Guest Column

Awaiting higher altitude clearance

High fuel cost and airport clogs continue to keep low-fare carriers below their potential says Jeh Wadia.

Jeh Wadia Managing Director GoAir

The Indian aviation industry is grafting its presence profoundly on the global aviation map and is flying high with scorching growth - one of the highest in the world. In 2005, the industry grew 25 per cent and in 2006, that figure nearly doubled. The arrival of low-fare carriers has fuelled this boom, bringing air travel within the reach of the common man. Low-fare carriers, which didn't exist till about three years ago, now account for nearly 38 per cent of the total domestic aviation market, and are expected to touch a share of 70 per cent by 2010, according to the Centre for Asia Pacific Aviation. With air fares now comparable with AC train fares, growth is more or less assured.

Low-fare carriers are undergoing a phase of market stimulation, as a result of which the yields are falling even as costs increase. Aviation turbine fuel (ATF), which constitutes 40-44 per cent of the total operating costs of a low-fare carrier, is priced by the government every month, and suffers from three main ailments: custom duty, excise duty and sales tax. Sales tax varies between four per cent and 39 per cent from state to state. Because of this, the ATF price in India is almost 60 per cent higher than the rest of the world, the biggest injustice done unto operators in India. In fact, if private Indian carriers are to avoid the fate of those that went belly-up in the 1990s, ATF prices have to come down. It would not be overblown to assert that the ongoing low-fare air travel revolution, which has started giving so many Indians their first-ever flying experience, hinges on fuel price economics.

The Indian aviation sector was expecting a much needed boost from the finance ministry in the recently announced budget. Topping the wish list was low ATF taxes. The classification of ATF as a 'declared goods' would have brought about uniformity in sales tax levied on aircraft fuel across all states, drastically reducing it to three per cent. This, in turn, would not only have helped low-fare airlines improve their bottomlines, but would have also enabled them to pass on the benefit to the passengers in the form of even lower fares.

Next on the wish list was an extension of the exemption of withholding tax on the lease and rental of aircraft. In India, withholding tax for a leased aircraft is quite a handicap, unlike abroad where this tax does not exist and hence leasing is a very economical option there. At present, over two-thirds of the 240 odd aircraft flying in the country are on lease, and the industry expects to lease around 400 more aircraft by 2012. An extended exemption would have helped airlines keep costs low.

It is not clear if differential airport charges are helping us de-congest airports. Nevertheless, the government is exploring other means of air traffic rationalisation. While the tax exemption on ATF sold to turbo prop aircraft extended to all small aircraft (under 40,000 kg) has been welcomed by the move's beneficiaries, it would be nice if a wider reappraisal is made of the rest of the taxation structure. Among the major sticking points are the customs duty of three per cent, countervailing duty (CVD) of 16 per cent and special customs duty on import of aircraft by private operators. This, combined with three per cent customs duty, 16 per cent CVD and four per cent special additional customs duty on imported spares and parts, acts as a spanner in the works of all low-cost carriers seeking to augment their fleet. And this is a volume business, with costs having to be defrayed over large numbers of passengers for fares to be lowered. Thankfully, the airport charge hike was rolled back. But it's still a mixed bag with differential airport charges between peak and non-peak hours. Though there is the incentive of lower charges for non-peak-hour flights, new slots for peak hour flights (especially in Delhi, Mumbai and Bangalore) have been put on hold. This hampers expansion plans of many airlines.

Also, it is not clear if the idea is helping us decongest airports. Nevertheless, the government is exploring other means of air traffic rationalisation, and it is good that airlines have been asked for suggestions.

- The author is the chief of GoAir. These are his personal views.