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Oil price surge sends India's airlines into financial tailspin
June, 09th 2008

THE recent aviation boom in India is in danger of spluttering and hissing to a halt with the latest increase in jet fuel prices.

Under pressure from the global rise in crude, the state-owned oil companies have hiked the price of aviation fuel by 19%, bludgeoning airlines already bleeding grievously from losses caused by rising costs primarily fuel, which accounts for almost half their operating costs.

Domestic fares have shot up as a result, casting doubt over the viability of many airlines.

The industry has enjoyed phenomenal growth over the past few years, with new airlines offering low fares. These fares put flying within the reach of millions of Indians for the first time.

After enjoying growth of up to 35% for several years, during 2007-08 domestic passenger traffic grew only 23% compared with 32% the previous year.

Fuel prices in India are much higher than in other countries because of punitive taxes.

With the latest increase, fuel now accounts for more than half the cost of flying compared with other countries, where it represents 30-35%.

"Airlines cannot keep passing the burden on to customers because the number of passengers could drop with serious consequences," said Civil Aviation Minister Praful Patel.

Mr Patel met Prime Minister Manmohan Singh to discuss measures that could help airlines survive.

Airlines such as Kingfisher, Jet Airways, Air Deccan and Spicejet have been engaged in savage competition to cut fares and attract passengers. This has led to annual losses of $US937 million ($A976 million) for all the airlines combined.

One government measure that might help is a cut in the sales tax on aviation fuel. Most Indian states tax jet fuel extravagantly, often by up to 35%.

"Airlines are facing an economic emergency," said Kapil Kaul, head of the Centre for Asia-Pacific Aviation. "The Government needs to slash this sales tax to 4%, otherwise running an airline in India just isn't a viable proposition."

Airlines with rights to fly international routes get some relief when they refuel outside the country. But purely domestic operators have no respite.

Some experts say the solution is to allow more Indian carriers to fly abroad by relaxing the requirements on the length of time an airline has been operating and its fleet size.

Such a relaxation could allow more airlines to fly overseas to nearby destinations, fill up their tanks with cheaper fuel, and return to India in the morning to fly on domestic routes with this cheaper fuel.

But Mr Kaul believes this is irrelevant.

"If an airline is already struggling, how is it going to generate the massive capital necessary for international flights which are very complex?" he said.

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