The Hindu Business Line : <I>Crude effect in the air </I>

Over the last couple of months major domestic air carriers have raised the fuel surcharge on their fare due to the hike in aviation turbine fuel (ATF) rates. ATF now accounts for about 38 per cent of airlines' operating costs. Taxes, particularly at the State level, push up significantly the ATF prices on which the airlines do not have any control. State government levies add around one-fourth to fuel costs. This policy-induced cost of ATF must be reduced.

The passenger air transport industry is soaring, as evident from the near-doubling of the number of passengers in 2005-06 from only 37 million in 2003-04. But with airport infrastructure not keeping pace, there are delays. Especially, the stacking of flights over airports raises consumption of ATF and hence, costs. Low-budget airlines are particularly hard hit, as this is one aspect of cost that they cannot control.

Despitethe significant growth in passenger traffic, most players in the Indian aviation industry have been incurring losses because of higher fuel cost coupled with lower pricing power. Further, the domestic airlines are mandated to purchase ATF from the three state-owned oil companies — Indian Oil, HPCL, and BPCL. Moreover, unlike the global players, Indian airlines cannot hedge fuel purchases through forward contracts. This forces the domestic players to pay a much higher price for jet fuel than airlines elsewhere in the world.

Liberalisation of the jet fuel regime will lower airlines' costs. Though some States have taken the initiative to reduce fuel surcharges, further liberalisation will intensify competition not only among the players within the sector but also among the different modes of transport.

Across country experiences show that the volume of passenger traffic increasesand fares decline when regulations and market structures become more friendly to competition ("Regulation, market structure and performance in air passenger transportation," Gonenc,R. and G.Nicoletti; 2001; OECD Economic Studies, No. 32).

Therefore, further competition, for example, by reducing State-level duties will have a more positive impact on the growth of this industry and employment generation, and negative effect on prices (lower fares).

(The author is an economist with CRISIL. The views are personal.)

More Stories on : Airlines | Impressions | Petroleum

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
A new triangle of trust

Crude effect in the air

The residence factor and tax incidence

Invest time in framing the new tax code

Tax on commission to foreign agents who corner business for an Indian event

Chambers of service

Damocles sword of reassessment proceedings

India moving forward `on a remarkably stable trajectory'