The Hindu Business Line : Taxes causing `turbulence' for domestic airline companies

Members of the Association of European Airlines indicate that their fuel bill constitutes 13.3 per cent of their total operating expenses, whereas for Indian carriers the fuel bill constitutes 45-50 per cent of the operating expenses.

In India, international operators pay about Rs 50,100 a kilolitre of ATF, whereas domestic operators pay up to Rs 73,000 a kilolitre in the metros.

MR RATAN SHRIVASTAVA, DIRECTOR, FROST & SULLIVAN.

Your air-ticket on important routes such as Mumbai-New Delhi just got more expensive. First, fuel surcharges were raised and now base fares have been upped. Prices of ATF or Aviation Turbine Fuel are being blamed as the fuel currently accounts for more than half of every hundred rupees spent by domestic airline companies on operations.

While it's true that ATF prices in India have risen from an average of Rs 21 per litre in 2004, to an average of Rs 70 per litre today - crude prices and ATF prices have always had a high correlation and so, the price rise is not unnatural.

What is aberrant is the `irrational' tax structure that Indian carriers are subjected to in their own country.

"The Association of European Airlines (AEA) members indicate that their fuel bill constitutes 13.3 per cent of their total operating expenses, whereas for Indian carriers the fuel bill constitutes 45-50 per cent of the operating expenses. Even for international operations, the price applicable to Indian carriers' uplifts is higher than those applicable to foreign carriers by 25 per cent. Domestic operators pay a 51 per cent higher price than what is paid by international carriers in India," comments Mr Ratan Shrivastava, Director, Aerospace & Defence Practice, South Asia & Middle East, Frost & Sullivan in their recently released report on the ATF market in India.

So, how irrational is the tax structure? Despite the robust growth in demand, the airline industry in India is facing huge losses due to various domestic and external factors, he said, adding that excessive taxation is one of the prime factors.

Indian carriers lost $500 million last year due to irrational ATF pricing. Business Line caught up with Mr Shrivastava over the email.

Edited excerpts from the interview:

Firstly, what is your outlook on ATF price globally? Is that coherent with Indian ATF prices?

ATF prices are rising globally as well, due to the surge in crude oil prices. The current difference in price between India and neighbouring Dubai and Singapore is still about 80 per cent higher. In India, the international operators pay about Rs 50,100 a kilolitre (ATF is trading at $167 a barrel) whereas the domestic operators pay between Rs 66,000 to Rs 73,000 a kilolitre in the metros. In India, till such time there are cross subsidies in petroleum, the market forces may not determine the fuel pricing.

ATF prices in India have risen from an average of Rs 21 a litre in 2004, to an average of Rs 70 a litre today; in the past six months alone, the prices have gone up by almost 40 per cent.

Frost and Sullivan has said in the report that the Indian ATF market has become highly controlled and monopolistic in nature.

ATF, as all other fuels, has been largely controlled by the Government of India. Oil exploration, refining and marketing have largely remained a public sector domain. Even with the entry of giants as Reliance Industries, the situation has largely remained unchanged from the era of controlled mechanism.

Thus the APM (administered pricing mechanism) dismantling has had little effect on the pricing of the fuel - a few players continue to dominate the market, forces of demand and supply do not play a role to the extent they should.

What was the rationale of the Government to let Indian oil companies the freedom to price ATF from April 2001?

The oil refining and marketing business remains largely in the public sector domain and the Government is the largest stakeholder in these firms.

So the rationale of APM is still not clear, as the Government decides on the pricing, duties, taxation, and the oil marketing companies still cannot freely decide the pricing of their products, be it aviation jet fuels, blended fuels, petrol or diesel.

Tell us about the existing ATF pricing mechanism in India.

The price of ATF in India is based on International Import Parity prices. However, the ATF supplied by Indian oil companies is refined in India from imported crude. There is no direct import of ATF.

The import duty on ATF is 20 per cent but the import duty on crude is only 10 per cent. Still, the oil companies charge a 20 per cent add-on to the Refinery Transfer Price (RTP).

Apart from this, oil companies also include a 16 to 49 per cent add-on towards marketing margins and contingencies on the RTP after the addition of the import parity add-on. This add-on varies between various cities.

On this, the Central Government levies an excise duty of 8 per cent. On the resultant price, the various State Governments levy local sales taxes ranging from 4 per cent to 39 per cent, which on an average works out to 25 per cent countrywide. The total Government levies thus work out to an add-on of 35 per cent.

Thus, effectively the price of ATF in India is 60-70 per cent higher than international benchmarks.

You have talked about `irrational' tax structure being one of the chief reasons for the price of ATF in India being higher than the prevailing international prices. Why do you term it irrational?

Irrational as there is little correlation between prevailing ATF prices globally and the pricing for the domestic airlines. Irrational, also, considering the variation between what an international airline will pay in Delhi (Rs 50,100 a kilolitre) to what a domestic airline pays (Rs 66,000).

Are oil companies, which charge a 20 per cent add-on to the RTP, doing something unfair?

I leave this to your judgment.

Is there a feeling among the higher authorities that airline companies are making a lot of profits? If no, what explains the imposition of Government levies which are an add-on of 35 per cent to the price of ATF?

I wonder, if this is the case, as the Minister for Civil Aviation, Mr Praful Patel, is himself working on the case, for reduction of levies on ATF, standard taxation of 4 per cent on ATF and declaring it as a "declared good."

It is also understood that an Empowered Group of Ministers is to be announced and a committee headed by the Cabinet Secretary is also looking into the matter for rationalised aviation fuel pricing.

Coming to taxes levied by States, how can Andhra Pradesh manage by charging an ATF tax rate of 4 per cent while Gujarat charges 30 per cent?

States need to take a call on this. It is estimated that the contribution of ATF taxation to States' kitty is Rs 5,000 crore per annum.

If the fuel bill of Indian airline companies comes to 13-14 per cent of total operating expenses a la international carriers, will they become profitable?

I presume that their financial health will improve, as today 45-50 per cent of the costs of operating occur from ATF costs. The overall profitability can be a function of several factors.

How can the Indian ATF price scenario change?

A change in the ATF pricing scenario can come about from a combination of several factors - such as a reduction on the duties of imported ATF, reduction in base price by the oil marketing companies, rationalisation of tax structure, allowing trading ATF as a commodity on MCX, hedging of ATF and allowing for market forces to play their role as well.

Would you advise hedging for airline companies?

I would argue for any avenue that allows for airlines to reduce expenditure on ATF as it directly affects an average domestic air passenger as well. Hedging, as we have said in our Market Insight (report) as well, is a good option.

Futures' trading does seem to benefit the operators as well as the oil refining and marketing companies, as there is a very high co-relation between crude oil and ATF (about 96 per cent). ATF is nothing but refined kerosene; kerosene can be categorised in three segments - aviation, industrial and PDS.

As recently reported, I understand that all permissions are in place for futures trading of ATF in MCX from next month.

What's your take on Indian carriers (such as Jet Airways) tying up with oil companies for long-term ATF contracts?

There have been some talks on this in the past also. This is a solution as well, but with increasing volatility in the crude market, it largely remains to be seen if this can be successfully implemented.

D. MURALI

KUMAR SHANKAR ROY

www.Detaxification.blogspot.com