Small-town India takes off with sharp ATF cuts

Written by Roudra Bhattacharya | New Delhi | Updated: Aug 21 2014, 09:43am hrs
Aviation turbine fuelStates such as West Bengal, Jharkhand, Chhattisgarh and Madhya Pradesh have slashed the value-added tax on aviation turbine fuel. (AP)
With airlines having dropped fares and added flights to

several minor airports across the country, small-town India is flying high. Carriers have been able to trim fares and start more flights to destinations like Bagdogra and Bhubaneswar thanks to the enormous savings that theyre making on the price of jet fuel.

States such as West Bengal, Jharkhand, Chhattisgarh and Madhya Pradesh have slashed the value-added tax on aviation turbine fuel (ATF), the consequence of which has been a big jump in flights, leading to a sharp increase in passenger traffic.

So enthused are some airlines by the cost savings that they have started international connections from these airports SpiceJet, for example, launched a Kolkata-Bagdogra-Kathmandu route last week.

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Had SpiceJet flown directly from Kolkata to Kathmandu, it would not have got the benefit of lower-priced ATF. SpiceJet chief operating officer Sanjiv Kapoor says the airline will continue to explore ways to operate more flights to stations with low ATF taxes.

In Raipur, the airport has run out of storage capacity for jet fuel after demand jumped sixfold following the cut in the VAT on ATF to 4%.

But nowhere is the evidence more compelling than at West Bengals Bagdogra airport, which doesnt levy any VAT on ATF.

The airport clocked a huge 64% year-on-year rise in passenger traffic in April-May because the number of flights has gone up by 37% over the previous year.

To be sure, the growth comes off a low base, but is nevertheless way above the national average of 5% and 6% during the period, as reflected in data from the Airports Authority of India.

The move to drop the VAT on ATF appears to have been a win-win situation: Airlines are tanking up cheaper and passing on the gains to passengers in the form of lower fares, in the process flying more passengers.

Says an airline executive, Ticket prices have fallen by R1,000-2,000 and this has encouraged more people to fly. Bhubaneswar is a good example of more flights having been added.

As Amber Dubey, partner and India head of aerospace, KPMG, points out, the highest growth in year-on-year traffic in May was recorded at Bagdogra (55%) and Ranchi (32%), where the tax on ATF has been slashed to 0% and 4%, respectively.

The states are benefiting from the increase in associated economic activity with the multiplier effect kicking in. Larger investments in the aviation infrastructure in these states have seen better logistics networks being created and employment being boosted.

There is a huge regional disparity in air connectivity. States in the north, east and northeastern part of the country, in particular, have very low flight connectivity in relation to their populations. However, while Maharashtra accounts for around 10% of the countrys population, the states share of flight movements is more than 20%. On the other hand, UP accounts for more than 15% of Indias population but its share of flight movements is abysmally low at 4%.

Fuel costs account for half of an airline's costs and, therefore, any saving on taxes helps. In India, ATF is 60% higher than competing regions like West Asia and Southeast Asia; in Delhi, for example, it is about R70 a litre.

To convince more states to lower VAT on ATF, civil aviation minister P Ashok Gajapathi Raju had set up a meeting of state ministers on Thursday. However, this has been cancelled since many have expressed their inability to attend. We are now speaking to the PMO. We want the PM himself to address this meeting to highlight the importance of this initiative, and a date will be announced soon. Lower taxes on fuel will give a huge boost to the country's aviation sector, a senior ministry official said.

Added Dubey, Odisha, Madhya Pradesh, Chhattisgarh, Jharkhand and West Bengal have already slashed ATF taxes. Rajasthan, Telangana, Karnataka, Gujarat and Goa could be next.

Elsewhere, airlines have also chosen to shift base in search of a good deal , which has created large employment opportunities for the state concerned. AirAsia is one such example, having shifted its base from Chennai to Bangalore when it launched in June this year after the Bangalore airport offered a 50% discount on landing and housing charges and zero fees for night parking for airlines designated as home carriers.