The government’s decision on FDI comes a bit too late. At this point in time, it is just a policy statement by the government; the procedure for its implementation is complex, cumbersome and will take a long time for fruition.

India is poised to become a world leader in every sector. Then, why not in the aviation sector? Currently, India ranks ninth in the world in the aviation sector and aims to be among the top three by 2020. However, there are impediments in the way that need to be removed.

Performance of Indian Carriers

A critical analysis of the current market scenario reveals that operations by a majority of Indian carriers have not been profitable for several years. In the last financial year, Indian carriers posted a combined loss of about Rs. 12,000 crore. As per sources in the Airports Authority of India (AAI), the Indian airline industry has achieved a growth rate of 13.18 per cent in passenger traffic in 2011-12 compared to the year before. The growth rate in domestic and international passenger traffic was 15.18 and 7.63 per cent respectively during this period. In the period under consideration, total aircraft movement in India also increased by 10.8 per cent with domestic and international aircraft movement increasing by 13 and three per cent respectively. However, despite the increase both in passenger traffic and aircraft movement, the Indian airline industry continued to suffer losses, attributable essentially to high operating costs and policy issues.

With the exception of IndiGo Airlines, none of the Indian carriers posted profits in the previous financial year. The market share of all the airlines showed major changes in the last one year. The market share of both Kingfisher Airlines (KFA) and Air India (AI) declined and within one year, KFA became the smallest carrier in terms of market share. KFA was the top performer at the end of January 2011 with the market share of 19.5 per cent, followed by IndiGo and Jet Airways at 19.2 and 17.3 per cent respectively. The combined share of Jet Airways and JetLite was 24.8 per cent, making it the market leader. Air India (Domestic), SpiceJet and GoAir had 15.8, 14.3 and 6.4 per cent of market share respectively. By the end of financial year 2010-11, Jet Airways remained the market leader with a share of 26 per cent.

In August 2012, IndiGo emerged as a market leader with a share of 27.6 per cent. SpiceJet, Air India and GoAir also gained, their market share rising to 18.5, 18.2 and 7.4 per cent respectively. Jet Airways and JetLite jointly scored 25.2 per cent. KFA proved to be the biggest loser by scoring just 3.2 per cent. IndiGo proved to be the biggest beneficiary followed by SpiceJet and GoAir. Recently, the government has permitted foreign direct investment (FDI) up to 49 per cent by foreign airlines in the Indian carriers and there is a general belief that this decision will help the airlines to improve their current financial status. However, it would be necessary to study the investment scenario in the global airline industry to understand whether this decision is really going to benefit the airlines.

Prospects of FDI

The government’s decision on FDI comes a bit too late. This might have benefitted KFA had it been approved a few years ago. However, this move still makes the Indian aviation market look positive and might encourage investment. At this point in time, it is just a policy statement by the government; the procedure for its implementation is complex, cumbersome and will take a long time for fruition. KFA might not be around till then. And who might be interested in investing in Indian carriers? American carriers can be ruled out completely due to their poor financial health. European carriers are unlikely to be interested due to consolidation in local markets.

Both British Airways and Lufthansa Airlines are busy buying smaller airlines. And then there is the Euro crisis. Middle Eastern carriers have shown interest but they will be cautious too. Etihad has already suffered in the deal with Air Berlin where it lost a few hundred million Euros. However, there is a high probability of one of the Gulf carriers investing in India. Gulf is also a lucrative market for Indian carriers and investment by a Gulf carrier would mean rationalisation of the routes and possible conflict of interest. It is also not clear as to which of India’s airlines, the foreign carriers will invest in. Air Asia, Emirates and some other foreign airlines have evinced interest but there is no final word from any of the potential investors so far. Also, the low market capitalisation and current economic environment may prove to be deterrents in attracting foreign carriers at valuations acceptable to domestic players. FDI can help some of the Indian carriers to remain afloat, but it cannot provide a permanent cure for the industry for which there would have to be change in basic policies governing the airline industry.

The Industry Needs Help

The precondition of a minimum of five years’ experience of continuous scheduled domestic operations and a fleet of at least 20 aircraft to be eligible for international operations, is a major hurdle in the potential growth of Indian carriers. This not only restricts competition at the international level but also gives unfair advantage to the foreign carriers over the Indian ones. Hopefully, modification of this provision would be brought forward in the next session of the Parliament.

Aviation turbine fuel (ATF) is the most important component in the operating cost structure of any airline in the world. For Indian carriers, fuel constitutes 45 to 50 per cent of the operating costs. Although, the government has allowed direct import of ATF by airlines, import tax and the state levies are still very high. Direct import of fuel could save 10 to 15 per cent of cost of ATF for the airlines, only if they could enter into agreements with oil marketing companies to use their infrastructure facilities. Availability of ATF to the airlines at affordable and competitive prices is a major hurdle for airlines. Declaring ATF as a ‘notified good’ can reduce this burden. Also, there is need to bring more transparency in the pricing of ATF.

Airbus and Boeing, the two major players in commercial aircraft manufacturing, have forecast that India would need more than 1,450 aircraft in the next 20 years. If this is going to happen, then India must have the maintenance, repair and overhaul (MRO) facilities within the country. India is the seventh largest market for Airbus. Being a huge market for aircraft manufacturers, high tax and import duties on aircraft spare parts restrict the growth of the MRO industry in India. Only Air India has its own MRO facility in India. All the other carriers are compelled to send their aircraft to other countries for the maintenance adding to the costs. To promote this segment of the industry, the government ought to implement measures such as tax holidays, simplifying licensing procedures for MRO and allotment of land at subsidised rates.

The primary airports get higher priority for development as compared to the secondary airports. Even though some secondary airports have been upgraded with modern infrastructure, these are not well connected by the airlines. This gives the advantage to the primary airport operators who raise their charges resulting in higher cost for the airlines operating from these airports. The best example in India is Delhi airport, where the airport usage charges were recently increased by the regulator, Airport Economic and Regulatory Authority, by 345 per cent in response to a demand for a hike of 774 per cent. There are also rumours about the upcoming Navi Mumbai airport that the airport charges may be 700-800 per cent higher than the charges at the existing airports. Competition by the secondary airports can only help in this case. This will also help to reduce the high air traffic burden at primary airports as well as reduce waiting time for the aircraft to land or take-off, thereby saving fuel.

Project Gagan is a big hope to reduce air traffic congestion and the waiting time for take-off and landing. This will also provide better communication and navigation facilities. It may be implemented on an experimental basis by the end of this year.