Relief now, but without reforms

Last week, the government took another decisive step towards mitigating the impact of rising jet fuel prices on domestic airlines by rolling out a Rs 10,000 crore Price Stabilisation Fund for aviation turbine fuel. Earlier this month, the government had approved a Rs 5,000 crore credit scheme for the airline sector to neutralise the impact of the ongoing war in West Asia. Jet fuel prices have roughly doubled in two months— from Rs 60.50 to Rs 142 a litre—because of the West Asia crisis.

Fuel, as is well known, accounts for 40-60 per cent of an airline’s total costs, and with Pakistan shutting its airspace to Indian carriers, flights to Europe and the US now take longer routes and burn even more fuel. The government’s Rs 10,000 crore pool of money must come as a relief for the airline sector, which is already running at a loss, with India’s biggest carrier, IndiGo, posting a loss of Rs 2,536 crore during the fourth quarter of FY26. This is how it works: the government picks a “normal” fuel price (the benchmark). When the actual price climbs above that line, the government temporarily covers the difference so airlines aren’t hit with the full spike.

The money goes to the oil companies that sell the fuel as an interest free loan. The government expects to get this money back later— the scheme runs until the full amount is recovered. The condition is that for the airlines to become eligible for this scheme, they must buy all their fuel only from government oil companies for up to three years. So they get a cushion now in exchange for giving up the free dom to shop around for fuel later. But the bigger issue is that if prices remain high, the Rs 10,000 crore pool will run out quickly, and there is a risk that the loan will become a subsidy that is never repaid.

But there is a larger problem playing out that the government has quietly ignored. The airlines have repeatedly raised concerns about the opacity of pricing by oil marketing companies (OMCs) and have, therefore, turned to sourcing fuel independently. With the government mandating that airlines seeking to benefit from the scheme must buy ATF from Indian OMCs, it effectively locks them into the very suppliers they have been complaining about. Concessions from the government should be just that, but if they come with conditions, it may be a temporary balm.

At the same time, it hurts the overall sector, and in this case, by freezing the competition and consolidating the PSU oligopoly. The government has been evading the big structural issue, and perhaps it is the right time to set things right in the airline sector once and for all. For that, it has to bring all states onto a single platform and address the issue of including the ATF under the GST.