New Delhi: A few months ago, letters from the finance ministry landed on the desks of airline officials across the country. They were, according to a low-cost airline’s finance director, reminders to the companies that a tax exemption on aircraft leases would likely be revoked in the Union Budget, and that the airlines needed to wrap up their lease processes quickly.
“It really sunk in then,” said the finance director, who asked not to be named because the letter was stamped “Confidential.” “Things were a little frenzied after that because we had hoped the exemption would continue,” he recalled.
The exemption, which applied to a tax called the withholding tax on aircraft leases, was granted three years ago, as the government loosened up regulation in the civil aviation sector.
When an Indian airline leases aircraft from companies overseas, the foreign company is required to pay a tax on that income. That tax is usually added on to the final bill to the airline. The exemption meant that the tax didn’t apply, and it brought down final lease costs for the airlines. The biggest beneficiaries, along with the young airlines, were Indian and Air India, whose ageing fleets forced them to lease aircraft regularly.
For weeks after receiving the letter, the airline industry lobbied the finance ministry to reconsider its decision. The Federation of Indian Airlines wrote several letters, and the chairman of Air India, V. Thulasidas, openly lamented to reporters that if the taxes were re-instated, AI’s bottom line would be hit by about 2% to 3%
Both Air India and Indian are likely to declare losses for the 2006 financial year. Their third-quarter revenues stood at Rs6,435 crore and Rs4,850 crore, respectively, according to figures released by civil aviation minister Praful Patel.
Private airlines such as Jet Airways and IndiGo—the new low-fare carrier that announced plans to have a fleet of 100 Airbus A320s—also lease most or all of their fleets.
In the last three years, the tax holiday had given them a lot of flexibility to shop around for deals in Ireland, Mauritius, Australia etc. because the tax rates for deals with those countries became immaterial. But after 31 March, the tax rate, depending on the country the leased aircraft’s company is from, could vary between 10% and 44%. For a lease on one A320, the aircraft of choice for the low-fare carriers, that cost could between $40,000 and $200,000 a month. It is unclear how many of the 250 or so airplanes in the country are leased, and which countries there were leased from, making it tough to estimate the total impact on the industry.
In addition to higher costs, “what that means is that we have to be careful about where the lease is from,” said Bruce Ashby, CEO of IndiGo, which will be adding up to eight A320s to its fleet this year.
For IndiGo, that will likely be Ireland, where it has done most of leases from, and where the tax treaty between India and Ireland is quite favourable, said Ashby. He estimated that on A320s that were three-quarters full, the per- passenger increase in costs would be about Rs60 each. But considering how competitive ticket pricing is right now, it seems unlikely that airlines will pass the added costs to customers.
Perhaps, more importantly, said a Jet Airways official, the decision reduces the flexibility of airlines in planning their fleet sizes. “Basically, we have airlines signing leases early on in the year to save money, instead of signing leases according to the need to add capacity,” he said.
Excess capacity has been an issue for India’s airlines, which have consistently added more seats than there are passengers, driving down prices to the point where the carriers lost more than $250 million in 2006.