Insights into Editorial: Hard landing: Jet Airways’ temporary halt

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Insights into Editorial: Hard landing: Jet Airways’ temporary halt


 Context:

Jet Airways announced temporary suspension of all its international and domestic flights, with the last flight operating between Amritsar and Mumbai.

In a filing before the Bombay Stock Exchange (BSE) and a statement to the media, Jet Airways said it was informed by the State Bank of India (SBI), on behalf of the consortium of Indian lenders, that they were unable to consider its request for critical interim funding.

Despite intense lobbying by the bankrupt airline, banks stood firm on their decision to not release emergency funds to sustain operations until a white knight is found.

 

Jet suspends all flights after banks refuse to release funds:

Since no emergency funding from the lenders or any other source is forthcoming, the airline will not be able to pay for fuel or other critical services to keep the operations going.

Over the last several weeks and months, the company has tried every means possible to seek both interim and long-term funding.

Consequently, with immediate effect, Jet Airways is compelled to cancel all its international and domestic flights.

At least one month’s salary was needed to be paid to the employees for retaining them.

Jet would require around Rs 170 crore to clear at least one month’s salary of its employees.

 

Survival of The Fittest:

The humbling of one of India’s most successful international brands illustrates the challenge of making money in the country’s aviation sector, dominated by low-cost carriers such as IndiGo and SpiceJet Ltd.

The Indian market is also highly price-sensitive, and airlines compete to keep fares low, even at a loss, to continue expanding.

The domestic market has seen around 20 percent growth in the number of passengers over the past few years.

Carriers including IndiGo, SpiceJet and Vistara, a joint venture between Singapore Airlines and Tata Sons, have over 1,000 planes on order from Boeing Co and Airbus SA.

 

Historically burn cash to sustain aggressive pricing:

Fuel accounts for 35-40% of airlines’ operational costs.

According to CAPA, an aviation sector consulting firm, Indian airlines could end the 2018 fiscal year with a combined loss of $1.9 billion. Because of this, they have to raise fresh working capital to finance their operations.

The industry wants longer credit periods for jet fuel purchased from state-owned oil marketing companies (OMCs) for user charges paid to the Airports Authority of India (AAI) and private airports as relief.

States are charging exorbitant value added tax (VAT) rates on ATF as the fuel remains outside the Goods and Services Tax (GST).

The civil aviation ministry has been pitching for inclusion of jet fuel in the GST. However, a consensus on the issue remains elusive till now.

According to sector experts, air traffic should grow at 1.5 time of the GDP. Considering 7-8% GDP growth, domestic air traffic should grow by a maximum of 10.5-12%.

But Indian airlines saw an ebullient growth of 17.31% in domestic air traffic in 2017-18 as they aggressively wooed passengers with aggressive ticket pricing. Frantic capacity addition has added to the aviation’s woes, says credit rating agency ICRA.

 

ATF should be brought under GST:

Aviation turbine fuel (ATF) should be brought under the Goods and Services Tax (GST) regime as it will ensure a level playing field for the domestic airline industry, Civil Aviation Minister Suresh Prabhu said.

He said input costs should be competitive for any sector and the ministry has been of the strong view that the fuel should be brought under the GST regime.

Different rates of taxes in states pushes the price of ATF. Each state has a different tax. Due to this, the refuelling (for airlines) cost completely changes.

The GST Council takes a call on that and we are pursuing this with the council continuously. We will work on it that aviation fuel should also be brought under GST for predictability and for ensuring level playing field,” the minister informed.

Airlines have been demanding inclusion of ATF in the new indirect tax regime.

Airlines could expect an annual relief of up to Rs 5,000 crore by way of input tax credit if ATF is brought under GST. The move could cushion them from the burden of increased jet fuel prices, besides providing relief to customers.

 

Whether National Civil Aviation Policy, 2016 implemented in Letter and Spirit?

The policy is also silent on the future roadmap for the state run Air India and the way forward for that airline.

There is no word about removing the sales tax on ATF and other taxation measures levied on Indian carriers.

The regional aviation policy is well-intentioned, but expecting private capital to flow to loss-making projects remains elusive.

The regional aviation policy unveiled by the previous government with incentives like 4% sales tax on ATF and no landing/ parking charges could not achieve the expected progress. Experts feel that the policy is too difficult to implement.

Adding to the woes, the expected rise in helicopter operations, private flying and regional airlines is likely to add to the pressure.

 

Conclusion:

India’s aviation market is cut-throat and it is survival of the fittest. One needs not only deep pockets but a deep threshold for pain.

When India’s Kingfisher Airlines went bankrupt in 2012, lessors were forced to write off millions of dollars in losses and thousands of people lost their jobs.

Even with 40% upwardly mobile middle class, India’s aviation industry remains largely untapped with promising potential. Air transport is still expensive for the majority of country’s population.

Safety, convenience and overall growth of all stakeholders is important and the government will have to work on this. The lenders and shareholders have to work and co-operate with each other to find a better solution.

Framing right policies with special focus on quality, cost and passenger interest can make India to achieve its vision of becoming the third largest civil aviation market by 2020 and largest by 2030.