The story is the same with almost all LCCs

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The story is the same with almost all LCCs. SpiceJet, Paramount Airways, JetLite, Indigo, none of them have been able to break-even despite so much increase in passenger traffic. In fact, Deccan Aviation is currently India’s largest loss making corporation, with Rs.843 crores of losses. The culprit, experts say, is the unduly high ATF tax, and of course, the fuel bill. Jet fuel prices in the Indian market have skyrocketed from merely Rs.21,000 per kilolitre in 2004 to Rs.70,000 at present. In fact, the price went up by 100% in the past one year. “In India, the situation of fuel price increase is compounded by the punitive taxation structure on aviation fuel. However, that does not mean that the low cost model has become unsustainable... Carriers that focus on keeping down other costs may be able to maintain a competitive advantage,” I was told in a formal statement from the office of the Regional Director for India and Middle-East, CAPA.

Compared to Lalu’s profits, in the financial year 2008-09, losses in Indian aviation industry are expected to cross $2 billion, while globally they could cross even $6.1 billion as per CAPA estimates. Even the International Air Transport Association has seconded this opinion forecasting losses of India’s aviation sector to cross $2.3 billion; and that too even if oil prices do not cross $135 a barrel! With oil prices already touching $137 per barrel (June 20, 2008 figures), is this industry on the brink of a mega collapse? Digest this – IATA has now revealed that the global airline industry’s fuel bill for 2008 can swell to $176 billion from the $136 billion in 2007, an increase of 300% when compared to 2003’s fuel bill of $44 billion.

Just around the 1st week of June 2008, airline fares were raised between Rs.300 and Rs.550 by almost all the airlines as ATF prices further rose. Today, a big question on the LCC model’s survival is getting raised as the fare difference between an LCC ticket and a Full Service Carrier (FSC) ticket is very insignificant. In their requisition to ministry for the bailout package, the aviation industry CEOs have asked the government to rationalise the sales tax and reduce it to 3%.

At present different states charge different sales tax on ATF and it is charged up to 30% in some areas. If the tax is reduced to 3%, the tax will come under the ‘declared goods’ category, and would cause the various state governments a combined loss of Rs.8,000 crore. While the states have requested the central government to bear 50% of the Rs.8,000 crore loss as they are not in a position to bear the brunt alone.

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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