Posted online: 2009-08-04
The Federation of Indian Airlines threatened to go on strike for one day on August 18; it made headlines and upset many, including the government. The strike is off, and, yes, airlines are at fault, including for an attempt at cartel-like behaviour. But the government is at fault too.
India’s aviation industry, flying around 40 million domestic passengers a year, is still an infant industry when compared to railways which transports about 14 million passengers a day and bus transport which carries 90% of passengers, mainly over short distances. As the economy grows and incomes increase, the propensity to travel by air also grows. Air transport, no doubt, is a more efficient form of long distance transport. For efficient economic growth, aviation infrastructure including air connectivity at reasonable costs becomes as much a necessity as railways or road transportation. This realisation came in the early nineties when liberalisation of domestic airlines was carried out, followed by liberalisation of bilateral air service agreements, to allow more domestic and foreign airlines into the country. But air travel is still considered a luxury.
Central and state governments have found an easy way to enrich their coffers by putting very high taxes on petroleum products via both sales tax and aviation related charges. About two decades back, air travel was done mainly by government officers or corporate executives who were not price sensitive as their office paid for the bills. With economic growth, ordinary businessmen and people from all walks of life needed to travel by air also but were price sensitive. The sale price of aviation turbine fuel (ATF), sales tax on ATF, navigation and airport charges kept air travel expensive. With the coming of low cost carriers (LCC), full service carriers started to lose dominance. From about 30% of the market in 2007, they have reached 55% of air passenger traffic in Q1 of 2009, showing how price sensitive this sector has become. The global financial meltdown impacted the sector globally and Mumbai 26/11 impacted India’s inbound tourism in a big way.
Airlines the world over suffered, including domestic ones. They can recover only with increasing air traffic and cost cuttings by use of better technologies like e-ticketing and improved procedures. Airline seats are perishable like electricity. Unfortunately, some domestic airlines felt that by cartelisation and increasing prices, they would be able to increase their bottomline. This didn’t work We need to relook at the government’s fiscal policy on the aviation sector. Boxes on the right list sales tax on ATF across different states, varying from 4% in Andhra Pradesh to 30% in Maharashtra. They also list comparative airport charges between Singapore and Delhi. Further, they provide a comparison of ATF charges at Singapore and Mumbai stations.
With the kind of price sensitivity we have experienced in the case of LCC vs full service carriers, it appears that if taxes and charges are reduced and this is reflected in reduced ticket prices, the loss to government revenue will perhaps be more than compensated by increased traffic. Andhra Pradesh has already taken a step forward towards reducing sales tax on ATF to 4%. If other states also join in, especially the states with metro cities, this will have a major impact on passenger traffic. Further, if we compare the tax on a railway ticket or bus ticket with the tax on an air ticket, then the comparison becomes completely skewed.
—The writer is chairman, International Foundation for Aviation and Development(India chapter) and India’s former representative to ICAO
The Federation of Indian Airlines threatened to go on strike for one day on August 18; it made headlines and upset many, including the government. The strike is off, and, yes, airlines are at fault, including for an attempt at cartel-like behaviour. But the government is at fault too.
India’s aviation industry, flying around 40 million domestic passengers a year, is still an infant industry when compared to railways which transports about 14 million passengers a day and bus transport which carries 90% of passengers, mainly over short distances. As the economy grows and incomes increase, the propensity to travel by air also grows. Air transport, no doubt, is a more efficient form of long distance transport. For efficient economic growth, aviation infrastructure including air connectivity at reasonable costs becomes as much a necessity as railways or road transportation. This realisation came in the early nineties when liberalisation of domestic airlines was carried out, followed by liberalisation of bilateral air service agreements, to allow more domestic and foreign airlines into the country. But air travel is still considered a luxury.
Central and state governments have found an easy way to enrich their coffers by putting very high taxes on petroleum products via both sales tax and aviation related charges. About two decades back, air travel was done mainly by government officers or corporate executives who were not price sensitive as their office paid for the bills. With economic growth, ordinary businessmen and people from all walks of life needed to travel by air also but were price sensitive. The sale price of aviation turbine fuel (ATF), sales tax on ATF, navigation and airport charges kept air travel expensive. With the coming of low cost carriers (LCC), full service carriers started to lose dominance. From about 30% of the market in 2007, they have reached 55% of air passenger traffic in Q1 of 2009, showing how price sensitive this sector has become. The global financial meltdown impacted the sector globally and Mumbai 26/11 impacted India’s inbound tourism in a big way.
Airlines the world over suffered, including domestic ones. They can recover only with increasing air traffic and cost cuttings by use of better technologies like e-ticketing and improved procedures. Airline seats are perishable like electricity. Unfortunately, some domestic airlines felt that by cartelisation and increasing prices, they would be able to increase their bottomline. This didn’t work We need to relook at the government’s fiscal policy on the aviation sector. Boxes on the right list sales tax on ATF across different states, varying from 4% in Andhra Pradesh to 30% in Maharashtra. They also list comparative airport charges between Singapore and Delhi. Further, they provide a comparison of ATF charges at Singapore and Mumbai stations.
With the kind of price sensitivity we have experienced in the case of LCC vs full service carriers, it appears that if taxes and charges are reduced and this is reflected in reduced ticket prices, the loss to government revenue will perhaps be more than compensated by increased traffic. Andhra Pradesh has already taken a step forward towards reducing sales tax on ATF to 4%. If other states also join in, especially the states with metro cities, this will have a major impact on passenger traffic. Further, if we compare the tax on a railway ticket or bus ticket with the tax on an air ticket, then the comparison becomes completely skewed.
—The writer is chairman, International Foundation for Aviation and Development(India chapter) and India’s former representative to ICAO
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