The Hindu Business Line : A mixed week for aviation sector

THE PAST seven days have been both a week of turmoil and some relief for the domestic aviation industry and its passengers. While the implementation of the Budget proposals in their current form could cause hardship to not only the major players but also possibly the travellers, the state-owned Indian Airlines (IA) has introduced the metro-non-metro scheme, which could bring cheer to the long-distance air traveller.

During the July 8 statement in Parliament the Finance Minister, Mr P. Chidambaram, had announced not only a hike in the foreign direct investment (FDI) limit in civil aviation but also proposed doing away with, from September 1, tax exemptions which are available to an Indian company to acquire an aircraft or aircraft engine on lease from a foreign state or a foreign enterprise — a move which could affect their finances and possibly force them to have a re-look at their proposed expansion plans.

The financial impact of the decision to do away with tax exemption on leasing an aircraft is likely to vary depending on how many aircraft are leased or owned by the airline. The move is likely to hit Air Deccan — which only operates a fleet of leased aircraft and plans to acquire more aircraft shortly through this route.

However, the impact of the decision might not be that severe on other airlines which have a combination of leased and owned aircraft in their fleet. Sources in Air India (AI), which apart from leasing Boeing 737-800 aircraft to start its low-cost airline is also planning to lease large aircraft such as Boeing 747 and Airbus A-310, said that the decision could put an additional burden of up to $250,000 per month per aircraft leased.

The move could also affect Indian Airlines, which has already announced that it plans to lease six Airbus A-320 aircraft and another 11 Airbus A-319 aircraft in a phased manner. Sources in Jet Airways, which many believe will be least affected by the Government move since it has a fleet of 41 aircraft of which 24 are owned by it, termed the decision to put a tax on lease of aircraft as an "unfortunate step".

None of the airlines has as yet said whether it would think of passing on the addition expenditure which are likely to be incurred.

But it is something which many feel cannot be ruled out if the Budget proposals are accepted in their present form.

"Globally the aviation industry runs on wafer thin margins. If these are also affected and more pressure is put on our finances, the industry as a whole will have to examine various options," a senior official involved in the day-to-day running of a domestic airline said. Officials felt that greater clarity was required on several issues.

"We need to check whether the arrival date of the aircraft, signing of the agreement to lease the aircraft or the date for remitting the funds for the aircraft is to be taken as the cut-off date for imposition of the new tax.

Unless we have clarity on these issues, how can the industry decide on what the impact will be on the passengers and airlines," the official of another domestic airline said.

Similarly, the airlines are also seeking greater clarity on the proposed tax on airport services. A senior airline official wondered whether the proposed service tax on outdoor catering would also apply to flight kitchens that supply meals to aircraft passengers.

Officials feel that if the Budget proposals add marginal impact on costs then the airlines may look at absorbing them, but if the impact was "major" and affect the margins then the airline may look at other methods of offsetting rising input costs.

Meanwhile, the Budget proposal of imposing a withholding tax on lease of aircraft is likely to place an annual additional burden of Rs 86 crore on IA and Rs 91 crore on AI. Similarly, the proposal of bringing airport services into the service tax list could put an annual additional burden of Rs 28 crore on IA and Rs 35 crore on AI, sources said.

Despite the gloom there was optimism that some way out would be found. "All the players, be it the Government or the industry are on the same side and are speaking the same language. It is just that we are not working together to get to the goal of making air travel more affordable and broad-basing it," airline officials said.

However, the gloom was lifted a bit when Indian Airlines introduced its metro-non metro scheme which offers the passenger the option of travelling on the non-metro section of a metro flight for a mere Rs 1,200 one-way.

A passenger opting for the scheme will pay Rs 11,940 for travel on the Chennai-Delhi-Jodhpur sector as against the normal fare of Rs 14,910. Besides, if the passenger decides to book the ticket at least seven days prior to departure the fare will be Rs 8,675.

Similarly, on the Kolkata-Bangalore-Thiruvananthapuram sector a passenger will pay Rs 12,090 as against the normal fare of Rs 15,420 while those booking at least seven days prior to travel will be charged Rs 9,630.

Likewise on the Mumbai-Chennai-Tiruchi sector a passenger will pay Rs 7,030 as against the normal fare of Rs 8,955 while for those booking at least a week before travel will be charged Rs 5,375.

The IA scheme remains in operation till October 15 this year and is valid on 224 metro and non-metro combinations.