From 44 million domestic passengers in 2008 to 121 million domestic passengers in 2018, Indian aviation has come a long way. This growth is forecast to continue with India becoming the third largest aviation market by 2030.
What is spurring this growth? A growing middle class that is 300 million strong, rapid urbanisation triggering increased travel demand, a rising propensity to spend, and significant capacity entering the market.
Needless to say, this growth 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. But the current ecosystem has far too many distortions. These are:
As the finance minister presented the Union Budget in July,
1. The government has clear intent with regards to aviation but details are pending the message to aviation stakeholders was that it was indeed a focus area. Several aviation-related items were mentioned including:
A vision towards India entering the aircraft financing and leasing market.
divestment of Air India. Consideration for re-examining foreign direct investment into Indian airlines.
Policy interventions towards energizing Maintenance Repair and Overhaul.
Further promoting the UDAN scheme.
Details of these proposals are yet to emerge. But the industry is eagerly waiting for details to be shared and put out as policy before committing additional capital or effort.
2. The core issue of ATF taxation remains unaddressed
At the apex of the aviation value chain are airlines. And to ensure a healthy value chain the first point of call is an environment where airlines can thrive. For airlines the single largest pain point is the cost of Aviation Turbine Fuel (ATF). ATF constitutes up to 40 percent of an Indian airline’s cost base and is the largest expense items. Globally, this figure averages roughly 20 percent.
The distortion of up to 20 percentage point means that Indian airlines do not face a level playing field. Further, it impacts the sustainability of businesses. Granted there have been success stories but they have leveraged financing structures and liquidity of asset types — both of which are subject to market dynamics. For Indian aviation to thrive there is not getting around the issue of ATF taxation.
3. Encouraging competition via multi-airport systems towards delivering good outcomes
For Indian airlines, the current commercial fleet of over 500 aircraft is likely to double within the next 7-10 years. And this fleet requires adequate airport capacity. Metro airports continue to be key to aviation traffic with around 61 percent of the domestic traffic and about 73 percent of international traffic still originating from the six metro cities. Which means that the capacity at these metros must be addressed — in a manner that is timely and cost effective.
Multi-airport systems may just be the answer.
Multi-airports also encourage competition thereby delivering outcomes that are in the best interest of the sector. These outcomes should have been delivered via economic regulation but the numbers speak otherwise.
For instance, at the Indira Gandhi International Airport in Delhi, 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. The cost of these overruns was covered by the flying public. Both airports were allowed to levy development fees to the tune of nearly Rs 3,400 crore.
India is one of the few countries in the world that allowed for the levy of both a user development fee (UDF) and an airport development fee (ADF). The contribution via fees levied on passengers were 1.2 to 1.4 times the equity contribution in the case of Delhi and 3.0 to 3.2 times in the case of Mumbai.
In looking at the project estimates of new greenfield airports like Jewar at Rs 15,574 crore, Navi Mumbai at Rs 16,704 crore and Dholera at Rs 5,083 crore this trend is likely to continue. 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. 4. MRO taxation continues to be a net-loss for the country
Maintenance and repair taxation in India remains the highest globally. With an 18 percent goods and services tax (GST) levy, providers have to compete on sale price with overseas players that only pay 5 percent — that too at cost price. This gap: 20-22 percent.
Consequently, most airlines contract their maintenance overseas, leading to a loss of jobs and output. Foreign airlines also do not source their maintenance 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 MROs being further disadvantaged. These royalties are imposed under different classifications ranging from 11 to 30 percent.
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 outsourcing majority of the $1.4 billion MRO business to international providers. That money if spent locally would spur employment and output.
5. The financing environment remains extremely challenging
After the shutdown of Jet Airways and challenges faced by other airlines, banks overall have a
negative outlook to the aviation sector. The reasons are many, including fluctuating EBITDAs, weak balance sheets, systemic impacts of the Jet Airways failure and the non-performing asset (NPA) cleanup. This does not bode well. Because the growth in the market requires adequate availability of funds — across stakeholders be it airports, airlines or MRO providers.
In spite of being a key growth market in Asia, private capital is reluctant to enter the aviation not only because of the challenges highlighted but also due to the legal procedures where contract enforcement is challenging at best.
6. India focused solutions versus force-fitting 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. Solutions that are tailored for the market. Unfortunately, until 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 climates 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 don’t quite work as well with the Indian market due to a 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 Assi ghat 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 taking a piece-meal approach.
variety of reasons.
As India continues to emerge towards playing a dominant role globally, its aviation sector cannot be overlooked. Especially 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 aviation market will witness compounded annual growth rates in the double-digits over the next five years. To leverage this growth policy interventions are necessary. Interventions that address the multiple distortions impacting the sector. Without these, the sector will fall way short of exploiting its full potential.
Satyendra Pandey has held a variety of assignments in aviation. He is the former head of strategy at a fast growing airline. Previously he was with the Centre for Aviation (CAPA) where he led the advisory and research teams. Satyendra has been involved in restructuring, scaling and turnarounds.