Capping regional fares will hurt airlines: Crisil

Regional connectivity scheme (RCS), as proposed in the draft aviation policy, is a big negative for the heavily indebted and loss-making airlines as it would cap fares on regional routes, says a report.
"We believe capping fares on regional routes, under the proposed RCS, to be effective April 2016, is a negative for airlines. Even with the 2 per cent cess on other tickets, we expect domestic air fares to decline by 5-7 per cent in FY17," Crisil said in a report, after the government sought comments on the new aviation policy.
The report, however, said the proposed 2 per cent levy on tickets for regional connectivity fund and freedom to charge ancillary services would marginally add to overall ticket cost and this would slightly offset the impact of price control.

It also said RCS needs more explanation as there is no clarity on whether a fare of Rs 2,500 per hour would be capped even for last-minute booking, identification of specific routes and associated regional impacts, and specific modalities to be adopted in administering this scheme.
However, linking reduction in state level tax on ATF to 1 per cent or below to avail the capped prices would help bring down the overall operational cost for airlines.
As of now, almost 50 per cent of expenses of an airline are due to fuel costs, as total tax on jet fuel is around 45 per cent. Some states levy as high as 30 per cent tax on ATF.

Welcoming the tax sops on MROs (maintenance, repair and overhaul), it said the incentives would provide a fillip to the industry.

The draft policy called for abolition of 12.36 per cent service tax, exemption from Customs duty on parts, three years of tax-free storage period of imported spare parts and easy Customs clearance for the MRO segment.
Another move is according MRO, ground handling, cargo and ATF the benefits of the infrastructure sector, the report said.
Currently, 90 per cent of aircraft repair work is done overseas as getting it done domestically means paying 60 per cent more. So the measure would help save a lot of forex, according to Crisil. Maintenance expense constitutes 10-15 per cent of the total operating cost of an airline.

Last Friday, government announced a slew of steps to boost domestic aviation in the much-awaited draft aviation policy, offering a bouquet of measures to make air travel more affordable.
The key propositions include a capped price system to up regional connectivity and service tax waiver for MROs.
But there is lack of clarity on the 5/20 rule that has been in force from 2004, making only those airlines with five years of domestic operations and a fleet of 20 airplanes eligible to fly abroad. India is the only country that has such a rule.