ATF Imports - more sops to airlines & more skin balm to a burns victim - Archie D'Souza

Airlines need brave lenders
Editorial Deccan Chronicle April 22, 2012

Since the proof of the pudding is in the eating, one will have to wait to see how helpful is the lifeline thrown by the government to cash-strapped airlines. The government has opened a one-year window for external commercial borrowings of up to $1 billion, with an individual airline limit of $300 million, for working capital requirements. In normal circumstances, the ECB route is preferred because it is a quicker and cheaper way of getting loans. But these are not normal times. Almost all airlines are running huge losses.

The overall debt of airlines is Rs 70,000 crore, of which Air India’s is Rs 40,000 crore. The lenders would have to be very brave to lend to such clients. It would have been better if the government had permitted FDI in domestic airlines, a move scuttled by some airlines which have political clout and fear competition.
Equally distressing is the helpline that permitted airlines to import aviation turbine fuel (ATF). It sounds like a great idea as ATF is 45 per cent of the total cost of running an airline because of high state taxes. It would have been easier for the states to pare their taxes. But then, who likes to give away money?

My comments
One more opinion from the school of thought that says FDI is stalled because of pressure from certain airlines – “a move scuttled by some airlines which have political clout and fear competition.”   I do not think that this is the actual reason.  I feel this is happening to protect the interest of the only public sector airline.  I have never really been able to understand the politics of it but such protection to the public sector is definitely bad economics.   If AI is not able to fend for itself it is best that it is wound up.  I’m not going into the merits and demerits of this.  I’d keep this discussion confined to two points – one, FDI and two, what purpose do these sops serve.

Let us look at the sops first.  I’ve already stated my opinion on ECBs.  (see my post entitled FDI in Civil Aviation – how it will help, in the same blog).  Now, I’ll speak about import of ATF.  According to reports appearing in papers on APR 22, 2012, Kingfisher, SpiceJet and IndiGo gave been permitted to directly import jet fuel.  The quantity expected to be imported is 13 lack kl at a cost of about 5730 crores.  If this policy results in a saving to the airlines concerned, then there’s something drastically wrong with our fuel pricing policy.  Remember, the costs involved are freight plus storage.  If that is less than buying fuel locally, the government needs to relook at the taxes on fuel, or at least ATF.  Fuel marketing & refining companies, need in turn, to relook at the pricing mechanism.

If all the airlines decide to import ATF, the local refiners will not have a market left, rendering useless infrastructure created for the purpose.  The exchequer too – centre & states, will lose out on tax revenues.   So where does this place us?  To quote the editorial, “It would have been easier for the states to pare their taxes.”