Fuel populism killing air transportation

India, the world’s largest democracy, has a sorry record in sound and bold economic administration. Populist measures abound, and nothing is sacred or immoral in the perpetual quest to obtain and then secure the “gaddi”.

Fuel pricing in India is a prime example.

Officially, the “Administered Price Mechanism” was abolished in 2002, but today, the Indian government has a greater control on the fuel market and prices than ever before. Private operators have been driven out of the market, and only the Government owned companies survive.

Government have become addicted to their windfall fuel tax income. In the last 6 years, fuel tax collections have increased almost 250% to a staggering Rs. 170,000 Crores (Rs. 1.7 trillion or US$ 41 Billion).
Indian bureaucrats have learnt well from the Europeans and their “tax and spend” Keynesian economic models. Fuel taxes are greater than the cost of the fuel. In Bangalore, when we pay Rs. 57 for a litre of Petrol, Rs. 32 is taxes, only Rs. 25 is the cost of the actual fuel. Internationally, the cost High Speed Diesel ex-refinery (excluding taxes, duties, levies, etc), is marginally higher than Petrol. Yet, in India, Diesel costs 35% less than Petrol, thanks to lopsided tariffs and populist driven subsidies.

The one fuel that is truly free in pricing is Aviation Turbine Fuel (ATF). Thanks to the government induced haemorrhaging, and the traditional, but wrong view, of air travel being a luxury, oil companies are using deregulation on their favourite whipping boy — ATF. In India, ATF costs double than prevailing international prices.

The results are plain to see. Despite being leaders in the global airline growth story, airlines in India, today, are bleeding, and bleeding bad. Losses in 2008-9 fiscal, are expected to cross $2 billion. Unable to sustain, in sheer desperation, airlines are hiking air fares, cutting back schedules, deferring aircraft deliveries, laying off staff, even considering importing their own fuel………. in short, anything, to cut down losses.

This has resulted in air traffic crashing all across India. In Bangalore, the shining example of India’s air traffic growth, from an annual growth rate of 33% year on year, for the first time since 2001, air traffic is actually falling to levels below that of the previous year.

Additionally, due to the remoteness of BIAL airport, regional air traffic is decimated, with air passengers switching to trains and buses instead. We might be tempted to say “so what”. But we overlook the productivity aspects in the slower transit time of trains and buses. And in today’s globally competitive economy, productivity matters…..a lot.

The operators of the Bengaluru International Airport, BIAL, now face an additional quandary. The airport terminal is reportedly, under capacity, and needs immediate expansion. Till now, their primary source of revenue, has been landing charges levied on flights. Thanks to a reduction in flight operations by the airlines, their income stream and cash flows have been reduced. So BIAL is increasingly forced to rely on passenger based User Development Fee (UDF), which has both the Government and passengers united in their opposition.

An imposition of UDF by BIAL on domestic passengers will only aggravate the already bad situation, and result in a further compression of air traffic. A downward spiral into a bottomless pit.

A possible solution requires bold decisions. Something both the political and administrative establishment in India are not known for.

  • Government has to pledge at least 10% of its fuel taxes towards public transportation infrastructure. My friends in the auto industry will hate me for this suggestion, but our cities are choking in their own growth.
  • ATF pricing should be reduced to international price parity. Ex-refinery, and taxes, union and state. Everyone should share the burden, including the airports and airlines. They must pass on the savings and re-invigorate the market, not use it to butress their bottom lines. The downstream impact of the aviation industry is far greater than the losses sustained by price reduction. We must not forget, every aircraft purchased by India, results in huge “offsets” i.e. mandatory exports of other goods and services.
  • A moratorium on UDF for at least 12 months by all airports in India. Keep costs low. It will pinch, but the increase in flight operations will butress some of the revenue loss.
  • Allow HAL airport to handle regional air traffic. By sticking to its hardline, BIAL will only continue to drive passengers away from the air, to trains and buses. A negative for all stake holders, including the citizens of Bangalore.
  • Diverting part of the regional traffic to HAL will also give BIAL breathing room, and delay the need for investment in a costly second terminal, till global economic conditions improve.
  • Forget a “temporary terminal”. Passengers will not accept travelling 50km, paying a UDF, and then using a “tent”.

This is just one view point. Other constructive suggestions are welcome via the comments section.

About Devesh Agarwal

A electronics and automotive product management, marketing and branding expert, he was awarded a silver medal at the Lockheed Martin innovation competition 2010. He is ranked 6th on Mashable's list of aviation pros on Twitter and in addition to Bangalore Aviation, he has contributed to leading publications like Aviation Week, Conde Nast Traveller India, The Economic Times, and The Mint (a Wall Street Journal content partner). He remains a frequent flier and shares the good, the bad, and the ugly about the Indian aviation industry without fear or favour.

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