Indian airline industry expected to suffer huge debt burden

The Indian airline industry is expected to suffer a huge debt burden of USD 20 billion in 2011-12, with the Planning Commission recommending significant and continuous investment to give a boost to the cash-strapped sector.

In what may sound music to the ears of the industry, the plan body favoured rationalisation of taxes on jet fuel and investment by foreign airlines in Indian carriers.

A working group of the plan body, which formulated the 12th Plan for the sector, said by not allowing foreign carriers to pick up stake in Indian airlines, access to potential sources of capital and expertise was being denied.

It proposed a projected total outlay for the sector at over Rs 54,743 crore for the entire plan period of 2012-17, including Rs 32,963.67 crore for Air India and Rs 17,500 crore for the Airports Authority of India.

Noting that half of the huge debt burden of USD 20 billion in 2011-12 was aircraft-related and the rest for working capital loans and payments to airport operators and fuel companies, the working group said the existing FDI policy does not permit foreign airlines investment, thereby denying access to potential sources of capital and expertise.

It also pointed out that the industry faced "many taxes" like those on fuel, aircraft leases, airport charges, air passenger tickets, air navigation service charges, maintenance costs, fuel throughput fees and other such charges.

"These fees and taxes on inputs are either not present in other matured aviation markets, or are much lower there. The Indian air transportation industry is thus laden with very high costs and larger operating losses than their other counterparts globally," it said.

This, the Planning Commission document said, was "not to say that air transport industry should be completely exempt from taxation - rather, it is a matter of distortion that needs to be addressed."

Maintaining that the future of Indian aviation growth was critically linked to the health of the airline industry, it said apart from many structural factors, the operating cost environment is adversely impacting the financial of the airline sector.

Noting that taxation of the sector was disproportionately high, it said "airlines must be treated as economic assets rather than as convenient source of taxation. Air travel should not be treated as a luxury good, but as a necessary and normal service ... and should be taxed accordingly."

Observing that the key cost drivers were high taxes and the ATF price which accounted for 40% of the airlines' operating cost, it said "there is no doubt that the current regime of aviation fuel taxation adversely impacts the financial performance of Indian air carriers.

"If aviation fuel taxes are disproportionately higher without any basis, then it retards the industry development vis-a-vis the overall growth in the economy and limits its potential contribution to economic well being. Multiple and higher levies on ATF will impact the operating cost environment of airlines."

The working group also pointed out that following dismantling of the administered price mechanism for oil, ATF prices in India were directly linked to the Gulf prices.

The jet fuel price in India "do not relate to the actual cost of producing ATF in India," it said and suggested that these prices be rationalised "to minimise the cascading effect of tax regime" so that the airlines' operating costs became conducive for provision of affordable air services.