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COVER STORYTax issues bring carriers togetherNews last month that India’s finance ministry is set onwithdrawing an exemption on withholding tax for leasedaircraft sent a shockwave through the industry.Little wonder. If forced to pay the tax, airlines will have to findtens of millions of dollars a year at a time they can least afford it.Take, for example, an Airbus A320. The average monthly leaseis about 1% of the aircraft’s value, or around US$400,000 perplane. An average 20% withholding tax – it varies depending onwhich country the aircraft is leased from – adds up to an annualtax payment of $960,000 for each jet.An estimated 150 aircraft are under lease with Indian domesticoperators so the bill would be nearly $150 million a year. But withmore than 450 planes now on order and a large number of thosebeing taken under lease agreements, the cost would become farhigher. And this is no long-term plan; the ministry has a targetdate of April 1 for its implementation.Developments such as this, along with heavy existing taxesand other worrying issues, prompted India’s airlines, often bitterrivals in the air, to come together for the first time late last yearand forge a new industry body, the Federation of Indian Airlines(FAI), to lobby for change.“Ultimately, we all agree as airline owners that we haveto reduce costs, improve the tax regime and improve aviationpolicies,” said Jehangir (Jeh) Wadia, managing director of lowcostcarrier, GoAir, one of the founding members. VasudevanThulasidas, chairman and managing director of Air India, is itsfirst chairman.“The real benefit . . . will come from preventive measuresand these are improving the policies, reducing the tax burdensand trying to ensure that the framework governing aviation as awhole is far more liberalized,” said Wadia.The finance ministry’s latest move to glean more moneyfrom the industry isn’t the airlines only beef. FIA has becomeincreasingly active since its foundation, speaking out stronglyon several issues, particularly the hefty sales tax applied to fuel.This varies from state to state, and between fuel for jets andturboprops, but it can be as high as 39%. For jet operators itaverages around 25-30%.The federation has written to government asking that it bedramatically lowered, to as little as 4%, a move that would giveairlines a massive financial boost during difficult times.It has also asked government to allow domestic carriers tohedge fuel, up to 40% of some operator’s costs. Hedging is onlyallowed at the moment for international flights.Boeing projected that India will need 856new commercial jets worth US$72 billionbetween now and 2026. Airbus’s forecast iseven higher, some 1,100 planes worth $105billion by 2025. The aircraft manufacturerspredict India’s air travel market will growat close to 8% annually in the next twodecades, compared with a worldwide averageof 4.7%.The industry is starting, however, froma low base. Andrew Herdman, directorgeneral of the Association of Asia PacificAirlines, said the scale of Indian aviation,with an estimated 37 million domesticpassengers in 2006, remains small in relationto a population of 1.1 billion and a stronglygrowing economy.“The Indian airlines as a group carryapproximately 2.2% of global passengertraffic and even less cargo. The potentialtherefore remains enormous and willcontinue to attract further investment,despite the current challenges confrontingthe industry,” he said.Foreign tourist arrivals into India reached4.43 million last year, up from 3.92 millionin 2005. Foreign exchange earnings fromtourism have shown strong growth from $5.7billion in 2005 to $6.6 billion last year.CTIARA’s Tarry believes the capacityissue is the key to who survives and whodoesn’t. “It’s the amount of capacity cominginto the market and the pace at which thatcapacity comes in,” he said. “What we seein India is a number of airlines which areeither operating, or not yet operating, or werenot operating when they placed significantorders for aircraft. The issue is the abilityfor that equipment to be absorbed profitablyand, more importantly, if the infrastructurecan cope,” said Tarry, who remains to beconvinced that all the aircraft ordered willbe delivered.After over-capacity comes infrastructure.Airport and air traffic congestion continuesto cause significant inefficiencies in thesystem. “It is the biggest bottleneck we havein Indian aviation,” said Prock-Schauer.New airports are being built in severalcities and improvements are underway atothers, but modernization takes time. InGoAir managing director Jehangir Wadia (left) signs up for 10 new AirbusA320s: everyone is losing money, he says6 ORIENT AVIATION INDIA MARCH 2007