Krrishan Singhania, Managing Partner, Singhania Associates, examines the current policies governing the aviation sector and talks about the further steps that can invigorate this space.
How do you react to the new aviation policy announced by the Union government in 2016, in the wake of resurgence in the aviation sector due to low oil prices (now rebounding) after nearly two decades of chasing the red curve of stunted growth?
The new aviation policy has brought in a lot of forward-looking changes to boost the slumping aviation industry; these changes have been made to make the industry more dynamic and lucrative for all the players and to level the playing field. One of the major changes which have been welcomed by the smaller airlines is that, prior to the policy change, an airline needed to have 20 planes and five years of local operations to fly overseas. This additional requirement of five years of local operations to fly overseas has been removed, allowing newer and smaller players to enter the overseas airspace, thereby improving connectivity across the world. This would benefit players like Vistara and Air Asia. This would lead to increase in healthy competition and in turn benefit the customers. The price of Brent crude oil had hit an all-time low, which has led to reduction in costs and in turn, increased the profits for the aviation industry.
The regional connectivity scheme (Rs.2,500 for an hour-long flight) for better pan-India flights was scheduled to take off in the second quarter of 2016. Air fares are comparable to first class AC train fares for the first time in Indian aviation history. Is this a viable business model, considering the negative financials of airlines in general? Has there been adequate movement on this front?
Civil Aviation Minister Ashok Gajapathi Raju recently stated that out of 1.3 billion, only 0.08 billion use the airways annually. It clearly shows the amount of potential the aviation industry has. With the increase in number of people travelling, the costs of airfare would reduce due to economies of scale, and there would be a fair distribution of overheads. The highly leveraged air industry would be relieved of the financial pressure caused due to financial and operating leverages and would lead to the improvement in ratios overtime. The air travel market in India has grown rapidly over the last year due to lower airfares, increased seat capacity and the expansion of the Indian economy, resulting in higher disposable incomes. The price of Brent crude oil had hit an all-time low, which has caused reduction in costs and in turn increased the profits for the aviation industry. The government has introduced fares below Rs 2,500 for planes ferrying passengers between cities in less than one hour. For this, the government has provided incentives like reduced service tax, lower VAT and excise duty on jet fuel. A corpus will be built to fund viability gap of airlines operating at such low fares. This move will surely result in a positive for the sector, but one thing that needs a check is that the burden does not eventually fall on the consumers in any other way.
Is India competent enough to think and execute futuristic airports (future-proofed aviation management and operations) on par with global standards? What are the imperatives for the airport industry?
Yes, India is competent enough to think and execute futuristic airports on par with global standards. Constructing futuristic airports not only requires world class infrastructure, but also requires due deliberation on the conservation of resources. If we see the current scenario, sustainable green buildings norms such as LEED, IGBC, and GRIHA are gaining popularity among airport developers and owners. Airport authorities are gradually adopting these global standards which include multiple innovative techniques such as high-efficient glazing systems, efficient and automated lighting systems, green materials and chemicals, water harvesting, water recycling, waste management etc. Over the long run, we would see futuristic airport developers going beyond green building certification. In due course, airport operators will go for self-enhancing processes to improve the sustainability index beyond the tailor-made solutions.
Is there adequate growth in cargo traffic in the aviation sector? What is the year-on-year outlook for 2017?
Freight movement is an indicator of the growth or slowness of an economy. However, all is not well with the global cargo industry, with freight movements slowing down in most markets due to various reasons. India has emerged as the second-fastest growing air cargo market after the Middle East and is expected to grow at a compounded annual rate of about 7 per cent over the next five years, according to the IATA Industry Forecast 2014-2018. India would also be among the 10 largest international freight markets by 2018 and the industry would be lead by the United States supplying 10,054000 tonnes and China with 5,639,000 tonnes.
The Centre is set to spend $10 billion to develop airport infrastructure over the next five years. This will mean optimisation of nearly 400 unused airstrips across India that will be revived. How do you expect the industry to react to this investment flow into the sector?
The Civil Aviation Ministry is determined to maintain the 23 per cent growth achieved in the aviation sector in the country. The aim is to become the third largest aviation market in the next seven years. India seems to be determined to stay ahead of the growth curve. With the recent announcement in the 2017 Union Budget about allowing the Airports Authority of India (AAI) to use its land bank for commercial purposes in addition to the aviation related services has been highly welcomed by interested private sector parties. This move will now encourage private entities to bid for management contracts for airports, which will result in efficient and better infrastructure. Huge airport lands can now be used for commercial exploitation which will help in rationalising airport charges, making flying cheaper.
Are our domestic airlines efficient and aggressive enough in the domestic and international space?
We feel that our national carriers are comparatively inefficient and not very aggressive in the international and national markets for the following reasons:
a.Oil and taxes: Aviation turbine fuel (ATF) is heavily taxed in India. ATF forms anywhere between 40-50 per cent of the cost, whereas it is 25-30 per cent for airlines in the US, Europe, and even South East Asia. It also seems that airlines in India don´t hedge their fuel. Fuel hedging is an important risk management tool and open exposure to the volatile fuel market is not a good thing for airlines, since ticket prices can´t be made to reflect market reality, especially at that frequency. Efforts are being made in this direction, though. The government is considering making sales tax on ATF uniform by including it under a certain category. The government was planning to allow direct import of fuel by airlines, but storage and distribution is only handled by OMCs (oil marketing companies).
b.Dollar versus rupee: The fluctuating price of the national currency leads to losses.
The depreciation of the rupee against the dollar leads to losses.
c.The high hangar chargers, taxes on airplane tickets, unfavourable policies coupled with lack of infrastructure leads to Indian carriers losing their cutting edge.
How can the aviation sector buck the variables of oil prices in the international markets?
There are certain problems that the Indian aviation sector faces when there is a change in the oil prices in the markets. From recent studies and published reports, it has been seen that global crude oil prices have jumped 37 per cent, crossing the level of $50/barrel.
Jet fuels constitute 40 per cent of an airline´s operating cost and when there is a slight change, it leads to decrease in profitability. The fuel cost is highly unlikely to result in the immediate improvement in the airline industry profitability ratio. Airline operators often hedge their exposure to fluctuations in jet fuel prices a few years in advance by locking into a fixed price. If an airline company locks to hedge with a price that turns out to be a higher price, then they cannot take advantage of falling fuel costs. Instead of hedging fuel costs, certain airline operators take unprecedented measures of investing in their own jet fuel production.
By doing so, airlines can take full advantage of the changing fuel prices, which improves their profitability much faster compared to long-term hedging.
With the aviation sector poised for a spell of profitless growth, the emphasis by airlines to go in for aircraft purchases on a large scale, as is being envisaged, may have an adverse impact on viability. Your thoughts on the subject?
Out of 1.3 billion, only 0.08 billion use the airways annually. It clearly shows the amount of potential the aviation industry has, even the air companies know this and the sector is poised for a spell of profitless growth, they are ready to purchase aircraft on a large scale.
A Boeing´s single-aisle 737 is the world´s most popular aircraft ù there are more of them flying around than any other jetliner. It´s also Boeing´s smallest and most affordable commercial aircraft. The company lists the price of a 737 as between $51.5 million and $87 million, depending on the model. This rat race is to tap the potential which the market has and all the airlines want to cash in. They are borrowing funds to buy these planes, a highly leveraged company leads to increase in EPS during a bull run, but during a bear run, the same leverage can lead to financial distress. Hence it can be safely said that financial gearing a double-edged sword. The companies must hence start with leasing planes and check the viability of the project before considering purchase of planes.
Are there any flaws in the current policies being adopted by the government as far as the aviation sector is concerned?
The New Civil Aviation Policy has been made with a primary objective of increasing air connectivity, allowing new domestic airlines to fly abroad quickly and opening up the skies for European and South Asian Association or Regional Cooperation (SAARC) countries. However there are some design flaws in several concepts which can be highlighted on conducting an in-depth analysis of the same.
(I)Regional Connectivity Scheme (RCS):
RCS is to facilitate and stimulate regional air connectivity by making it affordable. Promoting affordability of regional air connectivity is envisioned under RCS by supporting airline operators through (i) concessions by Central government, state governments and airport operators to reduce the cost of airline operations on regional routes and (ii) financial support (viability gap funding or VGF) to meet the gap, if any, between the cost of airline operations and expected revenues on such routes.
However, there is no mention of where the funding for VGF is going to come from. This leaves a doubt in the minds of consumers and travellers that eventually the burden may be transferred onto them.
The National Civil Aviation Policy has proposed to allow domestic airlines to undertake ground handling by themselves and deploy private security staff for non-core security duties at the airports. However, it is silent on the provisions regarding administration and governance of such personnel.
Increasing the FDI limit for airlines (including regional operators for whom FDI of 49 per cent was only allowed last November) to 100 per cent, with automatic approvals for foreign ownership up to 49 per cent, sounds good on the face of it.
But it will not bring new foreign players in the fray. This is because global airline players continue to be hemmed in by the 49 per cent ownership limit set by the United Progressive Alliance government in 2012, following which ventures such as AirAsia India and Vistara took off. This is because despite 100 per cent FDI being allowed, securing a scheduled operator permit still requires an airline´s chairman and at least two-thirds of its directors to be Indian citizens, and substantial ownership and effective control to be vested in Indian nationals. It then begs the question as to why would a foreign airline invest so much in a JV when it can have very limited management control.
Issues like ´opaqueness´ in working of DGCA and the promise to usher in transparency in the body in the interest of passenger safety and security has not been addressed in the National Civil Aviation Policy. The government should make DGCA more transparent, responsive and accountable. Even the BCAS is in the process of developing various security protocols and standards to ensure safety in the skies.
What are the further steps that the Centre can take to uplift the prospects of this sector?
The steps that should be taken in order to see a boost in the aviation industry can be primarily divided into three reforms:
The amount of taxes charged by the government on sales of air tickets is very high. Nowhere in the world are the taxes charged higher than the actual fare given by the airlines. The cost of aviation turbine fuel in India is the highest in the world, which plays a major role in the bottom line of an airline company. Aviation must be given infrastructure status and instead of charging taxes they must follow the concept of royalty which has been implemented successfully in the telecom industry.
To encourage and expect foreign investors to invest in this industry, there must be favourable laws and there must be clarity when it comes to law. Uncertainty in policy and laws leads to reduction in foreign investment.
Independent bodies have to be set up to keep a check, so that privatisation of airports does not result in increase in cost of user facilities at the airport. The consumer must not be overcharged for the tickets.
We have given the above suggestions to various airlines and we have played an active role in assisting the Government of India for implementing this new Aviation Policy.
(Nirali Shah, Anish Shetty and Saptashya Roychaudhary, Associates, Singhania Associates, also contributed to this interview).