FE Editorial Flying lessons

The Financial Express
Posted: Jul 07, 2008 at 2111 hrs IST
Updated: Jul 07, 2008 at 2111 hrs IST

Font Size

Print

Feedback

Email

Discuss

Related Articles

SpiceJet to receive $65 mn in a week as 2nd tranch...Air India needs up to Rs 1,000 cr infusion: PatelAir India employee gets 2-yr RI for cheating'Global airlines in deep crisis, 26 go bust'

The domestic airline industry is facing severe pressure on its margins on account of the surging price of aviation turbine fuel (ATF). Most airlines expect to make losses running into hundreds of crores this year. As mentioned on these pages before, the cost of ATF accounts for around 40% of the costs of airline operators. Hence the current spike in oil prices and the unwillingness of oil marketing companies—not without reason—to sell ATF at subsidised rates has made things very difficult for airlines. In addition, state governments levy high sales tax on ATF to mop up large sums of revenue. Sales tax on ATF is 20% in Delhi and is as high as 29% in Chennai, both major flying hubs. Some states like Andhra Pradesh and Kerala have reduced the sales tax to 4% but these are the exceptions to the rule. At the moment, airlines pay an average Rs 71,000 per kilolitre for ATF. They could, however, save up to Rs 10,000 per kilolitre if they were allowed to import ATF—prices are substantially lower in international markets—a policy which is currently disallowed by the government.

Estimates suggest that airlines can cut their projected losses of Rs 8,000 crore for the current financial year by one-third if free imports of ATF are allowed. This would be a far better solution than the government offering direct subsidies to keep airline operators afloat, a demand which is already being made by the airline industry and a demand that should never be met. The biggest protest against allowing import of ATF comes, not surprisingly, from state governments, which stand to lose significant revenues. The struggling public sector oil marketing companies would also take a hit. Still, it makes little sense to kill the airline industry to enrich state governments, which are in comfortable fiscal situation anyway, or to simply save oil PSUs, which should instead be given more elbow room on pricing. Some state governments are threatening to impose an entry tax on imported ATF as a way to make up for revenue losses. This would be economically irrational and stands on weak legal ground in any case—courts have struck down such taxes in Kerala, for example. Under the circumstances, allowing ATF import is a no-brainer.