The airlines want the government to reduce taxes on aviation turbine fuel (ATF) for all routes and not just those covered under regional connectivity scheme (RCS) as the operating cost is expected to increase by about 10% in FY18 on the back of hike in oil prices.
The Delhi government on Wednesday announced a reduction in value added tax (VAT) on ATF to 1% from 25% earlier on planes fuelling tanks for flying to airports under the RCS. This move will help in bringing down the airfares for common passengers as fuel constitutes more than 40% of the total operating cost of the airlines in India, claim experts.
The airlines have long been lobbying for a reduction in the taxes on ATF in India, which are said to be among the highest in the world.
Commenting on the development Aditya Ghosh, president and whole-time director at low-cost carrier IndiGo, said, “I understand that this relief is only for the regional connectivity routes. While this is a welcome move and it will provide the much-needed impetus to the regional connectivity scheme, we do request that this tax break is broadened to all air travel out of Delhi as it will allow IndiGo to provide even more affordable air travel to millions of our customers out of Delhi which is our biggest base of airplanes.”
IndiGo’s main base is at Delhi though there are smaller bases in other parts of the country.
Ajay Singh, CMD of SpiceJet said, “This is a welcome move, which will help reduce costs and, in turn, help bring down fares for flights to smaller airports in the country. We support all initiatives that help reduce fares for our consumers.” Senior executives from Jet Airways and national carrier Air India too shared similar sentiments.
RCS, which was announced in October last year, is basically a market-based mechanism in which airlines bid for seat subsidies to connect unconnected/under-served airports in the country. The fare under the scheme has been capped at Rs 2,500. A lot of airlines in the country including a few scheduled ones like Air India, SpiceJet, IndiGo, among others are believed to have shown interest in the scheme. The Central government, in order to push the aviation growth in India, has asked all the states in the country to decrease the taxes on ATF.
A recent report by aviation consultancy firm Centre for Asia Pacific Aviation (Capa) has expected cost creep of 10%, which means 10% decline in yields if the cost of oil increases to around $55-60 per barrel and the exchange rate is expected at around Rs 73-75. This would widen the industry losses further to $380-450 billion in FY18. Yields could further potentially decline with an increase in capacity by the airlines. The report further adds that with India’s abysmally poor traffic penetration – 0.04 trips against the US and Australia’s 2 per capita per annum, the first-time flyers with a push from RCS are bound to boost India’s air traffic growth from the current 223.6 million in 2015-2016 to 442 million by 2035. The tremendous growth is expected to make India the third largest aviation market within the next five years and number one by 2030.