More Than Bailout, Why Govt Needs to Offer Fuel Tax Lifeline to Save Airlines From Coronavirus Pain

Indian airlines have followed their global peers in flying near empty aircraft on domestic routes. (Representative image.)

Indian airlines have followed their global peers in flying near empty aircraft on domestic routes. (Representative image.)

As airlines continue to struggle, an unintended casualty of the global health emergency could be the proposed sale of state-owned Air India.

Sindhu Bhattacharya
  • Last Updated: March 19, 2020, 1:34 PM IST
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Governments around the world are either already pumping in billions of dollars to keep their respective airlines from collapsing or are in the process of considering mega bailout proposals, as the chaos due to Coronavirus pandemic spreads. Reports suggest India is also thinking about a mega rescue plan to save its airline industry from collapse.

A report by Reuters talks of a $1.6 billion (Rs 12,000 crore) package being drafted by the Indian government. An unnamed official is quoted saying the package could come in the form of waiver of taxes on Aviation Turbine Fuel (ATF) till the threat from COVID-19 recedes.

Indian airlines have followed their global peers in flying near empty aircraft on domestic routes. They have been left with little choice but to suspend a majority of international flights and are now staring at empty coffers as flyers increasingly stay away.

The situation is the same for most airlines across the globe. At least six global airlines have completely suspended operations and some major carriers such as Cathay Pacific, FinnAir and Quantas are operating only about 10% of their schedule. In India, GoAir and now Vistara have suspended all international operations while other airlines have also severely curtailed international flights as the panic over COVID-19 spreads.

As airlines continue to struggle, an unintended casualty of the global health emergency could be the proposed sale of state-owned Air India. The government had issued a preliminary information memorandum (PIM) for divesting almost its entire stake in the airline in January this year.

This was the second attempt by the Modi government to get rid of the perennial loss maker and the conditions for sale had been considerably eased compared to the first such attempt, which had bombed. But the outbreak of COVID-19 has put a spanner in the works and there is unlikely to be any movement forward on the sale anytime soon, though the government has till now kept the deadline for submission of bids in April.

With sale now doubtful, the government will be forced to pump in more funds into the ailing airline if it wants Air India to survive the next few months. The airline top brass has already indicated the dire needs for funds. This, when civil aviation minister Hardeep Puri had earlier said (repeatedly) that the airline will be shuttered if not sold, without committing more money for it to continue operations. Global aviation consultancy CAPA has said the government may need to infuse nearly Rs 3000 crore more in Air India as immediate interim funding to keep the airline going.

So whatever package the government works out to support the airline sector, it will need to additionally provide thousands of crores of rupees to Air India too to keep it afloat till disinvestment.

That governments around the world have either already acceded to airlines’ requests for bailouts or are being petitioned is no longer in question. CAPA says the United States alone is expected to offer nearly $58 billion to its passenger and cargo airlines apart from $60 billion to its aerospace companies to tide over the present crisis. Government help has also been made available in Australia and the UK.

Will India be able to support its critically placed airline industry - populated by private airlines, except Air India? CAPA has suggested some steps the government could take to mitigate the pain for airlines, instead of having to devise an outright industry bailout. These include bringing aviation turbine fuel under GST and implementing a short-term moratorium or extended credit terms for payments due to domestic oil companies and the Airports Authority of India.

Also on the table are proposals such as a weekly revision in ATF prices so that airlines can take advantage of lower rates as soon as they become available; concessions and moratoriums on airport charges will also be needed.

Even before COVID-19 hit, the global airline industry in general and India’s airlines in particular were in bad shape. An analysis by IATA shows that in the beginning this year – when COVID-19 wasn’t a pandemic – many global airlines had less than 3 months of cash to continue operations. Indian carriers fared worse, with one airline saying it had cash for merely a few weeks.

The situation is unlikely to improve in the near future as the pandemic spreads. CAPA has estimated that nearly 150 aircraft of Indian airlines are already grounded and that passenger demand for airlines in India could weaken substantially with a drop of 40-50% or even higher in the near-term and forward bookings are already down 30% compared to last year.

More of airlines’ fleet is sure to sit idle as travel curbs expand in the near future. Yields (revenue per passenger) may also come under further pressure and could deteriorate by 25% or more. Even if airlines were to offer rock bottom fares, traffic is unlikely to return anytime soon and this single step will anyway further dilute yields.

In this situation, any move by the government to waive taxes on ATF could be a life saver. ATF accounts for nearly 40% of an airline’s operational cost and India is among the countries which taxes it the maximum.

The Centre levies excise duty and countervailing duty while state governments then add levies so that the total tax incidence goes up to by 30-50%. If taxes on ATF are indeed set aside for a limited period, airlines could perhaps survive the COVID-19 decimation. But if the state governments do not agree or if the Centre doesn’t, then India could be left with yet another moribund sector (like telecom) on its hands, leading to huge job losses and a spike in bank NPAs.

The author is a senior journalist. Views expressed are personal.

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