Indian airlines will be allowed to import jet fuel directly under a proposal from a ministerial panel, Aviation Minister Ajit Singh said, sending airline shares sharply higher on the prospect they will be able to cut costs.
The panel also approved a debt restructuring for cash-strapped national carrier Air India, the minister said.
Both decisions need final approval from the cabinet.
Fuel accounts for about half of the operational costs of an airline. If the move goes through, the aviation companies will save about 15-20 percent on fuel cost, said Nikhil Vora, analyst at IDFC securities.
Shares of Kingfisher Airlines (KING.NS) surged to its maximum daily limit of 20 percent, while SpiceJet (SPJT.BO) and Jet Airways (JET.NS) rose 19 percent and 16.8 percent respectively.
Loss-making Kingfisher Airlines, controlled by flamboyant liquor baron Vijay Mallya, has long demanded the right to directly import jet fuel to save costs.
Airlines are now required to buy fuel from oil marketing companies including government-controlled Indian Oil Corp (IOC.NS), Hindustan Petroleum Corp (HPCL.NS) and Bharat Petroleum Corp and are subject to certain taxes and levies.
However, analysts have cautioned that the ability to directly import fuel will not be without problems.
The airlines ... don't have the infrastructure to import the fuel, store it and then transport within the country, said Sharan Lillaney, aviation sector analyst at Angel Broking.
Also, when they don't have the money to pay local oil companies how will they buy in the international market?
Most airlines in India are losing money as a result of high fuel costs, cutthroat competition and a slowdown in the economy.
Air India may issue 74 billion rupees of bonds as part of its restructuring, Singh also said on Tuesday, without elaborating.
Air India's lenders have yet to decide on how they will proceed with the airline's restructuring as they are reluctant to take on equity or take heavy writedowns.
Singh also said the panel would pass on the cabinet soon its recommendation that foreign airlines be allowed to buy up to 49 percent of an Indian carrier.