* Plans to revamp slot allocations system
* Will also review route policy
* In talks to slash state taxes on jet fuel (Recasts lead, adds details, minister comments, background)
By Anurag Kotoky
NEW DELHI, Sept 28 Airlines flying to Indian airports could face an auction for peak-time landing slots in a shake-up of aviation policy under the government's economic reform drive.
Authorities are also in talks with suppliers to cut taxes on aircraft fuel, a move that would help local carriers which posted losses of $2.5 billion last year as they grappled with high airport charges and below-cost fares.
Debt-strapped Kingfisher Airlines, once India's No. 2 airline, is operating only a quarter of its fleet while national carrier Air India is reliant on a $5.8 billion taxpayer bailout to stay in the air.
Earlier this month, India announced major reforms designed to revive economic growth and avoid a ratings downgrade.
"The policies that are now in place were made several years back. Things have changed now. We need to adapt to the changing times," civil aviation minister Ajit Singh told reporters on Friday.
He gave few details but analysts pointed out that Indian airport charges are already very high, with New Delhi the world's costliest, according to the International Air Transport Association.
Singh also said he would "nudge" local carriers to operate more flights to smaller towns but did not elaborate.
Analysts said the current system of allocating landing and takeoff slots on an ad hoc basis has become a major headache with the increase in traffic in Asia's third-largest economy and the emergence of low-cost carriers.
The new developments come just weeks after India, which has an aviation market a fifth the size of China's despite comparable populations, relaxed rules to allow foreign airlines to own up to 49 percent in Indian carriers.
Singh said the western state of Maharashtra, home to India's financial hub Mumbai, is willing to cut taxes on jet fuel.
Aviation fuel, which makes up about half the cost for an airline, is about 50-60 percent costlier in India, mostly due to state taxes.
Singh also said ailing Kingfisher Airlines, owned by billionaire liquor baron Vijay Mallya, could lose its licence to fly if it fails to operate at least five aircraft.
Lenders to Kingfisher held inconclusive talks about the beleaguered carrier's turnaround plan on Thursday and will meet again next month, a source told Reuters.
Mallya told shareholders on Wednesday he was in talks with foreign carriers for investments, reiterating comments he has made over the past year without any concrete developments. (Editing by David Cowell)