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BW Businessworld

Spread Your Wings

Photo Credit :

Ankur Bhatia, Executive Director, Bird Group & Chairman of CII's Core Committee on ‘Growth potential of Civil Aviation & Airports'

Indian aviation industry plays a very important role in shaping the Indian economy. As one of the fastest growing aviation industries in the world, the sector not only contributes to nation's revenues in the form of direct and indirect taxes, it also helps generate employment by supporting related sectors like tourism and hospitality. Today the total turnover of the Indian aviation industry is nearly Rs. 50,000 crore (US$ 11 billion) per annum.

With a compound annual growth rate of 18 per cent, today the Indian aviation industry ranks ninth in the global civil aviation market. Looking at its growth over the past few years, the Indian aviation industry has emerged as a huge market with a massive passenger movement in both domestic and international sectors. Today the country has 454 airports and airstrips, of which 16 are designated as international airports. It has been estimated that India would need 1,032 new aircrafts worth around US$ 138 billion by 2028. AAI is also planning to spend around US$ 3.07 billion in the next five years for developing, upgrading and modernizing metro and non-metro airports. Currently all 125 airports are owned and operated by AAI. Open Sky Policy of the Government and rapid air traffic growth have resulted in the entry of several new privately owned airlines and increased frequency/flights for international airlines. With such a huge potential, it is therefore necessary that the aviation industry is provided with an operating environment that induces further growth and development.

However, looking at the scenario in 2011, the Indian aviation industry was faced by some of the prominent challenges that hinder its projected growth. In spite of the tremendous growth in the past and the huge potential, the rising operating cost has completely jeopardised the economies of some airlines today. This high operating cost combined with a highly competitive market condition has added to the continued strain and draining of the limited financial resources of the airlines. It has been estimated that airlines in India are battling with a debt of more than US$ 15 billion today, which is threatening their existence and sustainability today. 

One of the biggest contributors to high aviation cost today is fuel prices in India. India is among the most expensive places aviation turbine fuel (ATF). On an average current domestic ATF prices in India are nearly 58 per cent higher than the neighboring markets due to a lopsided tax structure. Fuel currently accounts for close to 40 per cent of the total operating cost for various airlines.  Even a dollar increase in fuel prices in the international markets increases the operating structure of the airline and can cause major fluctuations in its cash flow. Therefore, there is an urgent need to review the tax structure for ATF uplifted for domestic operations.

Another challenge that harnesses the growth of the industry is the restriction on foreign direct investment (FDI) in airlines. At present, 49 per cent FDI is allowed in the civil aviation sector; however foreign airlines are completely barred to invest in Indian carriers. Any form of restriction on FDI in aviation limits the scope for airlines to find a strategic partner and further affecting their scope for growth.

Further Route Dispersal Guidelines from the government also need to be relooked to widen the scope of growth in the aviation sector. After opening the sector for private airlines, the Indian government laid down route dispersal guidelines with a view to achieve better regulation of air transport services and cater to the needs of different regions in the country. Until to 2009, national airlines could opt to buy an equal number of seats from regional or other carriers that have operations on CAT – II, IIA and III routes to comply with existing norms. However, in 2009 Directorate General of Civil Aviation (DGCA) banned this ‘Seat Miles' trading and also stated that non-compliance would lead to scrapping of the operating license. The policy of ‘Seat Miles' trading, which was beneficial for airlines suffering heavy losses on CAT II & IIA routes now became a challenge both economic and technical in the form of fleet management. This is because a type of aircraft required to serve regional route might be different from the one required to serve the metros. Domestic airlines have ever since been seeking relief in terms of the amount of mandatory flying required to meet these guidelines. 

Finally, with the rapid growth of the Indian aviation industry it has been forecasted that the air traffic will continue to grow at the rate of 8 – 10% over the next 10 years, which will result in a substantial increase in passenger traffic between 2010 and 2020 along with doubling of aircraft movements. However, the Indian airspace infrastructure is already constrained at India's current levels of traffic, thus managing the expected future growth clearly requires a continued and comprehensive increase in capacity at key locations, coupled with simultaneous modernization of technology and practices to handle en-route and arriving/departing aircraft. Therefore this makes the challenge for Indian airspace infrastructure 3-fold – improving economic & the operational performance, meeting user expectations and managing the change safely.

The compilation of above factors has lead to the domestic airline industry being saddled with a collective debt of about Rs. 50,000 crore. It will take at least three to five years for airlines to clean up their balance sheets. One has to be cognizant of the extreme financial stress that the airlines sector is going through. Thus there is a growing need have a common approach to devise strategic initiatives that can help overcome hurdles facing the Indian aviation industry today.

To bring down the high aviation cost, the government needs to take strategic initiatives in order to sustain and strengthen the image of Indian carriers as an affordable and accessible mode of transport for all. The recommended approach to curb these existing challenges is firstly to include ATF as ‘declared goods', in case the same is not feasible then placing the ATF in the GST should be considered so that a uniform rate of tax of 20 per cent levied by state governments. We also hope that the recent decision to allow airlines to directly import ATF will be approved for implementation by the cabinet. This will further help in reduction of sales tax, which is required to be paid by the airlines. 

Therefore, we certainly hope that the government will look at easing the inclusion of FDI in the aviation sector, as the current 49 per cent and no investment in the Indian carriers has limited the resources and lead to an investment gap. Therefore the government needs to allow international airlines to participate in the FDI. 

Finally, the Indian airspace infrastructure is already constrained at India's current levels of traffic. With the passenger traffic estimated to grow at the rate of 8 – 10 per cent for the next decade, managing the same will require rapid upgradation of airport infrastructure. Regional connectivity needs to be aggressively promoted as there is a considerable opportunity existing in connecting Tier-II and Tier-III cities with smaller aircrafts.

These initiatives will drive the sector towards further prosperity, development and employment. 

A new outlook for the route dispersal guidelines is also pivotal in order to augment the sector's growth. Therefore cross-subsidization of routes, establishment of a dedicated non-lapsable Essential Air Services Fund (EASF), airlines should be encouraged to invest in smaller aircrafts, geographical spread of sectors under respective CATegories - I, II & III need to change and percentage stipulation under each CATegory should also be changed. 

In order to improve upon existing infrastructural constraints in Indian Civil aviation, there is an imminent need to introduce changes like provide greater airspace capacity and improve flight path predictability. Therefore with the above initiatives, the key issue to bring down the high aviation cost can be addressed to sustain & further strengthen the image of the Indian airlines as an affordable and accessible mode of transport to all and not just the elite.

Ankur Bhatia, Executive Director, Bird Group & Chairman of CII's Core Committee on ‘Growth potential of Civil Aviation & Airports'