Capping regional fares, under proposed RCS scheme, will hurt airlines, says CRISIL

Capping regional fares, under proposed RCS scheme, will hurt airlines, says CRISIL [Governance & Infrastructure]

  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • The key propositions include a capped price system to up regional connectivity and service tax waiver for MROs.
  • 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.
  • Welcoming the tax sops on MROs (maintenance, repair and overhaul), the incentives would provide a fillip to the industry.

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