World-record fuel taxes are ripping apart
India's civil aviation profits, leaving carriers
doing runaway business yet adding red ink every
time the engines power up. The cockpit view as
captains of the industry try to pull out of a nose
dive is no more comforting - flocks of bills for
new aircraft orders are heading their way.
India's domestic air traffic increased a
record 33% in 2007 and carriers reported a
US$504.44 million loss. Aviation fuel taxes, at
between 70% and 100% higher than international
rates is the chief villain. Fuel bills gobble up
more than 40% of airline operating budgets and are
the biggest contributor to airlines losses,
grumbles the New Delhi-based Federation of Indian
Airlines (FIA), an industry body.
FIA
figures based on October 2007 prices point out
that aviation
fuel
in Mumbai cost US$1,033 per kiloliter as against
$580 per kiloliter in Singapore, Kuala Lumpur and
Dubai airports. Aviation fuel costs airlines
$1,145 a kiloliter in Kolkata, possibly the most
expensive in the world.
The country's
highly competitive budget airlines continue to
sell tickets for $12, but they come with $51 of
taxes added on, of which fuel surcharges are $41.
Three years ago, a Mumbai-Delhi one-way ticket,
including taxes, cost less than the current tax
component on air tickets.
Taxes vary with
differing sales taxes across India's 28 states and
seven centrally administered union territories,
ranging from 4% to 33%. Budget airlines have
maintained the uniform $41 fuel charge despite tax
variations across sectors, prompting market
analysts to accuse airlines of forming a cartel.
The taxes are not the carriers's only
nightmare, though perhaps the worst, and are
encouraging consolidation in the industry, with
industry pioneer Air Deccan merging with new
entrant Kingfisher Airlines in 2007, less than
five years after it began flying in August 2003.
Airlines are bedeviled by pilot and crew
shortages - India needs a 300% increase in cabin
crew recruitment in the next two years. Airport
congestion adds to costs with air travelers having
to cough up a $3 congestion charge. Passengers are
now greeted on board domestic flights to Mumbai,
New Delhi and Bangalore not just with the expected
time of arrival, but with expected delays due to
heavy air traffic over India's three busiest
airports.
The cost of keeping aircraft
circling for an extra five minutes adds an
additional $5.3 million to the industry's fuel
bills, according to estimates. Congestion delays
can range between 30 and 60 minutes.
Forecasts that dozens of new low-cost
airlines would by now be meeting the demands of
the country's fast-growing economy have proved
vastly optimistic, with barely half a dozen, such
as SpiceJet, Indigo and Go Air, in the air and
these are fighting to stay there.
The
aviation industry and the civil aviation minister
Praful Patel are pressing demands for a more
rational tax regime ahead of the federal budget to
be presented to Parliament on February 29. They
may be making some headway. The southern state of
Andhra Pradesh announced on February 12 a
remarkable retreat, with a 90% sales tax cut on
aviation turbine fuel, from 33% to 4%.
The
reduction will mean a revenue loss of around $14
million, Andhra Pradesh chief minister Y S R Reddy
told the media while inaugurating Hyderabad's
swanky Rajiv Gandhi International Airport, 25
kilometers from the city, which boasts South
Asia's longest runway at 4,260 meters. Reddy hopes
the loss will be offset by increased air traffic
and tourism, an argument the aviation industry is
enthusiastically promoting.
Aviation
Minister Patel has asked his cabinet colleague,
Finance Minister Palaniappan Chidambaram, to grant
aviation fuel for jet aircraft a "declared good"
status in his next budget. This would
automatically result in a uniform, nation-wide 4%
levy on jet fuel. The Federation of India Airlines
has also presented a long tax-cut wish list to the
finance minister.
The Indian Constitution
allows Parliament to deem some goods to be of
"special importance" such as cereals, sugar and
oil-seeds, and these "declared goods" cannot be
taxed over 4%. At present, only aviation turbine
fuel sold for smaller turbo-prop aircraft comes
under the declared goods category, as an incentive
to promote air services to smaller towns across
India.
While Patel ranks India as the
world's fastest-growing aviation industry, the
government and airlines are squabbling over who
pays the taxes. The government has asked the
industry to stop dumping the entire load onto
passengers, while the industry wants the
government to stop exploiting it as a cash cow.
Resolving the conflicting perspectives is
a matter of urgency as air connectivity
increasingly becomes a business necessity in a
country whose four major metropolises are
separated by distances of 1,000-plus kilometers.
The fastest train journey between financial
capital Mumbai and national capital New Delhi
takes 16 hours overnight, courtesy the Mumbai-New
Delhi Rajdhani Express.
Carriers,
encouraged by the country's fast economic growth -
gross domestic product grew more than 9% in the
2006-07 fiscal year - and evident passenger demand
have placed large orders for aircraft.
Air
India, the country's largest airline, has ordered
68 wide-bodied Boeing aircraft, including 27 of
the new Boeing 787 Dreamliners; Leading private
carrier Jet Airways is buying 43 new Boeing
aircraft. The deals together are worth $15
billion. Both airlines reported losses in their
last fiscal year, Air India coming in at $176
million in the red and with similar bad news
predicted this year.
Even so, the market
outlook is bright based on the prospects of
unprecedented growth linked to strong domestic and
overseas tourism. India's domestic air traffic may
grow ninefold by 2026, compared with a fivefold
increase in China's domestic market in the same
period, European aircraft maker Airbus said this
month.
To cater for the expected demand,
India plans to develop 400 to 500 airports by
2018, minister Patel announced on February 12.
To survive competition, domestic airlines
are attempting to strike a industry-wide deal on
fare cuts involving tax surcharges, but without
much hope for success. About 50% of seats are sold
for discounts - with of course the tax costing
nearly four times the ticket cost in most sectors.
Fare cuts also worry the industry
regulator, the Directorate General of Civil
Aviation, which fears airlines might compromise on
maintenance and safety standards to meet shrinking
operational budgets. The DGCA recently revealed
that it promptly carries out a safety audit on the
fleet of any airline that announces a fare cut. If
India's record aviation fuel taxes don't dip soon,
the DGCA might soon have fewer airlines to worry
about.
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