More profitless growth

Despite air traffic taking off, high costs and inadequate infrastructure are keeping the industry in the red

The aviation sector may have taken off with robust air traffic growth, but it has yet to cross much turbulence before it is finally airborne. Today, it is one of the fastest growing sectors in the country, but explosive capacity expansion, high cost structure and inadequate infrastructure are keeping the industry in the red.

In 2006, domestic carriers flew 25.50 million passengers, 31.44% more than the 19.40 million flown in 2005. However, this exponential growth has not translated into profits for the players.

As things stand today, airlines are struggling hard to keep their heads above the water.

Industry experts believe that in the year ahead too, carriers will find it difficult to keep out of rough weather. Also, the projections of airline head honchos are, if not bleak, nothing to smile about.

“In 2007, we will again see a surge in demand that will push up our revenues, but if the current situation does not improve, we will see another year of profitless growth,” forecasts IndiGo chief commercial officer Sanjay Kumar.

Top executives of other airlines echo Kumar’s sentiment. But even as they express their frustration over the current milieu, they know that the industry’s frail health is not beyond cure.

A little wind under the wings from the government could jet the industry into the profit zone. For airlines today the most important issue that needs immediate addressing is rationalisation of taxes on aviation turbine fuel (ATF).

At present, prices of jet fuel in India are the highest in the world owing to high sales tax, which range from 4% (Chattisgarh and Jharkhand) to 39% (Kerala).

“The issue of rationalisation of ATF taxes, including custom duty, needs to be urgently taken up in this budget to bring it in line with international prices,” says Deccan Aviation chief operating officer (COO) Warwick Brady. He feels removal of fringe benefit tax (FBT) on hotel stay of airline crew and privatisation and modernisation of airports and air traffic control (ATC) would also go a long way in making airlines cost efficient to offer competitive fares.

Airlines are also expecting the exemption of withholding tax on leased aircraft to be extended beyond March 31, 2007. The withholding tax is 3% of the leased aircraft cost.

“This tax is only beneficial for the foreign lessors and is detrimental to the Indian players,” quips SpiceJet Ltd managing director Ajay Singh.

Being a low-cost airline operator, Singh is extremely cost conscious, which is why he wants the passenger service fee (PSF) of Rs 220 to be reduced and differential airport charges for peak and non-peak hours. He is optimistic that input costs in 2007 will fall with greater sharing of resources across the industry.

“All this will pull down fares. Also, capacity induction will be slower this year, which will rationalise fares to some extent,” says Singh.

Air Sahara wants tax on its regional jet - Bombardier CRJ-200, which is much higher than other turbo props in the market - to be reduced. The full service airline’s president Alok Sharma firmly believes that the industry troubles are not
something that is “insurmountable”.

A snag that could bring an airline crashing down is constraint of funds. And so, the industry is lobbying for reforms in this area and asking the government to raise the foreign direct investment (FDI) cap from the current 40%. They also want the ban on investment by foreign carriers in Indian airlines to be lifted.

Once these issues get the government attention, airlines say they’ll be ready for a smooth ride.

Expectations
Privatisation and modernisation of airports and air traffic control

Removal of fringe benefit tax on stay of airline crew in hotels and free tickets

Exemption of withholding tax on leased aircraft to be extended beyond March 31, 2007

Raise in the foreign direct investment cap from the current 40%