With war clouds looming large over Iraq, the Indian airline industry is bracing itself against an increase in insurance premium and an additional burden of an estimated 25 per cent hike in aviation turbine fuel prices.
A war-risk insurance premium could be very high this time around official sources said referring to the 1991 Gulf War and recalled that a huge premium of Rs 600,000 per flight was paid for Indian Airlines' services to Kuwait at that time.
"The dollar-rupee exchange rate then was around Rs 10. But now with a rate of Rs 49-50 per dollar and a hike in insurance premium, even if it is maintained around the 1991 ratio, a massive burden will be imposed on the carrier," they said.
The increase in insurance burden would particularly hit the domestic carrier more on its Gulf operations where IA now operates many more flights than in 1991.
The aviation industry is already reeling under a war surcharge imposed by global insurance firms in the aftermath of the LTTE attack on Colombo airport and 9/11 terror strikes in the US in 2000. The ban on overflights imposed by Pakistan was also adding to the overall financial burden of IA.
The sources said just the announcement of a war could lead to a ten per cent hike in the spot market price of ATF, which could ultimately rise by almost $9-10 or about 20-25 per cent.
"ATF and motor spirit are not politically untouchable as kerosene and no subsidy can be expected on this count," they said.
While IA's total annual bill on ATF was about Rs 1100 crore (Rs11 billion) last year, every percentage point increase in fuel price would lead to a hike of about Rs 11 crore (Rs 110 million), the sources said.
Moreover, a war in the Gulf would lead to a shortfall of about 18 billion barrels of crude produced by Iraq per month and an additional shortfall due to the winter stockpiling of oil by the United States.
Iraq's oil would not be available in case of a war, the sources said quoting reports as saying that the US too always had a stockpile of oil supplies for between 24 to 30 months.
Therefore in the backdrop of a major shortfall in oil supply, the excess demand would lead to a hike in oil prices from the present average of $25 to about $35, with other oil-producing nations not being able to meet the shortage caused by Iraq, they said.
The sources said the route of India's oil supply would also be longer in case of a war, which would imply additional freight charges.
The winter stockpiling by the US generally raises the prices at the end of the calendar year and comes down by March, they said, adding the price at which IA was buying ATF this month was Rs 21,150 compared with Rs 21,900 per kilolitre in November and Rs 20,150 in December last year.