Concessions cannot boost air traffic

Government intervention in aviation should be resisted at all costs

It has been reported that the government is likely to waive excise duty on aviation turbine fuel and service tax on tickets, and also exempt travellers from paying passenger services fee of Rs 149, to enable short-haul air travel of a flying time of less than an hour at a fixed price of Rs 2,500. The Union civil aviation ministry, in a draft policy it released late last month, had talked of viability gap funding in order to improve regional connectivity through such airfares. The Centre will foot 80 per cent of the bill, while the states will provide the other 20 per cent, the draft said. The proposed tax exemptions could be over and above this subsidy.

This is yet another example of government intervention in the market that should be resisted at all costs. It is much like the backward area concessions offered to industry in the past. Factories came up at places that made no commercial sense only because the companies wanted the tax benefits. Many of them became defunct later. Something similar could happen if the government pushes ahead with the package for low-cost regional connectivity through tax concessions and subsidies. Airlines must choose their destinations on the basis of the traffic potential and not to claim tax rebates or subsidy. Moreover, the ministry must explain how it identifies Rs 2,500 per hour as the sweet spot which will cause the demand for air travel to explode. At the moment, airfares, aided by low aviation turbine fuel prices, are already lower than that on several sectors. A Delhi-Lucknow ticket, which is roughly a one-hour flight, can be purchased for less than Rs 2,500 for the whole of November (after the festival season) and December. Sops cannot stimulate air traffic. Andal in West Bengal is a good example. The West Bengal government offered several concessions to the new airport in the hope that it will be able to attract carriers. In spite of this, traffic to Andal has remained a trickle.

Then there are the usual problems related to handing out subsidies. There could be charges of carriers inflating their costs in order to claim a higher subsidy. This will cause a serious loss of management time for the government as well as the carriers. Also, will the subsidy be paid on seats that have been filled (at a loss) or also on empty seats? If it is on all seats, occupied as well as vacant, what will stop a carrier from sending a big aircraft to a minor destination?