Though levy of service tax on domestic air travel is negative, given the rebound in air travel, the players can fully pass on the impact to customers through hike in fares

Budget Provisions

The budget has decreased the outlay for the Ministry of Civil Aviation by 21% at Rs 9588 crore (Rs 95.88 billion) from Rs 12165 crore (Rs 121.65 billion) for FY2009-10. However, the revised estimate for FY2009-10 was at Rs 11713 crore (Rs 117.13 billion) against the outlay of Rs 12165 crore. However, the budget has increased outlay for AAI to Rs 3094 crore (Rs 30.94 billion) up from revised estimate for FY2009-10 of Rs 2823 crore (Rs 28.23 billion).

The budget proposes to increase the scope of air passenger transport service is being expanded to include domestic journeys and international journeys in any class from the earlier provision of taxing only international journey in any class other than economy class.

• The budget proposes to increase the MAT limit from 15% to 18%.
• The budget proposes to reduce surcharge on domestic companies to 7.5% from 10%.

Industry Expectations - not fulfilled

• The industry recommended reduction in customs duty on Aviation Turbine fuel (ATF) to 5% - Not fulfilled
• The industry recommended bestowing declared goods status to ATF so as to have a uniform sales tax rate of 4% across the country - Not fulfilled
• The industry recommended a withdrawal of service tax on First Class and Business Class air tickets - Not fulfilled

Budget impact

• The decreased allocation to the Civil Aviation sector is mainly due to decrease in investment in NACIL (Air India). The increased allocation to AAI would lead to higher outlay on infrastructure facilities.
• The airline companies are sitting on unabsorbed losses so MAT would not be applicable.
• The levy of service tax on domestic journeys would lead to higher burden on the airline companies. However, the companies would recover the same from the passengers.

Stocks to watch

Jet Airways, SpiceJet

Outlook

The budget had not much to offer for the civil aviation sector. Their demand for cut in taxes on ATF, which accounts for about 40% of the cost of any airline company, remains still un-answered. The levy of service tax on domestic travel would be recovered by companies from the passengers.

The Transport Air sector is seeing some light at the end of the tunnel. Though there is still some rough weather to face, the performance is improving. The passenger numbers are atleast showing some positive move.

However, the bleeding would continue for a while. The more hit are the full service operators who are carrying high assets and steep competition. The expansion plans of the LCC are in place whereas the full service operators are trying to improve their seat utilizations.

Fuel cost accounts for 35-40% of the operating costs down from the 45-50% level manly due to dip in ATF prices. The airlines with efficient performance would stand out.