At a time when the domestic airline companies have been trying to stage a turnaround financially on the back of decreasing aviation turbine fuel (ATF) prices, the Union government’s decision to increase the excise duty on jet fuel to 14% from 8% came as an unpleasant surprise to them.
However, the finance minister’s announcement that the maintenance, repair and overhaul (MRO) sector has been given exemptions from paying the customs, excise and other kind if duties will help foreign and domestic airlines to maintain and repair their aircraft in India comes as welcome move.
Fuel prices which constitute 35-40% of the total operating cost of an airline and all the indigenous airlines have been asking for a reduction in taxes on ATF to sustain the current levels of growth. Consequently the airlines may decide to hike passenger fares to cope with the recent increase in the excise duty in the coming days.
A senior official of an airline company said that prices of crude has increase by 15% to 36$ per barrel from 30$ per barrel in the last few days and with the recent increase in excise duty the price of ATF will increase by 12% for the month.
“Airlines have been under pressure for the last two years and we have been operating with such high taxes on ATF for a long term. So we will cope with it,” added the official.
According to industry experts, the passengers may not have to pay increased fares as result of this increase in taxes as the intensifying competition on the popular routes and low crude oil prices may allow airlines to absorb the increased taxes.
In the upcoming summer holiday season the ticket prices are unlikely to increase significantly and most of the airlines have also announced discounts during that period before hand to entice tourists.
“I do not think that air fares will increase with this development as the competition in the domestic market is very high and airlines cannot pass on the rise to the customers. Also the total number of passengers will increase in the current year as well so the impact will not be so adverse,” Dhiraj Mathur, partner, EY
According to an expert who did not want to be quoted said that in an airline 40% of the sum collected from a single ticket is spent on buying fuel and ticket prices can increase by R100-R300 in the coming days which is not at all steep.
“While the increase in excise duty is on ATF was unexpected and not good for the industry, it is unlikely to shoot up prices as the industry will also grow overall,” said Amit Pandurangi, Partner Delloitte LLP.
The annual budget also makes cheaper the maintenance, repair and overhaul of aircrafts in India by exempting the sector from paying excise, customs and other forms of tax. The government also proposed to ease the procedure to access the above mentioned exemptions.
Till now Indian airlines use to maintain and repair their aircrafts outside India as it was very expensive for MRO’s to import part of aircraft in India. As a consequence Sri Lanka and Dubai became hub for repairing aircrafts.
“It is a step in the right direction which will help create jobs in this sector. Most Indian aircrafts do not have any internal repairing capability so the MRO sector can thrive in India. The high taxes on the sector were an unnecessary item which should have been removed earlier,” said an official employed in the sector.