Airlines refuel in Andhra, Kerala to save tax

Airlines refuel in Andhra, Kerala to save tax

New Delhi
March 12, 2008

Cut in sales tax on aviation turbine fuel to 4% from 30% will reduce operating cost by 10%.

A reduction in sales tax on aviation turbine fuel (ATF) by the Kerala and Andhra Pradesh governments is encouraging several air carriers to refuel from airports located in the states.

Several carriers like Air India, Spice Jet, GoAir and IndiGo are now planning to refuel their aircraft at the Hyderabad and Kochi airports to get a benefit on lower ATF prices. Carriers say that they were expecting Karnataka and Tamil Nadu to follow suit — which could encourage carriers to make south India their fuelling hubs.

While Hyderabad airport will start levying the decreased surcharge from the first day of its operations (March 16), the reduced charges will be applicable to all airports at Kerala from April 1.

“By refuelling at the Hyderabad airport, we have calculated that we make savings of around Rs 30 lakh a month. So refuelling at such places where the sales tax is low would certainly make some difference,” said Siddhanta Sharma, CEO of Delhi-based budget carrier Spice Jet.

Spice Jet is planning to add 6 additional flights to Hyderabad to its already operating 13, and increase Kochi flights up to 2 from the current one weekly flight.

“The rationalisation of sales tax on ATF from around 30 per cent to 4 per cent would lead to a 10 per cent reduction in our overall operating costs which is pretty substantial. We hope that other state governments will follow Kerala and Andhra Pradesh’s example,” said GP Gupta, CFO of GoAir. ATF currently accounts for more than 47 per cent of an airline’s operating costs.

According to the airlines, the decrease in ATF rates would be very helpful for short-haul routes rather than long-haul ones. Also, fuel tankering or adding extra fuel does not work for all routes since the aircraft cannot be made fuel-heavy.

“We cannot make the aircraft too heavy with fuel for long-haul routes so fuel tankering is feasible mostly on the short haul routes. For instance, if we are flying from Hyderabad to Bangalore, which in effect is from a low tax to a high tax zone, we will try to fill up enough at Hyderabad so that it lasts us for a round trip to Bangalore and back,” said an Air India executive.

“However, this decrease in sales tax would not be a benefit for international flights at all because, the basic price of ATF in India is still 30 per cent costlier than international destinations like West Asia. So thinking that this would be used as an incentive on international operations also would be wrong,” he added.

Also in case of both Hyderabad and Kochi, the airline executives say that the high groundhandling and throughput charges would offset the fuel benefits to a large extent.

“Groundhandling charges per flight in Kochi costs Rs 40,000 whereas it costs us just Rs 6,000 when we do it on our own. Also, the fact that the Kochi airport is slated to temporarily close down for seven months starting November this year, might be a deterrent for some airlines from starting new flights to that airport or think of refuelling there,” said a Spice Jet executive.

Also, due to the open access system (access to both private and public oil companies to supply fuel), the Hyderabad airport developers will charge a throughput fee of Rs 2,170 per month for the maintenance of the fuel supply infrastructure, which will be passed on to the airlines.

Also, according to some airlines like Kingfisher, the decrease in sales tax will only help when it comes to major destinations like Delhi and Mumbai through which majority of their flights are still routed.