As the finance minister presented the Budget this Friday, aviation stakeholders watched with eager anticipation. Several aviation-related items were mentioned which included: A vision towards India entering the aircraft financing and leasing market. The divestment of Air India. Consideration for re-examining foreign direct investment into Indian airlines. Policy interventions towards energizing Maintenance Repair and Overhaul (MRO). Further promoting the UDAN scheme.
However, in terms of quantification or details – nothing concrete has been tabled as yet. Without details on several of the schemes, the intent versus impact that these proposals carry can vary significantly.
Take for example the Air India divestment. In a clear signal of intent, no funds have been allocated for the turnaround plan.
Compare this to last year’s Budget allocation for this at Rs 650 crore and actuals of Rs 3,975 crore. Up to Rs 2,600 crore has been allocated towards servicing the loans transferred to the Air India special purpose vehicle (SPV). And Rs 1,084 crore has been allocated towards the purchase of two new aircraft for Special Extra Section flights.
In spite of these allocations, the most likely outcome for Air India is that the government will be forced into
a sale of parts.
In her speech, Nirmala Sitharaman also laid out a vision for India to enter into aircraft financing and leasing activities. The groundwork for this was already started a year ago via the project titled Rupee Raftar. Specifically, the Ministry of Civil Aviation (MoCA) established a Working Group to review and recommend measures for developing an aircraft financing and leasing industry in India. The final recommendations were released at the Global Aviation Summit earlier this year. The report borrowed heavily from Ireland’s blueprint given the success of Ireland as a world leader in aviation finance.
For this vision to fructify, the policy intent and impact will require addressing issues ranging from credit flows to judicial reform, which are critical to the foundation for a leasing ecosystem. The numbers speak for themselves, with the spread between rupee and dollar financing in a range of 8- 10 percent.
Other items like India not fully subscribing to the CapeTown convention (which provides remedies for default) or the contract dispute process consequently impact the risk-premiums for the country. Details on the bold policy vision are awaited.
On providing an enabling ecosystem for the Maintenance, Repair and Overhaul (MRO) industry, it was stated that “the government will adopt suitable policy interventions to create a congenial atmosphere for the development of MRO in the country”. An alternate statement indicating that taxes would be levied on the same rate as overseas providers would have been better understood and provided a signal of clear intent to the MRO industry.
The reason is MRO taxation in India remains the highest globally. With an 18 percent 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. It is hoped that the policy interventions will address this but till they do, the MRO industry will continue to see their overseas competitors flourish taking in business from Indian airlines.
The controversial topic of further opening up Foreign Direct Investment in aviation was mentioned. The current policy only allows for an overseas airline to take a 49 percent stake in an Indian airline. This will be reconsidered.
Presumably, this takes into account the struggles of Jet Airways, the challenges at Air India and the overall negative outlook on the aviation sector which has led to constrained lending. Yet, given that aviation is a net job creator the longer term impact of such a proposal may be negative.
For the last few years, almost all aviation announcements have included the regional air connectivity, aka UDAN, scheme. The budget was no different and for UDAN, the budget allocates Rs 480 crore (based on actuals of Rs 441 crore last year).
That said, the sustainability of this scheme remains in question. Currently,
only 25 percent of the routes awarded have been operationalised and in many cases, the routes are being taken up for considerations other than connectivity. The regional aviation landscape is one that is challenging at best with all regional carriers in a state of distress. The situation is not forecast to improve anytime soon.
For a budget that focused so heavily on infrastructure and development, the topic of airport capacity and costs was missing. Similarly, a focus on issues of regulatory reform, safety, air-traffic flow and intermodal integration were not explicitly mentioned though it may be the case that these will find supplementary allocations.
Overall the budget addressed the aviation sector but only in parts. Of the
seven key issues facing the aviation industry, only three were addressed – and that too without much detail. Folks looking for a bold comprehensive move that would propel the industry forward will likely have to wait some more.
Satyendra Pandey 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.