In the past decade, the Indian aviation industry has emerged as the 9th biggest aviation industry in the world. However, high taxes and slow pace of regulatory reforms have adversely impacted the growth of this industry.
In spite of a reduced growth rate over the past few years, the civil aviation industry in India has witnessed buoyancy because of various factors such as Low Cost Carriers (LCCs), modern airports, Foreign Direct Investment (FDI) in domestic airlines, cutting edge information technology (IT) interventions and a growing emphasis on regional connectivity. While our country welcomed two new start-ups, Tata-Air Asia joint venture and Tata-SIA joint venture, it also witnessed the Etihad investment in Jet Airways. The year also marked the controversial grant of nearly three times bilateral traffic rights to Abu Dhabi by the Indian civil aviation ministry.
Air India has also sharply improved its financial position following the restructuring of loans and fresh equity infusion from the Government of India. Modernisation and capacity expansion projects at Kolkata, Chennai, Delhi and Mumbai airports were undertaken. Work at 33 out of 35 non-metro airports under development was completed. According to the Economic Survey 2013-14 tabled in Parliament, the domestic passenger traffic handled at Indian airports has seen a rise of 5.2 per cent in 2013-2014 compared to the previous year and the International passenger traffic has seen a rise of 8.34 per cent compared to the previous year. In terms of cargo, domestic cargo has increased by 7.7 per cent and international cargo has increased by 2.12 per cent.
Performance and Potential
In the past decade, the Indian aviation industry has emerged as the 9th biggest aviation industry in the world. However, high taxes and slow pace of regulatory reforms have adversely impacted the growth of this industry, which is already suffering due to global recession.
Mounting losses of domestic airlines, high cost of aviation turbine fuel, slow growth in passenger traffic, rising air fares, high airport charges, pitiable state of MRO (maintenance, repair and overhaul), high taxes and charges on fuels and ancillary services, demography, regulatory norms are various factors crippling industry growth. India, which is supposed to become the third-biggest aviation market by 2020, has less than 3 per cent of its population choosing this mode of transport as opposed to the United States where the number of tickets sold is thrice its population size. The slow growth rate of passengers can be mainly attributed to ticket prices, which do not fit the Indian middle class pockets but cannot be further lowered due to high operational costs of airlines. The woes of airline carriers can also be attributed to the price of aviation fuel in India, which is already 60 per cent higher than the middle-east as well as ASEAN contemporaries mainly because of Central and State tax regimes. Globally, fuel amounts to 34 per cent of the operating charges but in India it amounts to 45 per cent of the operating charges. Exchange rates also impact the operational cost.
While on the one hand new infrastructure projects are being planned through public private partnerships and FDI norms are getting more investment friendly for both greenfield as well as existing airports, the truth is that 70 per cent of the traffic is generated only from four major airports in India, as the remaining aviation infrastructure goes underutilised or unutilised. Out of the 115 airports run by AAI, only 71 are commercially operational and the rest are not utilised, mainly because they have proved to be economically unviable.
In conclusion, it can be said that in pursuit of becoming a strong aviation player, India perhaps did not put the right emphasis on development of human capital and a robust regulatory framework. The creation of a financially and operationally independent Civil Aviation Authority (CAA) and the National Aviation University (NAU) needs to be undertaken on a war footing.
Liberalisation of the civil aviation sector started in the 90s, thus paving the way for a large number of private entrants. While the government strived to make the aviation climate favourable through a series of policy initiatives, implementation of such policies has always been a challenge.
The air cargo industry has shown tremendous growth in previous years, more so with the advent of e-commerce. However, issues like poor infrastructure, lack of warehouses, delayed policy implementation, slow export-import procedures, restricted custom working hours, etc., are posing serious problems for its accelerated growth. The number of carriers are set to increase which on the one hand is a positive move for the industry but the lowering of entry restrictions could further bleed the air carriers. Even the busiest of routes can handle a maxi¡mum of five carriers with the US having four and Japan having three on its busiest route while India has six on the Delhi-Mumbai route.
Enhancing regional connectivity in Tier-2 and Tier-3 cities is also one of the ambitious plans proposed. In India, air travel is still looked upon as an ´elite´ mode of travel notwithstanding the nearly 400 million strong middle class of our country. There is an urgent need for the government and industry to work together and bring down ticket costs thus making air travel affordable for the major part of the population.
i.The PPP model needs to be encouraged and suitable policies to regulate this arrangement need to be put in place.
ii.A favourable and uncomplicated tax regime needs to be put in place that does not burden the already inflated air fare.
iii.Equivalent distribution of government funds towards development of airport infrastructure, improvement in connecting infrastructure, development of world class air navigation services, infrastructure and other related activities to improve air connectivity.
iv.Long-term capital is likely to be attracted to business models where government policy is clearly articu¡lated and successful implementation does not require navigating bureaucratic complexity.
This article has been authored by Ramesh Vaidyanathan, Managing Partner and Pooja Thacker, Associate, Advaya Legal.