India Trying to Help Debt-Ridden Airlines the Wrong Way?

Two wrongs don't make a right. India's beleaguered aviation sector needs a boost. But letting airlines avoid punitive state taxes by directly importing fuel isn't smart. Some tax is necessary to pay for environmental costs. The real target should be the subsidy given to loss-making state-owned Air India.

The sector as whole is predicted to lose around $3 billion in the fiscal year ending in March 2012, according to the Center for Asia Pacific Aviation. The cumulative debt burden of the three big carriers - Kingfisher (KING.NS), Air India and Jet Airways (JET.NS) is $16 billion. Air India's debt alone is $8.8 billion. Kingfisher has struggled to buy fuel and pay salaries, airport charges and interest to its lenders.

A ministerial panel is proposing that firms are allowed to import fuel directly. If the cabinet approves the plan and the logistics can be made to work, this will have a big impact on firms' costs. State taxes on aviation fuel average around 24 percent - the second highest in the world. And fuel accounts for around half of operating costs.

But there are two problems with the plan. First, while India's taxes may be excessive, slashing them to zero is not the answer. The industry's environmental costs should be paid for by taxation. Second, India actually has a surplus of jet fuel and exports half of its production annually. Creating an incentive to import fuel looks dumb. Reducing tax levels to international norms would be better.

What's more, the elephant in the room is Air India. The national carrier racks up monthly losses of $122 million. In the same breath as the fuel announcement, the ministerial panel also recommended that state-owned banks should reschedule $1.5 billion of the carrier's current debt over the next 10 years. This is just the latest example of state aid which allows Air India to finance a price war that has queered the pitch for the entire industry. The real priority should be to force the flag carrier to improve efficiency, so weaning it off subsidies -- or even wind it down.

CONTEXT NEWS

- Indian airlines may be allowed to directly import jet fuel, Aviation Minister Ajit Singh said on February 7. A ministerial panel also approved a $1.5 billion debt restructuring plan for Air India. Both decisions will need final approval from the cabinet.

- The announcement caused shares across the sector to rise sharply. Kingfisher Airlines surged to its maximum daily limit of 20 percent, while SpiceJet and Jet Airways rose 19 percent and 16.8 percent respectively.