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Airlines wait for panel to trim taxes before taking a call on fares
November, 18th 2008

Despite a drop in jet fuel prices by nearly 30% in the past two months, airlines are unwilling to pass on the benefit to passengers immediately, waiting instead for the decision of a committee appointed by Prime Minister Manmohan Singh on further reduction of taxes on jet fuel, also referred to as aviation turbine fuel or ATF.

The committee, tasked with looking in to the grievances of the loss-making airline industry, is scheduled to meet in New Delhi on Tuesday. One of the options before the panel headed by cabinet secretary K.M Chandrasekhar includes reducing state-level sales tax on ATF to a uniform 4% from as much as 30% in some states now.
After four price revisions in two months, ATF today costs airlines Rs39,380.51 a kilolitre in Delhi, nearly equal to price levels in August last year. The revisions were also a result of a customs duty waiver offered by the government earlier this month.

We are still evaluating, but no decision has been reached as yet, said Kingfisher Airlines Ltd executive vice-president Hitesh Patel on whether there were any possibilities of the carrier reducing airfares. Executives from Jet Airways (India) Ltd and National Aviation Co. of India Ltd, or Nacil, that runs Air India, echoed the sentiment.

Almost all domestic airlines have reported losses for the second quarter of this fiscal year, largely due to high air fares driven by ATF prices and planes flying less than two-thirds full. The airline firms say, as an industry, they are expected to rake up about $2 billion (Rs9,800 crore) in losses this fiscal year.

An analyst said there is a possibility that the real benefits of lower fuel prices may be visible in February, which is also a lean season for airlines. There is a chance airfares may come down as airlines will (then) compete with each other, said Mark Martin, an analyst with consultancy firm KPMG.

Martin also added that the recent reduction in ATF prices may have, however, been nullified partly by the depreciation of the rupee against the US dollar in the last few weeks. Depreciation on the US dollar or euro does has a damaging effect on operating cost, especially in maintenance, as spares, consumables and rotables are usually ordered based on operational utilization and existing inventory and are imported. From a cost-comparative standpoint, the resultant impact of low fuel pricing versus the depreciating rupee is less likely to help lower operating costs significantly, Martin said.

A senior Nacil executive, who did not want to be named as he is not authorized to speak to the media, confirmed that the benefits accrued by way of price reduction in jet fuel prices are being offset by rupee depreciation.

About 70% of total costs, including direct and indirect cost, is dollar denominated. Rupee depreciation is having an adverse impact on cost items such as salaries to expatriates, aircraft lease rentals, airport charges in overseas and interests on loans, he said.

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