Even as the price of crude oil escalates and currently hovers above the $110 a barrel mark, Budget 2011-12 did little to moderate the rapidly increasing aviation turbine fuel cost of airline companies. The widely-anticipated reduction in taxes on crude oil did not materialise.

Increasing costs

On the contrary, the Budget proposals to increase service tax on economy class travel (by Rs 50 for domestic journeys and Rs 250 for international travel) and 10 per cent for higher classes in the domestic sector, is set to add to the costs for air travel. It remains to be seen whether airline companies will pass on the increased costs to the price conscious customers in the country. For the moment, it seems like a losing proposition for the airlines, either way. If they increase costs, they run the risk of seeing passenger load factor dip. On the other hand, if they absorb escalating costs, they may see the nascent return to profitability take a U-turn.

The Budget fineprint also contains a not-so-pleasant surprise for non-scheduled operators (entities generally acquiring aircraft for personal use) looking to import aircraft for fleet expansion. They will now have to pay basic customs duty of 2.5 per cent (earlier exempt) for aircraft imports. But industry sources do not see this move having a major impact on planned imports by non-scheduled operators, given that the cost escalation is not expected to be major.

Another provision which will increase the acquisition cost of aircraft for airline companies is the withdrawal of exemption from education cess.

Markets react

The markets gave a thumbs-down to the Budget provisions for the aviation sector. Listed airline players Jet Airways, Kingfisher Airlines, and SpiceJet were down 0.9 per cent, 1.6 per cent and 4.8 per cent in Monday's trade, although the Sensex gained 0.7 per cent.

Related Topics