EXPECTED BUDGET IMPACT: Neutral
LONG TERM OUTLOOK: Neutral
In 2012, aviation sector stayed in focus with the government taking certain steps to pull out the sector from the red. Apart from allowing direct import of ATF and certain announcements in last budget, one of the key decisions taken by the government was allowing FDI in aviation sector where the foreign airlines could acquire up to 49% stake in domestic carriers. While all these steps were in positive direction, the sector as a whole still reels under losses.
After growing by 18% over the past two years, industry passenger traffic degrew by 3% in 2012. High base and slowdown in the economy impacted passenger traffic growth. However, slowdown in traffic was complemented by reduction in capacity and that helped the industry witness discipline on pricing front. Like last year, crude oil prices continued to stay at elevated levels and remained the prime factor for high operating cost.
Slowdown in the economy is expected to keep passenger traffic soft. Further, despite global slowdown, crude oil prices are not showing any signs of correction. We therefore believe that in the current situation, increasing fares to offset losses will be a difficult proposition. Accordingly, the industry continues to ask for sales tax rationalization on Aviation Turbine Fuel (ATF) which will help them reduce cost. In our view, the probability of this demand getting accepted in the budget is low as sales tax is a state matter. We expect the budget to be neutral for the aviation sector.