Kingfisher Airlines Chairman, Dr. Vijay Mallya, in an interview with Ashwini Phadnis of the Hindu Business Line claims it is "Taxes, not over-capacity, that is killing the Indian civil aviation sector".

The business logic to Dr. Mallya's statement is to reduce fares by reducing the ridiculous taxation structure on Aviation Turbine Fuel (ATF), which ensures ATF in India is almost double the international prices. Regardless of product, India is an extremely price sensitive market, and lower fares will bring the passengers back to the skies from the trains and buses.

While I agree with Dr. Mallya on the over-taxation, I talk his claims on over-capacity and taxes being the sole reason for the failure, with a big pinch of salt. Airlines were well aware of the tax structure before entering the market. I am surprised at the lack of planning and lack of risk analysis.

Over the last two months, despite reduction in ATF prices (thanks to lower global crude prices), all airlines have taken the benefit in to their books, rather than passing it to the consumer. It is natural for both government and public to be sceptical.

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I have not asked for a bailout or financial relief: Vijay Mallya.

As far as Kingfisher is concerned we do not sell at a loss. Jet Airways, over the last six months, their conduct shows that they too will not sell at a loss. There are other guys in the industry who will happily sell at a loss.

For the Chairman of Kingfisher Airlines, Mr Vijay Mallya, it is not over-capacity in the domestic market place, but the high taxation levels in the country that is killing the domestic aviation.

At a meeting with Business Line at the Business Centre of Taj Palace hotel as he rushed for four back-to-back board meetings, Mr Mallya outlined what he felt were the problems facing the industry.

Excerpts:

There is a rumour that you have asked Accenture to look at downsizing staff in your airlines.
We do not have surplus staff. Accenture was specifically hired to do merger strategy and merger synergy identification with Air Deccan. All this has been completed and we have actually realised Rs 300 crore out of the Rs 375 crore spent on synergies.

You are said to have met with senior opposition leaders and also Mr Sharad Pawar to seek a bailout of financial help for the aviation sector?
I have not meet a single opposition leader. Yes I did visit Parliament. But this was the first trip after leaving Parliament. As a former MP, I can visit the Central Hall (of Parliament) for life. I met several people but that does not mean I am lobbying.

I have not asked for a bailout or financial relief. All I have said that if States continue to charge sales tax on aviation turbine fuel (ATF) the aviation industry is not viable.

On Monday, you were quoted as saying that there will be more job cuts in the industry?
This is not correct. I was asked a question as to whether I was disappointed at the reaction of the Government towards the crisis facing the sector.

My response was that the Government should express urgency in considering the request of the aviation industry. However, they have other natural priorities. I hope our turn comes quickly. But I have not met with either the Finance or Petroleum Minister, although I made a presentation to the Prime Minister. I have not asked for a bailout or a single farthing from the Government.

It is the tax which is killing the aviation industry. I said that if you want to charge this kind of sales tax then this industry is not viable.

As far as Kingfisher is concerned we do not sell at a loss. Jet Airways, over the last six months, their conduct shows that they too will not sell at a loss. There are other guys in the industry who will happily sell at a loss.

So what has happened, we have raised the prices and this is because of the fuel surcharge, that is why traffic has slowed down. So if you analyse the cost structure it is the tax (which is affecting the airline industry).

What is the way forward? Given the fact that this is election year.
Why can people not understand that even in an election year, the airline industry is as important as any other industry. Can you imagine what will happen if the entire airline industry of India gets grounded and Air India has to manage on its own.

So, is the negative impact of elections worse or recognition that there is over-taxation? Anywhere in the world there is not such high sales tax (on ATF).

The fact of the mater is if the aviation industry has problems there is no point in making this big drama about tax-payers money. There is no point making a big drama about bailout.

All we are saying is stop fleecing us. We pay 70 per cent more for fuel than Singapore and Dubai. Is that fair?

We provide vital connectivity; any fellow who suggests that air traffic connectivity is not essential needs to have his head examined.

The second point I will like to say is history. Aviation is a substantial element of national security. If tomorrow there is a conflict and Indian Air Force does not have enough planes to transport troops and materials, Government will commandeer all civilian aircraft.

It is a very important sector, aviation. Everyone just wants to slam it. May be sometime if the airlines actually get grounded, the people will realise how important they are.

How long can this (high prices of ATF) go on?
We will all dramatically reduce our flights.

By when?
We do not operate like others. Saying if not done by this date then we will cut flights. We are not going on strike. We are merely saying that we cannot operate and pay these kind of tax. So either get real or you will see a complete slowdown or we will keep on chopping flights and grounding planes.

There is said to be 20-30 per cent over-capacity in the market
It is not over-capacity. Where are you getting all these leads from? Over-capacity! Do you know what is demand and how many planes are required? Neither you nor I know. We have seen a growth trajectory of 32 per cent CAGR over the last three years.

We are not talking about capacity. But we are talking about the fact that we are flying aeroplanes and losing money. Because of the tax. If the tax is not solved we will not fly to provide transportation at a loss and let Government get rich.

Let us say that on an average the price of oil was $40 a barrel. The Government said they will charge a 30 per cent tax. So in their State revenue budget it is accounted as budgeted revenue by this date from ATF. The same ATF went to $140 they collected $52. A windfall for the States.

All I am saying is collect the $12. They are not entitled to collect the difference. That is what we want simple and straight forward.

WINE PRICES IN BANGALORE HEADED INTO THE STRATOSPHERE !

You might be surprised at a wine article in my aviation blog, but wine is a subject close to my heart.

The convoluted alcoholic beverages policy in India, makes each state, akin to another country, each with their own cumbersome taxes and regulations. The recent collapse of the Doha round of trade talks was not the only failure last month. A trade war is growing between the three wine producing states in India, Maharashtra, Karnataka and Goa, and it is going to send prices of Indian wines up by 46% ~ 100%, in Karnataka. Unfortunately, unlike the world which has the World Trade Organisation, India has no mechanism for settling economic wars between states.

Bangaloreans, along with the rest of India, are increasingly taking to wine as their drink of choice. It is more healthy, low impact, goes great with food, and more fashionable. What ever the reason, the market is growing about 20% year on year. In 2007-8, about 56,225 cases of wine were sold in Karnataka, almost all of it in Bangalore. This does not include the Goan Port "Wines". As consumers' wine tastes evolve, they gravitate from the cheap and cheerful variety to the mid-range and higher quality.

Maharashtra is India's California; the leading producer of wines. About 18 "non-Karnataka", Indian wine producers, Sula, Indage, Reveilo, Nine Hills, Mandala Valley, Big Banyan, sell their wines in Karnataka. There are two wine producers in Karnataka, Grover and Naka, and about 27 foreign (Non-Indian) wine producers whose products are available in Bangalore.

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A few years ago, the Government of Maharashtra imposed a special tax of 150% on wines “imported” into the state from outside Maharashtra. It was a purely political decision done at the behest of one of India's most influential politicians in India, who has, for long, been reportedly, the major player in the wine-grape farming and wine producing industry in Maharashtra. The 150% tax made non-Maharashtra wines more expensive in the state. The wine producers of Karnataka, found it hard to compete in Mumbai, the capital of Maharashtra, but more importantly, the economic capital of India.

There have been half-hearted attempts by the Karnataka Government to resolve this issue with their Maharashtra counter-parts. The lack of genuine desire, urgency, or sensibility, on both sides, expectedly, has not yielded positive results. While, I will be the first to say, the nasty actions of Maharashtra deserve a response, the recent actions of the Karnataka Government, are equally nasty. Two wrongs do not make a right.

Effective August 1, 2008, the Karnataka government started levying a tax, just as offensive, to the one in Maharashtra, on all wines of Indian origin “imported” into Karnataka. The new levy raises the import fee on wine from outside Karnataka from Rs. 10 to Rs. 300 per bulk litre, an increase of Rs 217.50 per bottle!!!! Add to this other levies and margins that will subsequently accrue, the final retail price to consumers will rise by approx Rs 250~280 per bottle.

55% of all wine sold in Karnataka is currently priced between Rs. 350 - Rs. 550 a bottle. The increase translates to a 46% - 100% increase in final price. Lower priced, entry level, wines like UB's Zinzi will see their prices go up over 100% from Rs. 250 to Rs. 500~530 per bottle. Dr. Mallya’s fledgling Indian wine business (Zinzi) will be hit hard, in his home town of Bangalore, since all his Indian wines are produced in Maharashtra.

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The wines produced by Grover's and Naka in Karnataka, will be spared the tax. I wonder how long will they maintain their original price. Like any opportunistic business house, I am sure they will slip in a few price increases since their competition is more expensive by Rs. 250.

Another most unfortunate consequence: as the entry-level wines will rise 100% in prices, many prospective wine drinkers, who were just taking to wine, will decide wine is suddenly too rich for their blood, and give healthy wine-drinking a go-by, reverting back to high impact spirits.

Observing the antics of their fellow Governments in Maharashtra and Karnataka, the Government of Goa is now talking about similar "protection" for its wine producers and growers.

The market place, consumers and producers, determine usage. Government can implement rules of conduct (procedures) but no one, including the self-proclaimed smartest people in the world, often found working in government, can accurately predict a marketplace. The market place determines itself.

The majority of the wine producers in this country are going to take a hit – the emerging wine drinking segment will take a hit – the retailing industry will take a hit. Even the wine producers of Karnataka will be hit. To get around the new levy Maharashtra wine producers will set up wineries in Karnataka state. There is simply not enough wine-grape grown in Karnataka to meet the needs of the state. Existing farmers will be tempted away from their existing contracts with Grovers and Naka to supply the newcomers.

The only “good news” in this sorry saga ? Fearing the wrath of the WTO, the new Karnataka levy does not apply to foreign wines. With the new higher prices of the non-Karnataka wines, many of the Australian, Chilean, South African, Spanish, and Argentinian wines will now look quite attractive. This retrograde step is helping the foreign brands, while sticking a most cruel knife into the heart of the Indian wine business. How many wineries will close, and as a result farmers going bankrupt, as sales drop and mayhem prevails ?

This squabble, in many ways, reminds me of the days of the British Raj. While the Indian states are busy fighting each other, the winners are the foreign wines.

I wonder if Indian wine producers can go to the WTO and beg for protection from their own governments.

Thanks to Stanley Pinto for the inspiration and some of the data.