What Indian aviation needs to do to fly higher

March 25, 2012:

The Vijay Mallya-led Kingfisher Airlines may be struggling to stitch together a flight plan to stay afloat. Jet Airways could be facing tax problems of its own. Five out of the six Indian carriers have posted losses over the last three quarters.

But chieftains of global aviation industry describe this phase as but another "air pocket," which will soon pass and clear the runway for domestic aviation to take off on a more sustainable growth path.

This, clearly, was the postscript of the five-day 'India Aviation 2012' that recently concluded in Hyderabad, attracting global players in the airlines, airport and engine manufacturing sectors.

A stellar period

Indeed, the Indian aviation sector gained substantial altitude during the Eleventh Plan period, climbing to the perch of the ninth largest civil aviation market in 2011.

Not only did passenger throughput swell from 73 million in 2005-06 to about 150 million last year, but this period also saw four international airports getting completed.

The investment made by private airport operators was about Rs 30,000 crore in the last five years, involving greenfield airports in Hyderabad and Bangalore and modernisation of Delhi and Mumbai airports. Not only this, by 2011, five Indian carriers were operating on international routes and India had bilateral agreements with 104 countries.

But, aviation experts maintain, this is only the beginning of the Indian aviation story. India now plans to be among the top three aviation markets by 2020.

Aviation players see this as an achievable goal, given the right policy initiatives and a stronger Government-industry interaction. Boeing estimates that travel to, from and within South Asia is expected to achieve an average annual growth rate of 8.1 per cent in the next 20 years, outpacing growth in all other regions.

Airbus has revised its market forecast for India, stating that the country will require 1,040 aircraft worth $145 billion in the next 20 years. A KPMG-FICCI report shows that the Indian aviation industry is today worth $12 billion, with the airlines and airport segment constituting about four-fifths of this. And investments worth $50 billion are envisaged in the next five years or so.

Estimates from the Airport Authority of India and the private sector indicate that Indian airports would require an investment of about Rs 65,000 crore during the next Plan Period, of which Rs 50,000 crore will come from the private sector.

While Indian carriers plan to increase their fleet size to 800 in the next five years, the general aviation sector is likely to see $4.3-billion worth investment, with the addition of 300 business jets, 300 small aircraft and 250 helicopters.

Bumps on the way

But despite the global optimism, the flight path for this sector is not without its turbulence. Supply outstripping demand, spiralling jet fuel prices, rupee depreciation, stiff interest regime and intense competition are some of the factors that have kept profitability of Indian carriers under severe duress.

The KPMG report points out that five out of the six Indian carriers have posted losses over the last three quarters - some have not been able to net a profit ever since their operations began. All the three listed carriers have posted consecutive losses for the three quarters of the current fiscal, piling up crushing debts.

"Between 2008-09 and 2010-11, Indian carriers, barring Air India, have accumulated losses of about Rs 10,000 crore. And that this is happening despite an over 15 per cent annual growth in passenger traffic points towards systemic flaws in the industry," it says.

Kingfisher Airlines' woes are well-known, having come to such a boil that doubts are being whispered on how long Mr Mallya could remain in the cockpit.

Doubtless, high cost of air turbine fuel (ATF) has been the cardinal dampener. ATF accounts for more than 50 per cent of airlines' operating cost, while it is half of this in other countries. Sales tax in Gujarat for instance is as high as 30 per cent, while it is 29 per cent in Tamil Nadu and Madhya Pradesh.

According to KPMG analysts, ATF in India is nearly 60 per cent costlier than competing hubs such as Dubai, Singapore and Kuala Lumpur. The Government has agreed to the airlines' demand for direct import of the fuel. But, the KPMG reports says, this may actually bruise India's brand image.

ATF import will hurt

"India is an ATF-surplus country that exported nearly 45 per cent of its ATF production in 2010. It may appear strange that airlines in an ATF-surplus country end up importing fuel just to work around the prevailing taxation policies," it says.

And direct import of the fuel may not be as promising for airlines as it sounds. For, carriers will have to depend on oil companies, which could charge a premium for handling imported ATF.

"There is also the risk that some State Governments may put entry taxes on imported ATF once they realise their tax revenues are being compromised," the report points out.

What, then, is the way forward? Notification of ATF under the 'declared goods' category with a uniform application of 4 per cent sales tax, improvement of air connectivity to tier-2 and -3 cities, implementation of the 49 per cent foreign direct investment limit policy, close collaborations among Ministries related to the sector, development of regional airports and promotion of allied sectors such as maintenance, repair and overhaul could be some of the starters.

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