Indian Civil Aviation A Reality Check

To fully harness the growth prospects of Indian aviation, issues have to be addressed via deliberate and decisive measures

Issue: 3 / 2020By Satyendra PandeyPhoto(s): By Airbus, AIESL, Wikipedia
Sky is the limit for Indian aviation. While IndiGo continues to soar, the sudden fall of Jet Airways became one of the most astonishing surprises.

From 44 million domestic passengers in 2008 to 121 million domestic passengers in 2018, the airline industry in India has come a long way. This rate of growth is forecast to continue with India becoming the third largest aviation market in the world by 2030. A growing middle class that is 300 million strong as of now, a trend towards urbanisation leading to increased demand for air travel, a rising propensity to spend and significant capacity entering the market – all key factors for growth are aligned. Increasingly, passengers are taking to air as a mode of transport and India is targeting 500 million passenger trips in the next 20 years. These trips will have to be supported by an entire ecosystem including various stakeholders. From Original Equipment Manufacturers (OEMs) to Lessors and Financiers, from Maintenance Repair and Overhaul (MRO) providers to Multi-lateral agencies and from Airports to Airlines – to name a few. And the ecosystem at present has far too many distortions. The question is: can these be addressed decisively and deliberately towards continued growth, competition and sustainability?

THE GOVERNMENT’S INTENTIONS

As the Finance Minister presented the Union Budget in July this year, the message to the aviation stakeholders was that it was indeed an area of focus. Several aviation-related issues were mentioned as under:

  • A vision towards India entering the aircraft financing and leasing market.
  • The divestment of the national carrier Air India.
  • Consideration for re-examining Foreign Direct Investment into Indian carriers.
  • Policy interventions towards energising the MRO Industry in India.
  • Further promoting the UDAN regional connectivity scheme.

Details of these proposals are yet to be tabled. But the industry is eagerly waiting for details to be shared and stated as policy before committing additional capital or effort.

THE CORE ISSUE: ATF TAXATION

At the apex of the aviation value chain is the airline industry. And to ensure a healthy value chain, the first point of call is an environment where airlines can thrive. For airlines, the single largest choke-point is the cost of Aviation Turbine Fuel (ATF) which constitutes up to 40 per cent of an Indian airline’s cost base and is the largest expense item. Globally, this figure averages at roughly 20 per cent. The distortion of up to twenty percentage points means that Indian carriers do not enjoy a level playing field. Furthermore, it impacts the sustainability of businesses. Granted that there have been success stories; but in such cases, the airlines have leveraged financing structures and liquidity of asset types – both of which are subject to market dynamics. For Indian aviation to thrive, the issue of tax on ATF will have to be addressed.

AIRPORT CAPACITY, RESTRAINED COSTS: NEED OF THE HOUR

For Indian carriers, the current commercial fleet of 500+ aircraft is likely to double within the next seven to ten years. This growth in the size of the fleet will require matching growth in airport capacity – for developing networks, for parking the aircraft and for flying the aircraft. As of the latest count, there are 137 operational airports across the country and more are being developed. Yet metro airports continue to be key to aviation traffic with ˜61 per cent of the domestic traffic and ˜73 per cent of international traffic still originating from the six metro cities, which means that the capacity at these metros must be enhanced – in a timely and cost effective manner.

To ensure a healthy value chain, the first point of call is an environment where airlines can thrive

Unfortunately, the funding mechanism of airports has been such that the costs of incorrect capacity planning are borne by passengers by way of development fees. The numbers speak for themselves. For instance, at Delhi airport, the final project cost was 3.8 times the initial estimate and in the case of Mumbai, it was 1.7 times the initial estimate. These cost overruns were covered by the flying public. Both airports were allowed to levy development fees to the tune of nearly 3,400 crore. The contribution via fees levied on passengers being 1.2 times to 1.4 times the equity contribution in the case of Delhi airport and 3.0 times to 3.2 times in the case of Mumbai airport. This is neither a fair nor a sustainable proposition. A snapshot of airport developments across key cities is as below.

AirportExpansion at Current AirportNew Airport and Issues
Delhi (DIAL)4th Runway by 2021Jewar airport – in Uttar Pradesh. Bid document was approved by the Ministry of Civil Aviation on May 6, 2019.
Mumbai (MIAL)Not possibleNavi Mumbai airport – underway. Challenges remain. Likely completion 2024. Navi Mumbai awarded to existing airport operator – thus will not lead to additional competition
Bangalore (BIAL)2nd Runway by end 2019None planned. Should be evaluated including opening up HAL airfield which is not available for commercial flights per OMDA with airport operator
KolkataEfficiency improvement project underwayExtreme challenges with land identification (and acquisition) for a second airport
Hyderabad (GHIAL)2nd Runway to be commissioned. Date not determinedExisting second airport not available for commercial flights per OMDA with airport operator
ChennaiNot possible in current scenario2 sites identified. Consultants to be appointed. Completion date in 5 – 7 years
PuneNot possible in current scenarioSite identified in Purandar, no clarity on land acquisition and timelines
AhmedabadNot possible in current scenarioSecond airport to come up in Dholera with a target completion date of 2022
Goa2nd Airport by 2020New airport at Mopa awarded to GMR
The tax policy has led airlines to outsource majority of the $1.4 billion MRO business to international providers

The government, via its new policy of Next Generation Airports for Bharat (NABH) Nirmaan, is attempting to address the costs of capacity but further clarity is required including monitoring unwarranted expenditure and closely examining traffic projections. For existing airports, the costs must be closely monitored.

TAX ON THE MRO INDUSTRY

Tax on the MRO industry in India remains the highest globally. With an 18 per cent GST levy, providers have to compete on sale price with overseas players that only pay five per cent — that too at cost price. This gap is 20 to 22 per cent. Consequently, most airlines contract their MRO services overseas, leading to a loss of jobs and output. Foreign airlines also do not source their MRO services from India leading to additional loss of potential. Additionally, imposition of royalties by airports in contravention of the National Civil Aviation Policy (NCAP), leads to the MRO industry being further disadvantaged. These royalties are imposed under different classifications ranging from 11 to 30 per cent.

As India continues to emerge towards playing a dominant role globally, its aviation sector cannot be overlooked

Sadly, given this complicated structure, foreign carriers have leveraged on the MRO potential of India while India itself lags behind. The tax policy has led to airlines to outsource majority of the $1.4 billion MRO business to international providers. That money, if spent locally, would spur employment and output.

EXTREMELY CHALLENGING FINANCING ENVIRONMENT

After the shutdown of Jet Airways and challenges faced by other airlines, banks overall have a negative outlook towards the aviation sector. The reasons are many, including fluctuating EBITDAs, weak balance sheets, systemic impact of the failure of Jet Airways and the NPA cleanup. This does not bode well for the Indian airline industry as the growth in the market requires adequate availability of funds – across stakeholders be it airports, airlines or providers of MRO services. In spite of being a key growth market in Asia, private capital is reluctant to enter the aviation industry in India not only because of the challenges highlighted, but also due to the legal procedures where contract enforcement is challenging at best.

REGULATORY RESTRUCTURING: SAFETY, SUSTAINABILITY AND DIGITISATION

Given the growth in the sector, the demands on the regulator are ever increasing. The last five years have witnessed a determined approach to strengthen these bodies; but even simple items such as digitisation of records encountered significant hurdles. This has now been taken up yet again in a more decisive manner.

The episode of Jet Airways does not bode well for the Indian airline industry as the growth in the market requires adequate availability of funds

The new government is likely to push through additional measures and the parliament session has already seen some debate and some bills being introduced. Reinvigorating bodies such as the Directorate General of Civil Aviation, the Airport Economic Regulatory Authority and the Bureau of Civil Aviation Security towards stronger oversight, would in all likelihood, be very welcome by most of the stakeholders. Safety and sustainability will have to emerge as key focus areas. Given a recent string of incidents, safety management systems, protocols and audits will need to be stepped up with digitised documentation procedures that can build towards establishing trends and taking proactive rather than reactive steps. Up-skilling within the regulatory bodies will also be required.

INDIA-FOCUSED SOLUTIONS VS FORCE-FITTED WESTERN MODELS

Finally, the sector is wanting for India-focused solutions. With an abundance of talent, given the right environment, there can be extremely innovative solutions that are tailored for this market. Unfortunately, till now, the overarching theme has been to force-fit Western style models. Take for instance, new airports that have focused on using materials such as glass-and-steel – perfectly suited for cold climate, but completely at odds with most of the metro climate. Or the fact that the hybrid till regulation is being used which directly impacts affordability of travel. Or even algorithms that are based on Western calendars and do not quite work as well with the Indian calendar because many of our holidays are based on lunar cycles as opposed to Gregorian calendars where the holidays fall on the same day each year.

All of these demand a return to roots and developing solutions that are fit for the market. We have to build solutions that cater to the traveller from Assighat in Varanasi rather than building solutions for travellers from Times Square in New York; solutions that leverage the 5Ts: trade, transport, tourism, technology and tradition and solutions that look at the ecosystem as a whole rather than adopting a piecemeal approach.

OUTLOOK

As India continues to emerge towards playing a dominant role globally, its aviation sector cannot be overlooked. This is specially so as this sector acts as a growth multiplier including economic output, jobs and trade – all enabled via better connectivity. Aviation forecasts indicate that the Indian domestic market will grow at 15 to 18 per cent annually while the international market will grow at 10 to 14 per cent for the next five years. This growth must be leveraged internally and policy interventions, that address the multiple distortions impacting the sector, are necessary. To fully harness the growth prospects of Indian aviation, issues have to be addressed via deliberate and decisive measures. With these in place, for Indian aviation, “the sky is the limit.”

Reproduced from: SP’s Civil Aviation Yearbook 2019 2nd Edition