Can Budget wipe out streaks of red in blue skies?

It's a blue sky scenario for airline industry – jet fuel prices are at its lowest, air passenger traffic is growing at a healthy clip and there's a business-friendly government at the Centre. But it would still need a lot of help in various forms in the coming Budget to wipe out its huge losses.

Airlines in India are set to post losses of $1 billion in the current fiscal, according to airline consultancy firm Centre for Asia Pacific Aviation (CAPA). That is pretty disturbing for India's still fledgling industry. The only positive news is that the global aviation advisory firm had revised its projection downward from the earlier $1.4 billion loss.

Phee Teik Yeoh, CEO of the recently-launched full service carrier Vistara, is immensely confident that airlines are about to enter a better phase with "the current government's pro-investment, pro-business, pro-common man leanings".

"In keeping with the current government's pro-investment, pro-business, pro-common man leanings, everyone in the country has a lot of expectation from the forthcoming budget. There is a hope that the budget will be an extension of Narendra Modi's vision of enabling the people and making India a global tourism and investment destination with specifics that will steer the country on a growth trajectory," said the Vistara chief.

His optimism stems from the recent slashing of aviation turbine fuel (ATF) prices that has been a big relief for the industry.

"We are now looking for definitive steps being taken to further incentivise the sector and enhance its global competitiveness. A viable tax structure on airport infrastructure and MRO (maintenance, repair and overhaul) along with reduced state taxes on ATF will boost the 'Make in India' initiative of the government," said Yeoh.

In line with Vistara's ambition of flying overseas, he is hoping that the government would do away with the restrictive 5/20 rule, which permits only airlines with five years of experience and 20 aircraft in the fleet to operate on international routes.

"There is a need to improve the viability of the route dispersal guideline (RDG). Our country's bilateral aviation rights, which are currently under-utilised, need to be rightfully leveraged by Indian carriers to harness the true potential of the aviation sector in boosting the nation's economic growth, forex earnings, tourism and employment. If enabled in the right way, the civil aviation sector can contribute immensely to the growth of the Indian economy as well as enhance its reputation globally," said Yeoh.

One demand of the airlines, which has been a permanent fixture on their Budget list for years now, is that ATF should be classified as declared good. ATF for aircraft weighing less than 40 tonne is already a declared good.
Sanjeev Kapoor, chief operating officer (COO) of SpiceJet Ltd, emphasised the need for this to make airline industry financially healthy.

Amber Dubey, partner and head-aerospace and defence, KPMG, believes it would be much more prudent to generate tax from final goods and services than an industrial raw material (ATF).

Today, ATF in India is 55-60% costlier than the Gulf and Asean region. The cascading effect of ATF taxes (ranging between 2% and 38%) have brought ruin to the airline sector. The industry has been lobbying hard for long for it to be made uniform at 4% across India.

Further, Dubey says the government should announce a clear road-map for privatisation of Air India. In the absence of this, he believes, the state-owned carrier will continue to bleed under increasing competition, falling market share and increasing costs.

"The tax-payer's money can be used for development of the aviation sector as a whole, and to provide compensation to states for forgoing VAT on ATF," he suggests.

The list drawn by Dubey includes establishment of an independent Aeronautics Commission with a budget of around Rs 500 crore, in line with the ones created for atomic energy and space. This AeroComm should be headed by a technical expert and should report directly to the prime minister. Its mandate should be to facilitate cutting edge research and development of aeronautical manufacturing in India.

He also suggests allocation of Rs 1,000 crore for establishment of four National Aviation Universities (NAU) in the country and to support upgradation of AME training centres across the country.

The global consultancy firm's executive also recommends providing a 10-year tax holiday – covering all taxes and duties including customs, excise, service tax and corporate tax – to aeronautical manufacturing and MRO sector.

"We should encourage states to extend the tax holiday to local VAT. This should not be mistaken as a 'tax loss' since there's negligible manufacturing or MRO activity in India and hence hardly any tax collection. The multiplier effect of new investments and jobs would generate government revenue from consumption taxes several times over," Dubey argued.

Besides these, he suggests allowing private airport operators to issue tax free infrastructure bonds to the public, with investments in them being allowed for deduction under section 80CCF of the Income Tax Act. He also wants Section 80IA benefits to be provided for up-gradation of existing airports and essential airport infrastructure like ground handling, fuel farm and others to be covered under the same.

SpiceJet's Kapoor wants the aviation sector to be given an infrastructure status so that cheap capital is easily available to it. He also wants infrastructure at the smaller airports to be improved.

"The government needs to improve infrastructure at smaller airports. Some of airports have runway that is damaged. The government needs to spend on repairing them," he said.

KPMG's Dubey suggests that the allocation of Rs 1,000 crore as seed funding for the Essential Air Services Fund (EASF) to provide funding for no-frills-airports (NFA) and air connectivity in Tier 3-4 locations.

According to him, other measures that could be taken for improvement of airport infrastructure in the budget include seed funding of Rs 200 crore to establish 20-25 heliports at important tourist, port and mining locations with remaining fund coming from state governments and private operators and allocation of Rs 500 crore for modernisation of Air Navigation Services (ANS).

Sharat Dhall, president of yatra.com, believes the forthcoming budget is probably the most awaited budget India has seen in the last one decade.

"The expectations from this budget are very high. We are also hopeful that this budget will set aside a significant pool of funds for better connectivity by building new airports at, and better roads to key tourism destinations in the country. A reduction in airport fee and the taxes on airline fuel are also steps that will go a long way towards improving the health of the airline industry as well as driving passenger growth," he adds.