Alert Sign Dear reader, online ads enable us to deliver the journalism you value. Please support us by taking a moment to turn off Adblock on Dawn.com.

Alert Sign Dear reader, please upgrade to the latest version of IE to have a better reading experience

.

Zero-tax regime and PIA

May 13, 2019

Email

The proposed aviation policy aims to introduce zero tax and aeronautical charges on domestic routes to boost growth in the aviation industry.

If implemented as proposed, its financial impact will be about Rs13.3 billion — Rs3.3bn aeronautical charges and Rs10bn tax relief related to the Federal Board of Revenue (FBR).

Aeronautical charges consist of two parts: one paid by airlines and the other by passengers to the Pakistan Civil Aviation Authority (PCAA).

The table shows a comparison of airline-specific charges on domestic routes between two different aircraft: Airbus A320 weighing 78 tonnes and Boeing 777 weighing 360 tonnes.

When calculated for the entire fleet of all three airlines — Pakistan International Airlines (PIA), Airblue and Serene Air — for the whole year, the figure amounts to about Rs1bn only, which is just a small fraction (one per cent) of their total input cost.

The second part of aeronautical charges relates to passengers. These charges — usually hidden in the ticket price — are paid by each passenger at the rate of Rs600 per passenger. Amounting to about Rs 2.3bn, airlines collect these charges and deposit in the PCAA’s account on a fortnightly basis.

Our romance with the national carrier has already cost us over Rs400bn in the form of accumulated losses

The total amount of relief on account of aeronautical charges will be about Rs3.3bn. Interestingly, this will not affect cash flows of the PCAA because of two factors. One, PIA does not pay its share of aeronautical charges, which are about Rs2.3bn per annum (considering 70pc of its market share). Two, the corporate tax liability of the PCCA will be reduced by about Rs700 million because of a reduction of Rs2.3bn in its taxable income. The PCAA pays corporate tax of around Rs15-20bn every year. PIA’s outstanding charges, payable to the PCAA, on account of both domestic and international operations increase every year by Rs7-10bn. They are already piled up close to about Rs100bn.

There is also a proposal to ask the FBR for the introduction of a zero-tax regime to promote the domestic airline industry. If the FBR agrees to this proposal, it will lose more than Rs10bn per annum on account of the federal excise duty (FED) payable by passengers, sales tax on fuel and a reduction in corporate tax payable by the PCAA.

Tax relief by the FBR (Rs10bn) and aeronautical charges (Rs3.3bn) by the PCAA will increase airlines’ revenues by about Rs13.3bn. With its 70pc domestic market share, PIA will be the largest beneficiary. The other two airlines will accrue financial benefits proportionate to their market share.

PIA is adept at playing the victim with every new government by blaming the previous government for its disastrous operating results. Its most effective tool is the use of technical jargons like sixth freedom, open skies, fair skies, code share and seat factor etc. While complaining about open-skies agreements, they do not mention the United States, United Kingdom, Norway, Sweden, Denmark, Switzerland, Spain and Saudi Arabia — countries that have full open-skies agreements with Pakistan.

Instead, it purposely misinterprets the Pakistan-United Arab Emirates bilateral air services agreement which, in fact, is not an open-skies agreement for the airlines of the Gulf nation except for the Karachi-Dubai route. On all other routes like Islamabad, Lahore, Peshawar, Multan, Faisalabad and Quetta, the designated airlines of the United Arab Emirates are restricted to a limited number of weekly flights.

Pakistani airlines, on the contrary, enjoy full open-skies traffic rights from all Pakistani airports to airports in Dubai, Abu Dhabi, Sharjah, Al Ain, Fujairah and Ras Al Khaimah. The best part is that Pakistani airlines are also entitled to operate an unlimited number of weekly flights from all UAE airports to the United Kingdom and the United States.

The present government has already thrown away over Rs22bn of taxpayers’ money into this black hole. Throwing another Rs10bn in the form of a zero-tax regime will not make it any better.

Our romance with the national carrier has already cost us over Rs400bn in the form of accumulated losses. Even the richest countries in the world cannot afford the luxury of owning a loss-making national carrier. How long will it take for us to reconcile with the reality that no government-owned airline in the world can compete with private airlines on the price and quality?

To top it all, the present government also wants to regulate domestic ticket prices. How can this be done in a business where the price and the quality of service are determined by market forces? Air fares are, therefore, a function of competition and capacity, not regulation. The fares on domestic routes were the cheapest before the demise of Shaheen Air. Average fares on the Karachi-Islamabad sector were about Rs10,000, excluding the FED and aeronautical charges, which shot up to Rs25,000 after July 2018. The escalation in fares by about 150pc is a mind-boggling phenomenon, considering the fact that the domestic sector’s capacity was reduced by about 15pc only. Such are the complexities and dynamics of market forces in an oligopolistic market.

Super profits that the two private airlines are earning will attract a couple of new airlines. Afeef Zara Airways and AirSial are already gearing up. The capacity added by the new airlines and the resulting competitive pressure will automatically lower the prices without any intervention from the government. Moreover, the domestic passenger growth rate will return from negative to positive triggered by low prices.

The writer is an expert in airline economics and bilateral air services agreements

Published in Dawn, The Business and Finance Weekly, May 13th, 2019