Friday, July 11, 2014

India’s New Budget Frustrates Airlines

Indian Minister of Finance Arun Jaitley disappointed the country's aviation industry by failing to address its multiple concerns in his new budget.
July 11, 2014, 6:30 AM
With India’s airlines still mired in losses, the country’s new budget announced on July 11, did little to address some of the aviation industry’s most pressing concerns. It offered nothing on reforms in taxation on aviation fuel and maintenance, repair and overhaul–long issues of contention the aviation industry hoped India’s new government would address. In fact, the finance minister’s budget speech did not once allude to aviation, raising concern that the new government will be as ineffectual in removing obstacles to industry growth as its predecessor.

The entry of domestic startups–AirAsia India and soon to be launched Tata SIA—appears likely to exacerbate the situation as they released more seats in a market where supply already exceeds demand. The only good news in the budget seemed an acknowledgement that with “air connectivity out of reach for a large number of aspirational Indians,” a plan for development of new airports in Tier 1 and Tier 2 cities should proceed through the Airports Authority of India or private-public partnerships. 

Prior to the budget release, industry officials expressed high hopes for the aviation sector. “India’s new government will provide opportunity for the aviation industry,” IATA CEO and director general Tony Tyler had told AIN in anticipation of the budget. “Problems in India are onerous as taxes and regulation are holding back [the sector]…The new team India approach will provide an opportunity to drive the agenda for aviation that will make life better for all players.”

Aviation fuel taxes of up to 35 percent and a depreciated rupee have made operating costs prohibitive for struggling carriers. “With no tax reduction, this will mean a kick up in volumes will not take place for airlines as they cannot bring down fares any more or improve profitability,” an Indian airline official told AIN.

High taxes on MROs have driven domestic airlines to international shops. “India will continue to lose foreign exchange it could have earned by providing MRO services for neighboring countries,” said an MRO provider.

Regional carriers with smaller-sized fleets such as Air Costa appear likely to benefit from a focus on regional low-cost airports and a boost to tourism circuits in the budget. Recently, two new regional airlines, Air Carnival in southern India and Kolkata-based Zav Airways won No Objection Certificates and now await their licenses to fly.

Despite the budget’s failure to directly address aviation’s concerns, optimism still prevails in certain quarters. “The budget is an interactive process. There is no reason to be disappointed,” Air India chairman and managing director Rohit Nandan told AIN. Of course, Nandan has cause to celebrate. The latest tranche of an equity infusion in Air India, which finally joined the Star Alliance on July 11, totals  $1.2 billion in the current fiscal year through March 31, 2015.

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