India's Booming Aviation Sector Slows Down

Anjana Pasricha

India's formerly booming aviation sector is asking the government to lower taxes as high oil prices put a brake on growth. As Anjana Pasricha reports from New Delhi, the aviation industry has been piling up massive losses since last year.

Four years ago, 60-year-old Purnima Mehta, switched from traveling by train to taking a flight whenever she took a holiday in India.

She was taking advantage of cheap fares offered by a host of low-cost carriers which began operations in recent years.

But as rising fuel prices push up costs of air travel, Mehta says she might again opt for train journeys.

"After all, we cant cut down on running our car, but we can cut down on air travel. This will help us balance our budget," she said.

That is not good news for India's aviation industry, which was hoping for massive expansion on the back of an economic boom which put millions of first-time fliers in planes.

But steadily rising prices of aviation fuel in the last year have led to a hike in fares. That in turn is slowing down passenger growth.

As a result, the industry is reeling under losses.

Kapil Kaul, head of the Center for Asia-Pacific Aviation in New Delhi, says the domestic industry lost more than $700 million last year. He says the Indian industry is hit harder than those in other parts of the world because of the high local cost of aviation fuel.

"India, we have a peculiar issue with oil …. In India we are 70 to 75 per cent more expensive than the world average because of strangling taxation regime that we have on the air turbine fuel. Currently because of this high structural cost, driven by the extreme high cost of fuel, has driven the industry to almost expected $2 billion plus loss for 08-09 [2008-2009]," said Kaul.

Experts say the cost of fuel alone accounts for about half the operating cost of Indian carriers. The aviation sector recently asked the government to lower taxes on aviation fuel.

Kapil Kaul says he is hopeful that the industry will get some respite because the government is concerned about the health of the industry.

"A group of ministers has been formed to look at issues of the industry. The delegation that went to the prime minister has asked for an almost $2 billion subsidy for the airlines," said Kaul.

Low cost airlines, which depend on high passenger occupancy, have been particularly hard hit. Some are planning to suspend short-haul routes where traffic is low. Some others may be forced to sell out to bigger players.

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