CAPA believes that the regional aviation market is under-penetrated and the demand is growing at nearly twice the rate of the metros

Policy makers, aviation professiona ls and ordinary passengers alike now realise that something is badly wrong with commercial aviation in India. An industry that has consistently notched up double-digit growth rates for several years, and is forecast to continue on a high-growth path for many more years, should be the toast of the global airline business. Sadly, this impressive performance has failed to bring prosperity. All major carriers, with the possible exception of IndiGo, are believed to be loss-making. While Air India and Kingfisher Airlines are in dire straits; Jet Airways and SpiceJet are not far behind.

A variety of factors are responsible for the plight of the sector. No doubt inadequate infrastructure, a huge and unpredictable fuel bill, the global economic downturn and the fall in the value of the rupee against the dollar may be blamed. Add to that the insatiable expectations of trained aviation staff and rising input costs—on maintenance, airport charges and baggage handling. The high cost of capital and high interest rates have also conspired to drag the airlines deep into the red. But why have the carriers been so aggressive in increasing capacity? Why are they engaged in suicidal competition on the metro routes, rather than seeking new horizons?

Meeting Regional Needs

Scheduled flights in India now number close to 15,000 departures per week. However, the benefits of aviation connectivity are unevenly distributed, leaving the vast majority of the country’s population untouched. Uttar Pradesh and Bihar which have almost a fourth of India’s population are reportedly served by just 2.9 per cent of scheduled flights. On the other end of the scale, Delhi and Maharashtra claim the lion’s share of 37.3 per cent of flights, even though they comprise just 10.3 per cent of the total population. That is why Spice-Jet, realising that a large nascent market exists in the poorly served regions, last October, decided to strategically focus on improving air connectivity to Tier-II and Tier-III cities.

But a key requirement for the spread of aviation to the remote expanses of India is infrastructure. Unless aviation facilities are upgraded in a hurry, there’s likely to be only patchy progress. The country currently has 127 airports, with just 87 operational, a clearly inadequate figure for a huge nation and large population. That’s not the whole story, since barely 36 airports accept narrow-body jets like the Boeing B737-800 (189 economy passengers) or Airbus A320 (180 economy passengers). SpiceJet’s choice of the Bombardier Q400 NextGen (maximum 80 seats) for regional routes makes good sense. The carrier believes that this economical and fuel-efficient turboprop aircraft is best suited to the facilities at many of the smaller airports—short runways and basic services. SpiceJet’s flights, mainly in the South, reportedly achieve consistent seat load factors of over 80 per cent at economical fares. The carrier is considering an additional order for Q400s to help balance the losses experienced on its mainline routes. Other popular regional options include small jets like the Bombardier CRJ700 (maximum 78 seats) and the Embraer E-170 (maximum 80 seats). However, with fuel prices way above comfort levels, turboprops like the ATR 72-500 (maximum 78 seats) and the Bombardier Q400 NextGen are garnering greater market share. A requirement is also likely to emerge for small aircraft with 15-20 seats and up to 45-50 seats, to pioneer new routes till the market matures. Aircraft with up to 80 seats are exempt from airport landing and parking charges and billed at reduced rates for navigation facilities. Those with take-off weight less than 40,000 kg also pay just four per cent sales tax on aviation turbine fuel (ATF) across the country, whereas larger aircraft are billed up to 27 per cent in some states. ATF amounts to 45 per cent or more of an airline’s operating cost, so this is a major gain. Indeed, regional aviation in India can succeed only if based on the low-cost carrier (LCC) model.

LCC penetration in India has almost doubled over the past five years and accounted for 70 per cent of the domestic market in December 2011, according to the Centre for Asia Pacific Aviation (CAPA). But all LCCs except IndiGo are operating at a loss. Why? The LCCs are hurt by the high cost of ATF as much as the full service carriers (FSCs). Their manpower requirement for each flight is similar to that of the FSCs. In addition, the LCCs’ booking system is not entirely Internet based, so they need booking counters with additional staff, which raises costs. The LCCs operate on crowded inter-metro routes, rather than protecting themselves from heavy competition by opening up regional routes. And they pay the same airport charges as the FSCs since there are no low-cost airports. Indeed, the LCCs claim that high airport charges are killing them. Low-cost airports with reasonable charges may be just what the doctor ordered. Such airports have minimal infrastructure—a runway, simple terminal facilities and navigational aids—and offer only basic services. They could bring huge savings for the airlines. However, to be economically viable they would need to generate high levels of non-aeronautical revenue.