The ailing aviation sector needs a policy reform with respect to taxes on aviation turbine fuel and free pricing, apart from allowing direct investment by foreign carriers, according to a report by ICICI Securities.

The Indian aviation sector is now entering a low-growth phase with passenger traffic growth in single digits due to higher ticket prices along with last year’s high base effect. However, the report highlighted that a massive reduction in capacity by Kingfisher Airlines and the ongoing Air India pilots’ agitation continue to aid other private carriers in maintaining healthy load factors over the medium term despite negative passenger traffic growth in May 2012.

Fuel cost high

Fuel cost accounts for over 50 per cent of operating revenues of Indian carriers. But while crude prices have started declining due to a slowing global economy (down by 20 per cent in last two months), rupee depreciation has impacted Aviation Turbine Fuel (ATF) rates, which have come down by only 5.5 per cent.

The report said that if the rupee strengthens over the medium term, there would be more room left for oil marketing companies to cut ATF prices in line with the movement in crude prices.

The report also said the concern over slowing passenger traffic growth would be taken care of by capacity rationalisation by carriers such as Kingfisher Airlines due to liquidity concerns and the Air India pilots strike over the lean season (July-September). Further, the recent 5 per cent ATF price cut by oil marketing companies would help carriers such as Jet Airways and SpiceJet improve margins by 1.2 per cent and 2.7 per cent, respectively, the report added.

niveditag@thehindu.co.in

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