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Airlines hit a rough patch

MANAGING FUEL BILLS: An Indian Airlines flight being filled with fuel. - FILE PHOTO

Air India Chairman and Managing Director V. Thulasidas is on record noting that the airline incurred a loss of Rs. 700 crore last year on account of the rising fuel bill. The loss was bound to climb further this year, when international crude prices hit the $100 a barrel rate but steadied in the 90s.

With aviation turbine fuel (ATF) being the highest priced petroleum product, the impact of the petroleum prices can well be imagined in the bottom line of the airlines. Adding to the financial mess seems to be the continuing fare war in the international and domestic sectors. As such, most airlines appear reluctant to raise the fares even now.

At a recent seminar in Chennai, Air India chief and Jet Airways Chairman Naresh Goyal made out a strong case for a reduction at least in the taxation of ATF. The burden of the speakers there was that most airlines would be killing themselves in the price war, considering the impact of the fuel costs — which account for about a third of the operating costs of an airline.

In 2006-07, scheduled airlines in the country incurred a combined loss of around Rs. 2,000 crore, because of the competitive pricing policy they pursued. Mr. Goyal expects the losses to rise further in the current year on account of the fuel bills. ATF prices are said to be the highest in India, and in some States, airline officials say, they are twice that of the global rates. This is because of the higher tax rates and the Value Added Tax.

Industry sources argue that unless the airlines work together, the existing competitive market will continue to keep the fares down to the minimum. “In addition to the off season, and non-peak hour discounts, most airlines offer some form an apex fare system for the early bookers. A certain percentage of the seats is offered at throwaway prices by the low-cost airlines, and at a significant discount by leading operators. They are keener on better occupancy than reasonable pricing of seats. As such about 50 per cent of the seats occupied in any flight may have been sold at a discount,” the Regional Manager of one of the leading private airlines explains.

Despite several appeals by the Centre, and more directly by Civil Aviation Minister Praful Patel, the State governments seem unwilling to lower their tax rates, as ATF and the tax on all petroleum products provide a convenient revenue cushion for them. Whatever the increase in fuel prices or taxes, consumption has not declined. So the States see no reason to tamper with the rates.

Under these circumstances, industry sources feel that the only option before the airlines is to evolve a consensus on the fuel tax or cess levied on passengers or cargo. “This should be a variable, linked to international fuel prices. It cannot be fixed. Perhaps, it should be a certain percentage, or adopt a formula related to crude pricing. Only then can the airlines manage their fuel bills,” reasons an operations manager.

Unfortunately, it has not been possible for the airlines to agree on such a pricing mechanism and if one airline begins to undercut, the whole system collapses.

Aviation authorities say that the problem needs to be addressed by the airlines themselves, though the Centre is seriously concerned over the pricing of petroleum products.

The oil companies are also complaining about a huge hole in their books because of the increase in international crude prices and the non-adjustment of the domestic prices for months.

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