‘Budget has little room for aviation-specific manoeuvres’

Indian aviation business is unlikely to return to pre-Covid level before FY24. Recoveries have been delayed with slowing demand due to the current spurt in Covid infections, says Sumit Singhania, Partner, Deloitte India.

Supply-side interventions such as tax reduction or support for local manufacturing of parts in the upcoming Budget would be welcomed, as there is little headroom for large-scale industry-specific manoeuvring, he says.

In an interview to BusinessLine, Singhania also touches upon the outlook for FY22 and recovery, and the push for local maintenance, repair and operations (MRO) activities, among others.

Edited excerpts:

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Post the third wave of Covid infections, how do you foresee recovery for Indian airlines?

Till December 2021, there was a month-on-month growth in passenger numbers. But initial data for January suggest that, post a rise in Covid cases, there is already a 20–30 per cent fall in passenger traffic. Airlines are rescheduling or curtailing operations, too.

International operations remain closed in view of [the latest coronavirus variant of concern] Omicron. This will delay recoveries for airlines like IndiGo or Vistara, which were ramping up international operations.

The current slowdown will impact recoveries for airlines in the short run and may drag out their P&L [profit and loss] position. Airlines would quite likely extend their losses in FY22. Debts may increase too, if airlines resort to tapping markets for working capital or other requirements.

Achieving pre-Covid numbers, which looked possible around FY23, is now expected to be delayed by at least another year. Not before FY24, at least; and all this is presuming economic activity is not thrown off-gear because of deadlier virus variants.

Do you expect Budget support specific to the sector?

In 2020 and 2021 there was little direct subsidy or doleouts for the sector in the Budget. These couple of years were quite unique as fiscal consolidation was not exactly top priority for the Government, and for obvious reasons. With the green shoots of economic recovery in the current financial year, the Government may actually turn its attention back to fiscal consolidation goals, and, therefore, direct support — in the form of capital or soft loans or cash payouts — may be unlikely for the aviation sector.

That said, the sector can expect a few tweaks to existing tax laws for incremental leverage on the cost side, such as lower corporate tax rate and, possibly, a moratorium on payment of minimum alternate taxes [MAT] for a couple of years. Inclusion of ATF [aviation turbine fuel] in GST has been a long-due ask of the sector; any policy direction on this will be quite welcome.

So, what sort of support should the sector expect?

 To be fair, the sector should look at supply-side support primarily.

For instance, viability gap funding options, reduction in input tax or import duty reduction on specific item purchases; support — mostly tax support — for MRO activities; push for local manufacturing of items that are mostly imported, and so on.

On taxes, industry will definitely expect reduction of ATF taxes. Some of these tax liabilities could well have 8-10 per cent impact on the P&L of airlines and, therefore, a direct impact on the bottom-line.

Besides, depending on how much headroom the Finance Minister may have on the back of the robust tax collections in recent quarters, there is a case for lowering corporate tax rate and MAT for airlines, especially for a couple of years, to tide over the current demand-induced slowdown.

 The Centre can do away with clauses that lead to litigations. For instance, the HSN [harmonised system of nomenclature] classification of aircraft parts for custom duty has been an ambiguous area. I am sure the industry would want that fixed.

ATF prices are still on the higher side. Your comments?

ATF costs account for 25-40 per cent of an airline’s operating cost. The Government is doing its bit by asking for a reduction in ATF tax by the states, and many are complying. But it becomes effective when there is sufficient demand for the airlines.

The Centre or state governments cannot generate demand for the airlines or carriers. That is completely dependent on the return of passengers’ confidence in resuming domestic travel.

As of now, corporate travel has practically stopped, leisure travel is extremely slow too. This time, very few state governments have imposed restrictions on flying. So people are moving less. Once the Covid caseload comes down, I am sure air travel will pick up at a domestic level. This was witnessed post the second wave and well into the festive season. Hopefully, it will be a sharp uptick again end-February onwards.

New operators are planning to launch. Do you think it is a good time to enter the market?

Long-term prospects of Indian aviation remain intact. The Centre and state governments are investing in airports and modernising terminals, privatisation under the PPP model is underway. Schemes like UDAN are fostering regional connectivity, at affordable rates.

The slowdown is Covid-induced at the moment. Structurally, the segment is fine. New players coming in may begin with staggered operations — starting with select high-profitable routes — rather than going the whole hog. So yes, it looks like a good time for new players to come into the market.

However, as we see some of the existing players will have their balance sheets stretched with the increases in debt level, losses will continue for some time, and so on. But in the long term, Indian aviation will not be dominated by one or two players, as was the case earlier.

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