The finance minister’s decision to allow small regional jets to buy aviation fuel at the same prices as equal-sized turboprop-engine aeroplanes will benefit some of Air Sahara’s fleet and all of Paramount Airways’ five jets, encouraging growth in the non-metro routes that these airlines fly.
Turboprop engines are generally used on small or slow sub-sonic aircraft.
It might even encourage other airlines to add small jets to their fleets, said analysts, so that they can take advantage of the new flat 4% sales tax (ST) on aviation fuel, compared with the 23% state ST that they pay on average to buy aviation fuel for their larger aircraft.
But what it won’t do is help the sagging fortunes of India’s major airlines, which spent a combined total of $1.3 billion (Rs5,754 crore) in 2006 on aviation fuel.
Aviation fuel makes up 40% of their costs, and when customs and excise duties are added to ST, aviation fuel costs almost 70% more in India than it does in countries such as Singapore or the United Arab Emirates.
The ST reduction does not apply to Boeing and Airbus aircraft, which make up the majority of the 245 commercial aeroplanes in the country.
“Overnight, the government could have made all of the airlines profitable,” said Warwick Brady, the chief operating officer at Air Deccan, one of India’s top three airlines by market share. “All it has to do is snap its fingers.”
Air Deccan, a low-cost airline, has had operating losses ever since it went public in 2005, but Brady said its shortfall on each ticket is only about Rs388 on an average. The Indian aviation industry lost an estimated $250 million last year, mostly due to intense price wars and high aviation fuel.
“The industry had hoped that aviation fuel altogether could be given a ‘declared goods’ status,” said V. Thulasidas, chairman, Air India. But Thulasidas did acknowledge that the decision would encourage growth in the sectors that these smaller jets fly—mostly non-metro airports in remote locations.
That was likely the intent of the decision, since the decade-long deregulation of the aviation market has led to significant growth in the metro routes, especially Delhi-Mumbai, while many airlines only flew to non-metro routes to fulfil their obligations to the government in exchange for permission to fly.
That, said a source at the civil aviation ministry who did not want to be quoted, is what had prompted the government to reduce ST on the smaller turboprops in 2001. Deccan Aviation Ltd, which later launched Air Deccan in 2003, for instance, initially flew only ATR’s French-made turboprops that seat less than 80 people, to take advantage of the lower fuel prices.
“There is a small matter which has large beneficial consequences,” said finance minister P. Chidambaram, as he introduced the measure in Parliament. “Turboprop aircraft have been replaced by new generation small aircraft, which have taken air services to smaller airports and to the remote parts of the country.“
That’s why, Chidambaram explained, he had taken the decision to extend ST advantages enjoyed by turboprops to all aircraft weighing less than 40 tonnes at takeoff.
For Paramount, which flies five business-class, Brazilian-made Embraer aircraft to non-metro airports in South India such as Madurai and Thiruvananthapuram, the decision will knock at least 30% off its fuel bill, which makes up 40% of its cost, said its managing director M. Thiagarajan.
“We have had to compete against turboprops consistently, and this finally levels the playing field,” he said.
Air Sahara said it would save up to Rs30 crore a year on the seven regional jets it flies.