Why are airlines in India at the edge of a precipice?

In March 2020, when airlines across the world halted flights due to the pandemic, many in the industry expected some closures. While many global carriers declared bankruptcy, all Indian aviation companies survived. Not a week went by without the industry betting at least a couple of the weakest ones would shut down. But, they managed with whittled down operations, refusing to pay almost all vendors and cutting salaries. All Indian carriers — big and small — proved more resilient and we still have six main airlines operating and a clutch of tiny ones (Alliance Air, Trujet and Air India Express).

Intransigent and a bit cussed in the first wave, the government softened its stance in 2021, allowing few minor concessions. In the first wave, small considerations were made for individual carriers, leading to heart-burn as accusations of favouritism flew thick and fast. A big saviour for many airlines has been cargo and charter revenue. The bubble arrangement helped domestic airlines operate to lucrative destinations minus the usual competition as scheduled airline operations remain suspended.

The latest move to postpone restarting international flights has not gone down too well with hub carriers like Emirates, Etihad and Singapore Airlines who feel this is being 'engineered' at the behest of domestic players, who gain from lower competition. Passengers have been losing since supply is restricted and fares on bubble flights are far above usual. This remains a thorny issue and the picture will become clearer by December.

Mounting Troubles

Yet, the troubles for Indian carriers never seem to end. The surging price of aviation turbine fuel (ATF) is the latest threat. Fuel prices are now above pre-pandemic levels and since May, US fuel prices have risen 130% while Indian prices have gone up 300%. As of November 1, 2021, the India international fuel price is 30% higher than US while domestic fuel prices are 60% above the US price.

Airlines in India reeling under losses due to the pandemic are now facing bleaker prospects. Analysts say while main players survived the first shock this could be the last straw. What made matters worse is capacity has been reintroduced and there’s a downward pressure on yields. Costs have risen due to higher fuel prices and rupee depreciation. Things are looking worse than ever.

The government can help by waiving or at least reducing excise duty to 5% from the present 11%. The airlines are jointly seeking this to help them tide over this crisis. IndiGo CEO Ronojoy Datta said airlines were “not expecting a miracle but small practical steps can help.” Air Asia India CEO Sunil Bhaskaran says a one-time waiver of the 11% central excise could help matters. He added tax rates being ad valorem make matters worse. The excise reduction amounts to roughly 2% in costs for airlines.

The bigger problem is state VAT which on average is around 18-20%. State VAT in metros from where the airlines lift almost 70% of their fuel needs remains quite high, between 20-28%.

But concerted pressure has been applied by the Centre on states to consider reducing state VAT on ATF and more recently Uttarakhand, Srinagar, Kerala, Andaman and Nicobar Islands have reduced state VAT. Of the more important flying stations, Telangana has the lowest rates for a while now.

In 2021, the government has been more receptive to the industry’s pain. It allowed airlines to access funds through emergency credit guarantee loan scheme introduced by the finance ministry in the aftermath of the pandemic. It allows airlines to borrow a certain amount from their banks with a government guarantee backing the loan. It is also exploring waiving off other unreasonable charges. The Airports Authority of India (AAI) has marginally reduced the rate of interest it charges airlines on delayed airline payments from 12% to 10%. The airline industry wants some charges levied when aircraft were not flying to be waived or reduced substantially. The industry is trying to get MOCA (Ministry of Civil Aviationb) to help in areas under its jurisdiction since getting the ministry of finance to agree takes far longer.

Some pending issues are yet to be settled. There’s a refund of just over ₹1,000 crore due to airlines from the government on a disagreement relating to duties levied on aircraft part imports, a case won by the airlines but where refunds have not been made. Airlines are also seeking a 50% cut in airport levies for the next six months that could help them save around ₹1,200-1,400 crore and government needs to step in to see what it can do to spread the pain fairly across airport operators and airlines. Further, airlines want to do self handling instead of paying companies like SITA which currently charge around $ 1 per passenger. Then there are issues such as suspension of GST payments, reduction in bank guarantee periods against airport charges and levies and abolition of royalty charges, all of which can help for now but remain unresolved due to the MOCA-MoF coordination required.

Penny Wise, Pound Foolish

Many argue the government is being penny wise, pound foolish in fuel taxation. Reducing duties on ATF for one year would cost the exchequer around ₹2,600 crore but would help almost every airline’s bottom line significantly. Indian carrier CEOs and founders have long maintained while they are told to compete with airlines across the world, they do not have a level playing field.

The long-term solution to India’s high taxation on ATF is to bring it under GST but the government has refrained from doing so since all states need to agree. “There is momentum on this matter now as more states begin to appreciate the crisis the carriers are facing”, says a senior MOCA official.

At a national level, this remains a “political hot potato” especially due to the fact that diesel prices remain high too. Where the government is struggling with high petrol and diesel prices, any reduction on ATF can be damaging in perception terms. “This is more a mindset issue than anything else. In India, aviation is still viewed as a “sin” or luxury industry, akin to liquor or cigarettes”, says a senior industry professional.

But many argue the high tax on fuel needs to be rethought at a macro level to create a resilient and robust economy. “This is a classic case of focusing on short term gains versus long term perspective” argues Akasa CEO Vinay Dube. He says that the wider point is India needs to create a robust transportation system and the high taxes are stifling this, not just aviation but transportation as a whole.

Meanwhile, Indian airlines are scrambling to raise resources from any possible source. Globally, governments have stepped in to save airlines from the brink of disaster. India has so far has been quite restrained and unwilling to budge but many argue for the country’s aviation sector, it’s a now or never moment.