India’s Carriers Find Little To Cheer in New Budget

 - March 11, 2013, 1:20 PM
Air India, which is among the early operators of the Boeing 787, is set to receive a further capital injection of almost $1 billion from its government shareholder, but it is about the only Indian carrier with any grounds for optimism from the country’s new budget. (Photo: Boeing)

The Indian government’s new budget, released on February 28, brought little relief for the country’s ailing air transport sector, although the industry awaits a possible announcement of some reduction in high aviation fuel taxes. In particular, the budget documents made no mention of hoped-for fiscal support for India’s emerging regional airline industry.

High fuel prices and other rising operating costs combined with declining passenger traffic have resulted in mounting losses for Indian carriers and represented a severe constraint to the growth that once seemed unending. India’s domestic airlines carried 5.13 million passengers in January–a 3.77-percent reduction on the 5.33 million carried in January last year. Last October, the government bowed to pressure to allow foreign investment in Indian domestic carriers up to a 49-percent equity limit, but few takers have surfaced so far: Malaysia’s AirAsia has announced plans to establish a new operation in partnership with Indian industrial group Tata; Abu Dhabi-based Etihad Airways’ planned investment in Jet Airways remains incomplete; and the only local airline with reason to celebrate–state-owned, debt-ridden Air India–stands to get a $973 million equity infusion from the government as part of its turnaround plan.

“It has been a disappointing budget for aviation,” said Amber Dubey, a partner with KPMG Advisory Services in India. “The aviation sector will continue to struggle until fundamental policy changes on the taxation front are brought in.”

According to Dubey, the only relief from the budget came in the shape of a minor adjustment to customs duty relief that extends, from three months to one year, the period in which operators must use the parts they import. “This clause is useful for those like us doing heavy checks,” said Vivek Gour, managing director of Air Works Engineering. “We can now tap more business and plan our inventory for a longer period.”

According to Indian industry representatives, the country’s maintenance, repair and overhaul businesses charge as much as 25 percent more for their services than do competitors in neighboring countries like Sri Lanka due to India’s higher taxes. The situation has cost Indian MRO providers a considerable amount of work. “While customs concessions are appreciated, the biggest killer is a 12.5-percent value added tax on the sale of spares,” said Bharat Malkani, chairman of Mumbai-based Max Aerospace & Aviation. “This makes our costs much higher and we cannot be competitive.”