For those who do not know much about the Indian aviation sector, it would be disappointing to learn that all the scheduled domestic airlines, whether the network or the budget carriers, have remained in losses for most part of their post-deregulation history. This has led many to term the Indian aviation as a non-viable industry where the carriers only run into the losses and very rarely see the profits. The reasons could be many but the overall policy paradigm seems to make the whole industry non-viable. The price of the aviation fuel is one of the major reasons for the bad financial health of the airlines and a stumbling block in the way of further reducing the prices of air tickets.
With airlines running into losses and seeking the bail-out packages from the government, there is a raging debate on whether the bail-outs shall be given or not. Even if the bail-outs are handed out, these would be the one-time measures and might not still save the airlines from the financial troubles or make the aviation sector more viable. For this reason, there is a need to examine the whole policies related to the aviation sector in general to make the industry more viable for the carriers.
The key to the restoration of the financial health lies in managing the prices of the aviation fuel, or the ATF. ATF accounts for almost half of the operating costs of airlines in India. This is way above the world average which is about 30 percent. If the prices of the ATF can be reduced to bring the ATF contribution to the total operating costs to the level of world average then the savings of 20 percent can be instrumental in making the aviation sector more viable for the airlines. This saving can be used to generate more profits or fuelling their growth ambitions by offering cheap air tickets to customers.
However, reducing the prices of the ATF would require a deeper analysis into the components which lead to the high prices of the fuel. One of these components is the high base price of the ATF. The base price is often cross-subsidized with the prices of the LPG, Kerosene and other petroleum products which are commonly used by a large number of people. Since the governments seem reluctant to hike the prices on these fuels due to political reasons, the sufferer is the airlines industry.
The second important component of the price of ATF is the high sales tax levied by the different States in India. This, along with the high base price, has limited the further reduction of the prices of air tickets.
The government is pondering to move the ATF into the list of commodities on which the government can fix the prices. If that happens, it will take away the price-determination from the oil companies. The move, which would ostensibly be aimed at reducing the price of ATF, would be an initiative to make the system more viable for the airline industry.
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