The tax cut in aviation turbine fuel (ATF) announced by Delhi government for flights in the Regional Connectivity Scheme will help bring down costs, according to SpiceJet Chairman and Managing Director Ajay Singh.
“So all aircraft which are flying under the RCS scheme, when they fuel their aircraft in Delhi will have to pay a reduced sales tax of 1 percent when they travel on these RCS routes,” Singh said
The Delhi government on Wednesday slashed tax on jet fuel to 1 percent from the current 25 percent. Presenting the Delhi Budget for FY18, Deputy Chief Minister Manish Sisodia said the cut in VAT on ATF will be applicable for direct flights between Delhi and remote areas identified under the RCS scheme as per prescribed conditions.
Below is the transcript of Ajay Singh's interview to Shereen Bhan on CNBC-TV18
Q: It is a big cut from 25 percent down to 1 percent, but it is only for regional connectivity routes. Can you explain to us what is the immediate impact of this for a company like SpiceJet and then I will talk to you about the medium and the long-term implications? But in the immediate term, what will this mean for SpiceJet?
A: How this works is as far as we understand it, we still have to see the fine print, but what we understand from what they are saying is that there is a central government scheme called the regional connectivity scheme (RCS) and in that regional connectivity scheme the idea was to connect centres like Delhi with small towns.
And what was provided for in that RCS scheme was that at the small town airports, there would, in any case, be a reduction of tax on aviation turbine fuel (ATF), sales tax on ATF to 1 percent. But there was no requirement of that reduction happening in the larger town like Delhi. So it seems that what the Delhi government has done is they have passed on that same benefit aircrafts which are fuelling in Delhi. So all aircrafts which are flying under the RCS shceme, when they fuel their aircraft in Delhi will have to pay a reduced sales tax of 1 percent when they travel on these RCS routes.
Q: Can you take me through what is the capacity that you are currently deploying towards the RCS routes and hence if we were to extrapolate that in terms of financial benefits to SpiceJet, what would they accrue to?
A: We cannot really comment on that because under the RCS scheme, we have all bid for routes. SpiceJet is one of the very few airlines that has actually bid for RCS routes. And the government is still to officially intimate to us who is going to fly on which route. So, pretty much on the RCS routes, the airlines that are bid are Alliance Air and SpiceJet. And certainly if those routes are allotted to us, there will be a benefit from this particular ruling.
Q: You are saying that those routes have not been finalised by the government because the bidding process is still underway and perhaps, we will hear a decision from the government shortly. So, in the immediate term, and I am only asking this because from a market perspective, all of the aviation stocks were rallying today anticipating gains from this decision of the Delhi government. So, you are saying that on an immediate basis, there is unlikely to be any direct impact as far as the bottomline is concerned?
A: This RCS scheme is going to start very soon and we are hoping, in fact, that aircraft can fly as soon as April and May. So as soon as we hear back from the Civil Aviation Ministry on which routes have been allocated to which airline, benefits will accrue on those routes. But as I said, our understanding is that this is really for the RCS routes. And in the RCS scheme, essentially, of the major airlines, only Alliance Air and SpiceJet are the airlines that have applied for routes and would benefit from the scheme.
Q: It was our understanding that other airlines like IndiGo, etc. had also bid for the RCS routes. You are saying that that is not the case?
A: That is not our understanding, no.
Q: From a long-term benefit perspective or a medium-term benefit perspective, if you indeed do get these routes allocated to you and you do start flying over the next two months or so, explain to us how this will work and what it will eventually mean as far as SpiceJet is concerned?
A: We still need to see what exactly this will do, but obviously, if we fly a large aircraft on one of these routes, the sales tax on ATF is currently 25 percent, that will be reduced to 1 percent. Now, 40 percent of the cost of flights is the cost of ATF and therefore, if the tax on this gets reduced 24 percent, essentially, you are looking at a 10 percent overall reduction in cost for those particular flights which is pretty significant in aviation terms.
Q: If I were to look at this development today, the announcement by the Delhi government, club this with the decision of the Cabinet Committee on economic affairs where they have decided to allocate about Rs 4,500 crore to upgrade underserved and unserved airport or airstrips to the tune of about 50 of these airstrips. Do you believe that this regional connectivity aspiration and dream that the government has held out is finally starting to take shape?
A: Absolutely. Both those steps are extremely welcome. As you know, we have about 400 airstrips and airports in the country of which we only use 75 airports currently. The Cabinet's decision to upgrade up to 50 airports using this additional money, Rs 4,500 crore will certainly help a great deal in providing these airports, providing capacity at these airports and having airlines be able to fly to these airports. So certainly, it is a great move on the part of the central government and all these measures which help reduce aviation cost, measures of the sort that the Delhi government has taken today, they are all welcome and they will all help boost regional connectivity.
Q: I know that you are still awaiting to hear what the government intends to do as far as the bidding process is concerned, but eventually, what is the ballpark that you are working with in terms of the kind of fleet capacity that you will deploy on these RCS routes?
A: There are certain limitations to the number of routes that government allowed us to bid on and we are taking an active part in this team and there will be a significant number of routes that we will be flying through.