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Corporate Oct 18, 2012

Cut aviation costs before forcing expansion into smaller cities

By Rajesh Pandathil

The aviation ministry seems to have some disconnect issues. There is no serious thought on bringing down the costs for airlines, but it is planning to bulldoze an expansion on the country's aviation sector.

According to a report in the Business Standard, Minister Ajit Singh has said the ministry may make it mandatory for Indian carriers to fly to tier-III and -IV cities.

There are plans to create a new category of such cities in the route dispersal guidelines, "so they (carriers) have to fly a certain percentage (of their flights) here", the minister has said in an interview to the newspaper.

Re-categorisation of cities is a much needed step, no doubt, given the categories that now exist are based on a guideline devised in 1994. AFP

There is also a plan to change the 10 percent rule, which mandates domestic companies to fly 10 percent of the number of their flights to metro and other large cities to locations in the Northeast and Andaman & Nicobar Islands etc.

These plans are being devised even as the airlines are reeling under high costs of fuel and airport charges in India.

A survey cited by a recent Times of India report said operating expenses for airlines in India are much higher than those for their counterparts from developed countries, while ticket charges here are lower by 113-280 percent.

The companies have been struggling because of this. Though Jet Airways and SpiceJet managed to report profits in April-June, their income came more from sources other than their core operations.

As much as 40-45 percent of an airline's operating cost in India is fuel expense, while the same internationally is 20-25 percent. The high price of aviation fuel here is mainly due to the taxes.

A plan for rationalisation of tax on the fuel has been a non-starter.

In a report to the ministry in January this year, Nathan Economic Consulting India said high tax rates on the sector raise airlines' cost of operation, with respect to domestic services, which not only negatively affect the airlines' ability to grow but raise the cost of air transport for consumers.

"India's civil aviation policy's dialogue framework should set out both short and long term solutions to rationalise tax rates; initially classifying ATF as a 'declared good,' attracting a 4% tax rate, and eventually incorporating ATF into the goods and services tax (GST)," it said.

Re-categorisation of cities is a much needed step, no doubt, given the categories that now exist are based on a guideline devised in 1994. In a span of 17 years, many cities in India have changed drastically.

The re-categorisation exercise will take the new realities into account. And smooth and faster transport is key to development.

Increasing the coverage of aviation to remote areas with low connectivity is important. But for this, the government will also have to find ways to cut operating expenses of airlines.

Unless and until this is done, customers in all likelihood will stay away due to the higher ticket charges. And the sector is sure to bleed further.

by Rajesh Pandathil

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