Airline companies likely to begin pulling back on routes where operating costs are high because sales tax on ATF

Airline companies in India, reeling under losses projected to top $2 billion (Rs8,520 crore) this financial year if the current record oil prices hold or continue to rise, have signalled that cost-cutting measures such as layoffs and pulling back on flight routes to states that levy high sales tax on aviation fuel are on the anvil.

Senior executives at the airlines, who met Union civil aviation secretary Ashok Chawla on Wednesday, lobbied the government to allow subsidies for the fuelalso known as ATF, or aviation turbine fuel in line with subsidies on fuel used by trains and motor vehicles.

India controls prices at which diesel, petrol and other petroleum products are sold.

ATF, which used to constitute around 40% of the operating cost for airlines, now accounts for up to 60% after prices of the fuel tripled in the last three years. The fuel today sells at Rs71,759 per kl in Mumbai, some 19% more than the previous months price, and Rs69,227.08 for the same volume, up 18.56% from May.

Burdened with high ATF costs, airlines have not just started cutting down their route expansion plans but are also cancelling flights on certain low-traffic routes. They will now begin pulling back on routes where operating costs are high because sales tax on ATF in some states is as high as 30%, three executives from three airlines confirmed to Mint on the condition of anonymity.

Few states such as Andhra Pradesh and Kerala levy sales tax at 4% but most others charge between 20% and 30% increasing overall operating cost of an airline by as much as 15%.

One way to reduce the burden of such costs, a senior airline executive said, is to cut down flights to such states by half. We will all progressively start doing this.

Unrelated to this decision, state-run National Aviation Co. of India Ltd, or Nacil, has set up a task force to look at withdrawing the loss-making routes of the carrier in the domestic and international sectors.

Airlines such as Jet Airways (India) Ltd, Kingfisher Airlines Ltd, Deccan Aviation Ltd, SpiceJet Ltd, InterGlobe Aviation Pvt. Ltd-run IndiGo and GoAir Pvt. Ltd have also said they are considering cutting down the routes.

Job cuts could be the next major cost reduction effort attempted. A second senior airline executive said the airline industry will also slow its future recruitments in next two to three years, which was expected to grow by 30% considering the expansion plans. Indias airlines employ more than 70,000.

Since 1994, Nacil has frozen fresh appointments and currently is only recruiting pilots, engineers and cabin crew, said Nacils executive director (finance) S. Venkat, adding the firms airline service, Air India, is in talks with its unions to increase the productivity in all sectors and redeploying staff.

Bhupendra Kansagra, the promoter-director of Delhi-based low-fare carrier SpiceJet, said, Indian aviation industry will witness major retrenchments as oil price is going up and airlines are making huge losses.

Future recruitments, as a corollary, would also be squeezed. Following the footprints of international carriers, Indian carriers are also reducing flight frequencies, cutting down new routes, reviewing fleet expansion and deferring delivery of planes. This would reduce the number of people that was actually estimated, said Hitesh Patel, executive vice-president, Kingfisher Airlines.

A senior Jet Airways executive, who did not want to be identified, said airlines including his own will certainly look at that option seriously, but added retrenchment is a sensitive issue in India and airlines will be very cautious.
None of the executives interviewed by Mint divulged job cut targets at their firms.

Kapil Kaul, chief executive, Indian subcontinent and West Asia, Centre for Asia Pacific Aviation, an international aviation consulting firm, predicted the retrenchments will be minor?to start off.

I do not see a knee-jerk reaction resulting in major job cuts at this moment. There could be only temporary retrenchments. But if the oil price continues to head north, airlines will be forced to take some major steps in cutting down the manpower, Kaul said. Though the airlines have not got an assurance from the government on their request to subsidize ATF, the ministry officials have asked them to submit data benchmarking aviation fuel costs in India with global prices through their lobby body Federation of Indian Airlines.

The government has agreed to call a second meeting of states finance ministers on 22 June for convincing the states to bring down sales tax on jet fuel tax to a uniform 4%. Along with the civil aviation minister, airline representatives will also meet Prime Minister (Manmohan Singh) on 11 June, a senior airline executive who attended Wednesdays meeting said. He did not want to be identified. Airline industry executives and state finance ministers had met on 5 May.

Another airline executive said that the civil aviation secretary on Wednesday promised that the government will not licence new flights on existing routes in the market without careful scrutiny of capacity utilization on those routes and also will not issue new licenses in the immediate term.

The government has also assured that it will sympathetically look at relaxing international flying norms, he said. Currently, Indian rules disallow airlines to fly overseas routes unless they have five years of operating experience in India.