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Indian airfares among world's highest

Danish A Hashim | October 21, 2004

Air travel in India is far more expensive than in other countries. In 2000, the fares for domestic airlines were found to be 69 per cent higher than the average of selected world airlines.

This, when there is a possibility of reducing the existing fares by at least 41 per cent to be at par with the international average.

On the contrary, air travel has actually become even more costly from October 14, with all the full-service domestic airlines raising airfares by 10 per cent.

It may be recalled that in June this year, airfares were raised by the same amount. The successive increase in fares can be attributed to the spurt in global crude oil prices and the weakening of the rupee.

As there is still no respite from the spiralling crude oil prices, even after crossing the $50-a barrel mark, the costs of aviation turbine fuel and air travel may rise further.

ATF prices in the past five months -- from April to October -- this year have increased from Rs 21,750/ KL (kilolitre) to Rs 30,800/ KL, registering a 42 per cent increase.

Such a steep hike in ATF prices does not augur well for the domestic civil aviation industry, where all the three full-service airlines -- Indian Airlines, Jet Airways and Sahara Air -- are struggling to make profits.

The agony of these airlines is further aggravated with the aggressive price strategy of the year-old Deccan Air, whose financial performance remains to be analysed.

In India, there is ample scope for not only reducing the effect of increasing global crude oil prices, but also to reduce the ATF price itself.

The average ATF price in February 2003 was Rs 22,380/KL against just Rs 11400/KL in Singapore. It can be easily shown that if the ATF price in India were at the level of Singapore then, even after the spurt in global oil prices, the ATF price today would have been much lower than what it was in February 2003!

It is interesting to note that the airlines in India have to spend around 30 per cent of their operating expenses on ATF, compared to only 10 to 15 per cent in selected international airlines.

According to an estimate, if Jet and IA were incurring expenses on ATF at par with the international average, the operating cost per unit of output would have been lower by about 14 per cent, other factors remaining constant.

There are two main reasons for the high price of ATF in the country: high sales tax, which averages more than 25 per cent, by various state governments, and high excise duty (which has recently been cut to 8 per cent from 16 per cent) by the central government.

IA alone contributed Rs 158.76 crore (Rs 1.59 billion) to the state exchequer and Rs 140.98 crore (Rs 1.41 billion) to the central exchequer in 2001-02. Hence, it is necessary that ATF is categorised under "declared goods" to cap the sales tax on it at the 4 per cent level.

What is happening, however, is that the few states that earlier imposed lower sales tax on ATF, have started to increase it. For instance, Andhra Pradesh has hiked the sales tax from 4 per cent to 30.5 per cent, Rajasthan from 26.7 per cent to 28 per cent and Chhattisgarh from 4 per cent to 25 per cent.

The excise duty also needs to be brought down to 4 per cent. For IA and Jet, a reduction of combined sales and excise duty, from the prevailing average of 40 per cent to a desired average of 8 per cent, would have reduced the ATF cost per unit of output by 32 per cent in 2000.

However, this would have still left the ATF cost 66 per cent more than the international average.

This brings us to the second reason for the high price of ATF, namely, the high price charged by the three state-owned oil companies -- Bharat Petroleum, Indian Oil and Hindustan Petroleum. These companies enjoy the exclusive privilege of supplying ATF to the airlines.

The Naresh Chandra Committee rightly notes the need for allowing airlines to source their ATF requirement from the supplier of their choice.

In short, the government needs to undertake two important measures that will not only absorb the increase in global oil prices, but will also reduce the ATF price. One, reduce the sales tax and excise duty to 4 per cent.

Two, allow the airlines to source the ATF requirement through import. This in turn will help in arresting the growth of air travel cost, which is already sky-high.

The author is a consultant at the Indian Council for Research on International Economic Relations, New Delhi

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