Time for Civil Aviation in India to let Fly

These are exciting times to be in India as the economy prepares to change gear. The civil aviation industry is poised to grow significantly to make India the world’s third largest aviation market by 2020 and the largest by 2030. If India is to reach these levels of growth then all stakeholders have to come together with a clear roadmap and focus on implementation of policies.

So what’s holding us back?

The last two decades has seen India open up its skies to the private sector. Several companies rushed in to set up airlines and very quickly discovered that aviation is a long term play and the dynamics of costing and cost control play a major role in keeping an airline afloat. Airlines like ModiLuft, East West, NEPC, Deccan and Sahara, all learned the hard way and at high cost. But that experience has helped newer and leaner airlines like Indigo, Jet, Go Air and Spicejet to grow. All are poised to grab a slice of the massive opportunities that lie ahead.

High cost of ATF

But almost all airlines are financially stressed. One of the biggest pain points for the airlines is the high cost of Aviation Turbine Fuel (ATF). ATF cost is almost 60% of an airline’s operating cost India and thanks to myopic vision and misplaced priorities, ATF taxation structure is lopsided.

At the time of writing this, the Delhi-Chennai-Delhi fare is: Rs 19,542. The break-up is: Base fare is: Rs 12,536; Airline fuel charge: Rs 5,975 (47.66% of the base fare!); Airport Development fee: Rs 738; Passenger Service Fee: Rs 293.

Now compare this with a Delhi-Bangkok-Delhi flight. I could get a 3 day hotel package thrown in for the same price as a Delhi-Chennai-Delhi ticket. No wonder that in 2013, Thailand attracted 26.7 million tourist arrivals as compared to India’s 6.84 million. We have a problem and the opportunity cost is very high.

The Centre and state governments are responsible for the absurd levels of ATF taxes being levied along with high airport charges. The ATF taxes varies from state to state and this is hampering growth of regional aviation. On one hand there is Tamil Nadu with 30% tax, Karnataka with 25% and Andhra Pradesh with 12.5% while you have pragmatic policies in states like West Bengal that have declared zero tax for three years for Bagdogra airport and the upcoming airport in Durgapur. States like Jharkhand, Chhattisgarh have taxes at 4% and Maharashtra too has 4% (excluding Mumbai & Pune). What is needed is for the central government to bring together all states to agree for a uniform tax structure. If the tax were to be lowered across states to 4%, the resultant increase in passenger and freight traffic will spur investments in aviation and tourism related industries, resulting in the creation of more jobs.

Lack of MRO facilities

Today all airlines send their aircrafts overseas for Maintenance, Repair and Overhaul (MRO). We pay in precious dollars while the overseas industry gains business at our nation’s cost. Sheer lack of vision and planning has resulted in high customs duties, VAT and other taxes and has not allowed the MRO industry to develop in India. We are now losing foreign exchange, direct revenue, direct taxes and employment opportunities to other countries.

Lack of investment in technology, personnel and training

India has fallen behind in recruitment and training in an industry that demands a very high quality of personnel. This along with lack of investment in technology is a matter of serious concern. The air traffic has grown significantly and challenges in managing the same are increasing by the day. In fact, the U.S FAA has had to downgrade India’s safety ratings on account of this. Unless the government steps in and take corrective measures in the short and medium term, the industry will continue to drag.

Positive moves

It’s not all gloomy. Fortunately, the government has taken corrective measures and the domestic airlines industry is getting ready to take flight. The positive measures are:

  • Domestic airlines are now allowed to fly overseas. This will help the domestic airlines to grow and compete with international airlines.
  • International airlines are now allowed to invest up to 49% in a local airline. This is a welcome step as it will attract much needed capital along with bringing in international best practices.
  • Promoting Greenfield airports like Navi Mumbai, Goa, Kannur and Kushinagar. Development of 15 low cost airports has been approved while another 51 airports in smaller towns are planned. There are 450 airstrips in the country in various condition and if even a part of these were to be made operational, it will catalyze development of an ecosystem for aviation and spur tourism across India.
  • Bringing more airports under private management through PPP model. This can only help airports operate more efficiently with the passengers being the biggest gainers.
  • Direct import of ATF has now been permitted. This will help mitigate some of the cost pressure on operating profit of airlines.
  • Domestic airlines are set to grow to 800 aircrafts by 2020. That’s a sizeable investment.
  • More low cost airlines like Air Asia are set to enter the market and open up regional aviation.

There is no reason why India cannot emerge as a leading hub for aviation and the opportunity for India to take advantage is immense.

Will all stakeholders stand up to the task?