singapore because it is cheaper there. However, this option diminishes the efficiency of the aircraft impacting profitability as it is compelled to carry a heavier load resulting in lesser than potential fuel economy,” another aviation sector official explained.

Meanwhile, Director General and Chief Executive Officer of Civil Aviation Authority (CAA), H.M.C. Nimalsiri said the CAA is planning to bring the concerns of high aviation fuel prices to the notice of the CPC in due course. The move follows representations made in this regard by IATA officials during a recent meeting in Colombo.

“The CPC has to think in terms of the country’s objective than from an individual organisation’s perspective. Our prices have been the highest in the region. We are in an international marketplace competing with international airports silently, so only if we keep prices competitive, we could improve our business,” said Nimalsiri.

Pointing out however, that this is not the first time IATA had made representations on the subject to the Sri Lankan authorities, the CAA Chief admitted that ground handling charges, fuel pricing and catering costs need to be competitive if Sri Lanka is to attract more airlines.

“It is a frequent concern raised by IATA. They have made similar requests during meetings with Ministers from the former regime as well sometime ago.

The additional costs could drive away airlines and specially reputed airlines from the country,” he said.

Citing an example, Nimalsiri noted that British Airways, despite resuming flights to Colombo having extended their Male to Sri Lanka flights sometime ago, took a decision to mobilise other routes that were more financially viable due to the high prices.

Meanwhile, Managing Director of CPC, Neil Jayasekera said that CPC has taken note of the concerns raised by IATA and is taking every effort to bring prices down further.

“We are also importing fuel mainly from Singapore and that country unlike Sri Lanka can afford to market at a competitive price. We have to bear freight costs, port handling charges and other taxes,” said Jayasekera.

However, speaking of future plans in the pipeline, the Managing Director noted that there is potential for a price reduction though this may not happen very soon.

“We are keeping prices at the minimum every time. This is the best price we can keep. There are things in the pipeline and you will see the results though they may not be very soon,” the Managing Director added.

While at present propellant fuel is being transported by train and bowsers from the oil refinery at Kolonnawa, the CPC Chairman in January this year had signed an agreement to initiate constructing a pipeline to supply aviation fuel from Muthurajawela to Bandaranaike International Airport, the main center for fuel bunkering for the aircraft.

“At present we are keeping prices at a premium because we can’t even fulfill the existing demand since we are running at optimum level.

The direct link to Muthurajawela is a two to three years project and if complete, we will be able to pump fuel on a daily basis and even think of price reductions,” Secretary to the Ministry of Petroleum Resources Development (MPRD) Upali Marasinghe outlined.