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Why the govt stand on airline sector is wrong-headed

Last updated on: February 9, 2012 11:20 IST

Why the govt stand on airline sector is wrong-headed

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BS Reporter in New Delhi

Two decisions by an empowered group of ministers on Tuesday demonstrated the government's continuing inability to come to grips with the problems being faced by the aviation sector.

Both are wrong-headed, but in different ways.

Allowing airlines to directly import aviation turbine fuel may sound at first like a reasonable approach, in that it allows them to avoid paying local taxes that are, in some states, among the highest in the world.

In Delhi, for example, ATF is sold at around Rs 63,000 per kilolitre; at other airports, the price can be higher by Rs 5,000-6,000.

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Meanwhile, at hubs like Dubai and Singapore, ATF is available at around Rs 43,000.

Yet there are other issues to be considered.

Importing millions of tonnes of ATF through ports, and trucking the fuel to airports, will be both difficult and expensive, given India's strained infrastructure capacity.

It is unlikely to help airlines cut costs as much as expected -- it will just increase the inefficiencies in an already inefficient sector, and reduce state revenues without necessarily a corresponding gain to consumers.

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It is worth remembering, too, exactly how many consumers are being discussed here. There were 60 million air tickets sold last year.

Most of those will have been repeat flyers.

The number of air passengers is thus well below five per cent of the population.

India must be a rich country, its governments flush with funds, to imagine that an industry serving this section of population deserves fuel at rates comparable to those charged for diesel.

Petrol continues to be priced at Rs 65 a litre, comparable to ATF; those dependent on roads hardly have the option of having their cars or scooters or buses buy fuel directly from Dubai.

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As a stimulus for the airline sector, it is inequitable and inefficient.

The only real way to reinvigorate the sector is to have airlines fix their business models and increase prices.

But how can private airlines do that when they're being forced into competition with Air India, capable of charging uneconomic rock-bottom prices with a government guarantee?

This guarantee was made explicit in the other decision by the EGoM, which cleared a restructuring programme for the state-run airline's short-term debt.

Non-convertible debentures will be issued to repay Rs 7,400 crore (Rs 74 billion) of the company's Rs 22,000-crore (Rs 220-billion) short-term debt.

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The rest will be converted into long-term debt, to be repaid in over a decade.

The bond will be government guaranteed and have a rate above government securities.

In effect, the taxpayers of India are underwriting the operation of a carrier that serves, poorly, the top percentiles of India's population.

It appears that the government continues to be unwilling to even consider methods to implement what should be inevitable: the end of financial allowances to Air India.

If the airline has to be shut down and sold off piecemeal, so what?

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It carries only a sixth of air traffic.

The sector's profitability and efficiency will only increase.

It would actually be cheaper to ask Air India's 30,000 employees to sit at home, on full pay, for five years.

The EGoM's two misguided decisions show the government's unwillingness to take the basic calls necessary to fix the airline sector. India's taxpayers will pay the price for these errors.

 



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