The group will focus on the taxes on aviation turbine fuel (ATF) by various State governments and its base price. ATF accounts for over 40 per cent of the total operational cost of an airline in India as against 20-25 per cent globally.

The Union Cabinet on Thursday decided to set up a Group of Ministers (GoM) to assess the impact of high prices of Aviation Turbine Fuel (ATF) on the aviation industry and suggest measures to reduce its burden on the operational costs of the airlines.

At its meeting here, presided over by Prime Minister Manmohan Singh, the Union Cabinet also sat through a presentation by the Civil Aviation Minister, Praful Patel, on the health of the aviation sector and the hardships being faced by it.

The decision to set up a high-powered GoM came within days of Who’s Who of major private airlines as well as chief of Air India apprising the Civil Aviation Minister of the financial crisis that has set in the sector due to high ATF prices, steep airport charges and low volume of passengers at a time when global economy was in throes of deep downturn. Private airlines had threatened to go on a day’s strike on August 18 but later put on hold their decision and favoured dialogue with the Government.

After the meeting, Mr. Patel said the GoM, expected to be set up soon by the Prime Minister, would focus on the “very high nature” of sales tax rates being imposed on ATF by various State governments as also its base price, which was "much higher" than most of the other countries. ATF accounts for over 40 per cent of the total operational cost of an airline in India as against 20-25 per cent globally.

Mr. Patel said that he briefed the Cabinet on the need for additional capital infusion in the national flag carrier, Air India, which currently has an equity base of only Rs 145 crore and has placed orders for new passenger jets worth about Rs 50,000 crore.

The Cabinet was also apprised of the decision of Airports Authority of India (AAI) to raise funds by issuing infrastructure bonds worth Rs 5,000 crore. AAI is in the process of modernising and upgrading a large number of airports throughout India, including those in Kolkata and Chennai.

Elaborating on the need for reducing the burden of ATF, he said the prices of jet fuel had increased by as much as 99.6 per cent in the past one year. Giving comparative figures, he said that ATF price per kilolitre averaged between Rs 24,000 to Rs 26,000 from the entire East and Southeast Asia to Dubai, London and New York.

However, ATF price in States like Andhra Pradesh, which had the lowest sales tax rate of four per cent, ranged between Rs 34,000 and Rs 35,000. In Delhi, it was Rs 38,000, in Mumbai over Rs 40,000 and in Kolkata Rs 46,000 per kilolitre.

ATF attracted sales tax at the rate of 28-30 per cent in Karnataka, Bihar, Madhya Pradesh, Tamil Nadu and Gujarat, while it was taxed at 25 per cent in Maharashtra, West Bengal and Himachal Pradesh. In Delhi, Goa, Haryana, Jharkhand, Chandigarh and some other States were charging 20 per cent sales tax, while in Jammu and Kashmir, Uttar Pradesh and Nagaland the rate was 21 per cent. Mr. Patel said that ATF consumption had gone up from 24,84,000 metric tonnes in 2003-04 to 44,55,000 metric tonnes in 2008-09.

Referring to the airline industry dubbing airport charges as being on the higher side, the Minister said these accounted for 7-8 per cent of their total operating costs and the rates in India were "comparable’’ with those worldwide.

India has emerged as the ninth biggest aviation market in the world, but was "still the least penetrated’’, he said, adding that the country accounted for 0.02 air trips per capita, compared with 0.1 in China and 2.2 in the US. He maintained that aviation sector was estimated to grow at the rate of 8.5 per cent per annum by 2015. While the number of aircraft in India had gone up from 158 in 2003-04 to 396 now, domestic flight departures per week had risen from 5,108 in 2003-04 to 11,048 in 2008-09.

Pointing out that average yields of the airlines had suffered due to the global financial downturn, Mr. Patel said the average airline ticket price had fallen from Rs 6,035 in 2003 to Rs 3,956 in 2008 while variable costs like that of ATF kept rising. As a result, the number of flights operated by all airlines had fallen by 12.5 per cent in 2009, while passenger traffic had risen from 28.5 million in 2003-04 to 69.6 million in 2007-08 and stabilised at 70.1 million in 2008-09.

Meanwhile, aviation consultancy Centre for Asia Pacific Aviation (CAPA) said that with the focus of full service carriers like Air India, Jet Airways and Kingfisher Airlines shifting to low-cost carrier (LCC) model, it predicted that by the third quarter all full service airlines would bring a significant part of their operations under the low-cost model.

"The problem for the incumbents [full service carriers] is they are entering the LCC sphere with still-higher cost structures relative to their peers, while their mainline operations remain subject to intense competition. The problem for the LCCs is that everyone is now moving to imitate them," CAPA said.

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