http://www.iata.org/publications/airlines-international/october-2012/Pages/india.aspx

Special Report - Putting the Pieces Together

The potential of the growing Indian market can only be realized through a coordinated aviation policyIndia is a huge country, a land of great diversity. Geographically, culturally, and socially, the sub-continent swings from one end of the scale to the other. Its aviation sector doesn’t buck the trend.

The potential is enormous. The market already has some 150 million travelers passing through its airports, and if Indians begin to travel with the same frequency as Americans, then the years ahead could see the market boom beyond the two billion mark. This will not happen quickly and is dependent on an expected increase in per capita GDP. Even so, by 2020 traffic at Indian airports is expected to reach 450 million, making it the third-largest aviation market in the world. Some 90 million passengers per annum (mppa) are projected to pass through Delhi alone.

At the same time, a multifaceted crisis has taken hold of the industry that threatens to nip any progress in the bud. Air India and Kingfisher Airlines, for example, are in critical condition. Airline losses approached $2 billion in the year ending March 2012—on the back of a $3.5 billion loss over the previous three years. The Centre for Asia-Pacific Aviation (CAPA) believes Indian airlines’ debt burden will soon reach $20 billion. Indian banks and financial institutions are exposed to about half of this amount.

Indian domestic traffic fell 1.1% in July compared with a year ago. After expanding at 20%-plus rates through 2010 and early 2011, the Indian market stopped growing at the end of 2011. July capacity rose 2.1%, ropping the load factor from 71.8% last year to 69.6%.

At least the crisis has pushed aviation to the forefront of national thinking. But current aviation policy has a fragmentary approach that is not connecting the dots in the value chain. Airports and fuel are getting more expensive even as airlines struggle.

A coordinated “India Inc.” approach that addresses the central challenges of infrastructure, costs, and taxes is urgently required.

A different picture

In terms of airport infrastructure, India has got a great deal right in previous years. The Public-Private Partnerships (PPP) model has delivered world-class facilities at Hyderabad, Cochin and Bangalore. And the benefits of these developments are clear to see. Bangalore’s international services have more than doubled over the past decade, for example, enabling India’s “Silicon Valley” to earn contracts throughout the world.

“In India, the PPP model for developing greenfield airports as well as upgrading existing airports has provided the opportunity to develop integrated airport cities on the lines of Dubai and Hong Kong,” says Promananda Elangbam, Manager of Marketing at Bangalore International Airport Ltd. “A holistic approach to airport infrastructure and its management is the need of the hour. Done in a transparent and effective manner, this can help boost international trade and tourism considerably.”

But at Mumbai a different picture emerges. A delayed new terminal that will push capacity to 40 mppa should finally open for business at the end of 2013. Traffic growth is such, however, that the airport will become congested again by 2017. And there is no possibility of significant further expansion at this facility.

Mumbai is India’s financial capital and an important part of the country’s economic wellbeing. A jam-packed airport will undoubtedly curtail the many benefits of healthy air connectivity. 

Prime Minister Manmohan Singh has recognized the urgency of the situation and backed the Navi Mumbai airport project that dates back to the mid-90s. Even fast-tracking the development may not be enough, though. Projections suggest there will be nearly 275 million passengers in the Indian system by 2017, the majority of whom filter through Mumbai and Delhi.

A dire situation

The lack of space isn’t the only concern at Mumbai. It has a similar concession model to Delhi—and the northern hub has been making the headlines for all the wrong reasons.

The Airports Economic Regulatory Authority of India (AERA) approved a 346% increase in charges at Delhi Airport effective from May 2012. The increase will add more than $400 million annually in operating costs for airlines.

“An increase of this magnitude will impact travel demand 5% to 7%,” says Tony Tyler, IATA Director General and CEO. “That’s bad for airlines, for passengers, for Delhi International Airport Private Limited (DIAL), for the Delhi hub, for Delhi as a city, and

indeed for India and its economy as a whole. We need to focus on how to make Delhi a more competitive airport, a successful hub and a driver of economic growth.”

DIAL pays 46% of top-line revenue to the Airports Authority of India (AAI) as a concession fee. Much of this is used to subsidize other public sector airports, which is not only in contravention of international standards but also distorts competition.

“I urge the government to initiate deliberations on utilizing the 46% concession fee to offset the increase in aeronautical charges and the cost for passengers,” says Tyler. “This could be the basis for a way forward that protects the interests of DIAL, its airline customers, the fare-paying public, and the economy. And it is important that we find a workable solution soon to avoid Mumbai, with a similar concession structure, falling into the same dire situation.”

Any discussions won’t come a moment too soon. The hike in prices has come about through aggressive concessions fees and the over-recovery of a $10 billion investment in airports over the past decade. The next 10 years are expected to see airport projects totaling $20 billion—which may mean yet more record rises in airports charges unless concession fees and over-recovery are tackled. Already Chennai has proposed a 118% increase to fund its modernization project, while at Kolkata, the Airports Authority of India has asked for a 242% increase in for 2012/2013 and a 35% increase the following period.

“There has been huge improvement in infrastructure with newer terminals like Terminal 3 in New Dehli, the Rajiv Gandhi International Airport at Hyderabad, Bengaluru International Airport and others across the country,” says Naresh Goyal, Chairman, Jet Airways. “However, the imposed levies and charges have resulted in an increase in operational costs.”

Tax increase

India is becoming increasingly expensive. Taxes are everywhere in India’s aviation sector, a clear indication that the government views the sector as a revenue source rather than a revenue generator. Including taxes on domestic fuel, India’s aviation sector contributes in the region of $2.15 billion (INR120 billion) in taxes annually according to an Oxford Economics India Benefits of Aviation study.

In contravention of International Civil Aviation Organization (ICAO) policy, India’s Ministry of Finance has put a service tax on tickets as well as landing and navigation charges. Fuel taxes—an excise duty of 8.2% and domestic charges that can add up to 30% to the bill—mean fuel is 45% of Indian carriers’ operating costs. This compares unfavorably with the global average of 33%.

“For the industry to recover from its current travails and achieve long-term sustainable growth, there is a need to address problems created by high input costs,” says Goyal.

It is little wonder that the sub-continent’s airlines are struggling. The difficulties being faced by Air India and Kingfisher Airlines in particular have been well documented. Aside from the structural issues, industry observers have cited Air India’s artificially low fares as the main factor behind the struggles of Indian carriers. It is reported that the average Indian ticket price of $95 is about $11 shy of a break-even figure. A weak rupee isn’t helping and has caused further cost increases in dollar-denominated expenses.

The contraction by Air India and Kingfisher Airlines does have a slight upside. CAPA reports yield increases for Indian airlines in the region of 10% in the fourth quarter of the 2011/2012 financial year, improving toward 15% in the first quarter of 2012/2013.

And capacity management will remain tight. Approximately 24 aircraft are due to be delivered in the next 12 months, eight of which will be Bombardier Q400s. This will lead to an increase in domestic capacity of 7% to 8%, only half of the increase seen in the previous financial year.

India’s carriers are not part of the global alliance scene and there has been little enthusiasm to revamp a number of bilateral agreements. Emirates—one of the few carriers looking to increase its presence on the sub-continent—has exhausted its entitlements, for example.

The government may be loosening the shackles slightly. In March 2012, then Finance Minister Pranab Mukherjee said the government would allow foreign airlines to take up to a 49% investment in Indian carriers. Closer ties with international airlines could make a crucial difference, although there has been little enthusiasm to date.

For many, though, it is putting the cart before the horse, as investment won’t be forthcoming while the fundamental aviation framework is so weak. “India is an attractive destination for us to serve, but I am not sure if India will be an attractive destination for us to invest in,” Willie Walsh, Chief Executive of International Airlines Group has noted.

Other challenges loom on the horizon. The policy on ground handling needs to be resolved. Airlines have argued against the government proposal to limit airports to a maximum of three competing handlers and no final decision has yet been made. It is also expected that much-needed investment in air traffic management could translate into higher fees.

It is estimated that Indian aviation will need about 350,000 new employees to facilitate growth in the next decade. Shortfalls in skilled labor would see staff salaries rise above inflation, adding further cost pressure. Robust training programs will be the key to a sustainable future, especially considering that India will probably continue to provide a significant workforce for Gulf carriers.

Numbers in the wings

If India can resolve the crisis, the economic and social benefits that derive from improved competitiveness and air connectivity would be enormous. Already, the aviation industry supports close to 0.5% of Indian GDP and some 1.7 million high-productivity jobs. The annual value added by each employee in air transport services in India is approximately 10 times higher than the Indian average.

Tourism is an obvious area of improvement. The Indian Tourism Ministry is targeting 10 million tourists by 2017, nearly double the 5.7 million arrivals expected in 2012. Foreign visitors—around 89% of which arrive by air—contribute $9.8 billion (INR548 billion) every year. Stronger air services would make a notable difference, not only to the tourism sector, but also to the bottom line of the Indian economy.

Indian exports could also gain substantially from a more competitive and cost-efficient air transport sector. The Commerce Ministry wants to double India’s exports to $500 billion by

2013-14 compared with the 2010-11 level. The Indian government must utilize the determination it has shown in fighting the European Emissions Trading Scheme to put its aviation sector back on track.

“The world is focused on Indian aviation—from manufacturers, tourism boards, airlines, global businesses to individual travelers, shippers and businessmen,” notes Tyler. “If we can find common purpose among all stakeholders in Indian aviation, a bright future is at hand. The benefits of such an effort will be shared across the entire economy.”

The optimism is echoed by Jet Airways’ Goyal. “In an emerging economy like India where the need for connectivity is critical to facilitate the growth of trade and travel, one can only be optimistic about the future.”

Action plan for India

A Knowledge Paper on India: The Emerging Aviation Hub by the Federation of Indian Chambers of Commerce and Industry in collaboration with KPMG released in March 2012 suggested the following eight-point action plan for Indian aviation.

Ensure collaboration between the Ministry of Civil Aviation, other related ministries, regulators, and the industry

Promote other sectors that can both support and benefit the aviation sector Reduce fuel sales tax. The long-term benefits in terms of higher economic activity and

employment generation would more than compensate for the notional loss of tax revenue in the short run

Create an Essential Air Services Fund (EASF) to support air connectivity to second and third-tier airports. Greater private sector investment in airports should also be encouraged

Implement recent policy decisions such as the 49% Foreign Direct Investment limit, and establish safeguards to prevent excessive and predatory ticket pricing

Establish an Air Cargo Promotion Board (ACPB) to address the significant challenges in the air cargo sector and make India an air cargo hub for the region

Promote the domestic Maintenance, Repair and Overhaul industry by removing the anomalous tax structure and providing a “deemed export” status to help prevent business moving abroad

Establish a world-class National Aviation University and promote private sector investments in training academies to produce highly-skilled human resources