Against strong headwinds

Having drifted into a turbulent zone in 2008, domestic carriers did everything possible to fly out of it through most of 2009. They cut capacity — either by resizing fleets or rationalising flights, or both.

Some of the full-service carriers (FSCs) transferred a huge chunk of their offerings to the low-cost segment to attract passengers. Case in point: Jet Airways, which launched a new service,  Jet Konnect.

Then finally, by the end of 2009, most airlines had managed to exit the rough weather patch. The flight to safer winds was also supported by improving demand and rising airfares.

Easing of aviation turbine fuel (ATF) prices, which had soared to over $100 per barrel in 2008, also helped the carriers. In fact, high operating cost, slipping demand and excess capacity were the main reasons that Indian airline companies had skid off the runway.

The fuel bill of an airline constitutes over 40% of its operating cost. And since they cannot cut down fuel consumption, airlines have always asked the government to slash the sales tax on ATF by bring it under the declared goods category. This would ensure that the fuel would attract a flat 4% tax, rather than the current situation, where each state os free to decide its own tax on the fuel.

M Thiagarajan, managing director of Paramount Airways, said: “As the aviation sector is an integral part of India’s economic growth engine, it is important that certain benefits in the form of uniform sales tax on ATF, by bringing it under the declared goods category, be implemented immediately.”

Taxes on ATF range between 29-35% across states. This demand for bringing ATF in the declared goods category has been put forth to the government in the pre-Budget season in earlier years, but has always been struck down.

Civil aviation minister Praful Patel supports reduction of the tax, but has not been able to do much because the issue involves other ministries and the state governments.

“While this (tax) rationalisation has always been on our agenda, it has not happened, as this decision is always left to the state government and not  the central (government),” the minister recently told the media.

Dinesh Keskar, president of Boeing India, believes that despite an improvement in the fundamentals, the aviation sector still needs to be wary of fuel-cost headwinds. “If fuel costs are kept in check, the segment will see steady (passenger) traffic growth at 8-10% thanks to the boost in domestic travel,” he said.

Another predicament for the aviation sector is the lack of infrastructure. With metro airports still in various phases of development and lacking adequate number of runways, planes still spend time circling over airports awaiting clearance to land.

A few years ago, the Airports Authority of India (AAI) had decided to develop airports in smaller cities. For various reasons — one of them being a lack of sufficient budgetary allocation — that plan failed to take off. 

Airport charges too  have played havoc with  airlines’ costs. Hikes in user development fees (UDF) at various airports have also crimped margins. Last year, the companies that run the Mumbai and Delhi airports urged the government for a further 10% increase.

Airlines are worried they will face the same consequence at smaller-city airports too — last year, AAI chairman V P Agarwal said the authority planned to levy UDF of Rs 900-1,000 on international passengers and Rs 200-250 on domestic travellers in 11 airports that it managed.

Then there is the issue of foreign direct investment (FDI). Starved for funds  and having low creditworthiness — most of their
assets having been pledged to raise money during the crisis — airlines are keen that the government lift the FDI cap of 49%. They are lobbying for the FDI ceiling in the sector to be pushed up to 74%.