Column: Are we ready for take off

Updated: Mar 24 2014, 08:59am hrs
India could become the third-largest aviation market by 2020 and the largest by 2030, as per the recently-released FICCI-KPMG India Aviation Report.

According to the report, India is blessed with a great geographic location, a large upwardly mobile middle-class and immense tourism opportunities. India is amongst the top 10 in the aviation world with a market size of around $16 billion. But this is just the proverbial tip of the iceberg, with nearly 99.5% of Indias population yet to see the insides of an aircraft.

The key issues include the industrys low cost-competitiveness, excessive taxation, intrusive government control and inadequate regional connectivity. There is a widespread perception within the bureaucracy and the political class that aviation is a luxury service and hence deserves no special attention. What gives us optimism is that most of Indias challenges are related to policies, procedures, regulations, taxation and perceptions. These are man-made problems and, hence, surmountable.

The last few years have seen a series of far-reaching reforms. Global routes were opened to private Indian carriers, many leading Indian airports were privatised, FDI was permitted in Indian carriers, direct import of ATF was allowed, external commercial borrowing was permitted for airlines and maintenance repairs and overhaul (MRO), import duty on aircraft parts was abolished (up to one year from date of import), the Aircraft Acquisition Committee was abolished and 24x7 Customs operations were started at cargo terminals at leading airports.

In the recent past, the government has decided to allow entry of A380s, provide visa on arrival for tourists from many countries, corporatise Air Navigation Services , abolish the discriminatory 5/20 Rule, create an independent Civil Aviation Authority, etc. These are welcome developments. Some of these decisions need to be ratified by the Cabinet and Parliament and hence may require some more time. A lot more needs to be done.

Perhaps the biggest hindrance to growth is the high taxes on ATF. India sells one of the costliest ATF in the world, nearly 60% costlier than competing nations in the Middle East and ASEAN regions. ATF accounts for nearly half of the operating cost of Indian carriers. This is why a Delhi-Cochin or a Chennai-Srinagar flight ticket is, at times, costlier than a three day all-expense paid vacation in Thailand and Malaysia. No wonder, foreign tourist arrivals in India are an abysmal 7 million per year. Singapore gets 14 million, Malaysia 24 million and China 58 million. India should on a par with China, given that it has many places of historical, cultural and natural interest.

The irony is that the common man, in whose name high taxes are imposed on ATF, is prevented from flying due to high travel costs! Some argue that a discounted tax rate for ATF may be unfair given that buses, autos and scooters pay the same tax rate on fuel. This argument misses the logic that as against buses, autos and scooters, aircraft can fly across state and national boundaries! Aircrafts will refuel wherever they enjoy a tax arbitrage.

The progressive states in eastern and central India have perhaps understood this and have reduced ATF sales tax to 4-5%. West Bengal is the only state in the country to have declared 0% sales tax on ATF at its regional airports; and 15% sales tax on ATF (on incremental flights) at capital Kolkata. Gradually refuelling of aircraft will shift to these states and the leading metros will be forced to match these rates. We may have wasted another three to four years of growth opportunities in this process.

The most significant development in the Indian domestic market is the growing dominance of the low-cost carrier model, which in FY13 accounted for 70% of the domestic capacity. LCCs have driven the growth in aviation and tourism through low fares, introduction of regional routes and periodic discount offers. Full service carriers plan to shift more seats to their low cost offerings. Indian carriers plan to double their fleet size by 2020 to around 800 crafts.

The next generation of growth in India will be triggered by regional airports. At present, there are around 450 used, unused and abandoned airports and airstrips spread all over the country. The first step involves development of a concept plan of a no-frills airport (NFA) by MoCA and its approval by DGCA.

An NFA would have no luxuries associated with metro airportsviz air-conditioning, baggage carousels, meet-and-greet areas, pre-check-in waiting area, x-ray machines, ATC tower, a large security contingent and an arrival lounge, etc. It would be more an upgraded railway station than a downgraded metro airport. The focus would be to provide a clean, hygienic and functional terminal at the lowest possible cost. As traffic increases, the terminal can be upgraded.

The other initiatives to promote NFAs involve relaxing onerous regulations regarding ATC and security, allowing domestic code sharing, awarding transferable development rights (TDR) for NFA developers, providing free utilities and connecting infrastructure by the local government, etc. The proposed Essential Air Services Fund (EASF) by MoCA needs to be set up immediately to provide seed-funding for NFAs and airlines operating on regional routes.

Indias current MRO market size is estimated to be around $700 million. By 2020, the total Indian fleet would double in number, making a strong domestic MRO industry a critical need. According to industry sources, merely 5-10% of the MRO work for domestic scheduled carriers is carried out in India and most of the maintenance activities are outsourced to third-party service providers outside the country. An inter-ministerial task force on MRO needs to be formed immediately to check the outflow of MRO revenue, foreign exchange and jobs.

The report points out that development of air transportation services and socio-economic development are highly correlated. According to the International Civil Aviation Organization (ICAO), an additional dollar invested in air transport leads to a benefit of around three dollars to the local economy. Moreover, every additional job created in the sector results in creation of over six new jobs in the local economy.

The growth in Indian aviation has created significant employment opportunities. The need to strengthen the human resource development infrastructure is immediate. As per KPMG estimates, the total manpower requirement of airlines is estimated to rise from 62,000 in FY11 to 1,17,000 by FY17. It is estimated that Indian aviation, overall, will need about 3,50,000 new employees to facilitate growth in the next decade. Shortfalls in skilled labour could create safety issues and may see staff salaries rise, hurting Indias cost competitiveness.

The recent US Federal Aviation Administration downgrade of India to Category 2 has been a dark episode in Indian aviation history. This is evidence of our low focus on talent development and safety issues. MoCA, DGCA and the industry have to work together on a war footing to ensure that Indias Category 1 status is restored at the earliest.

We need to broaden the base of domestic flyers through limited period tax-holidays, monetary support to regional carriers and infrastructural support to NFAs. That may help create a revolution similar to the one in Indian telecom industry, making flying affordable to the aam aadmi.

With contributions from Gautam Arjun, senior consultant, Aerospace and Defence, KPMG in India.

Amber Dubey

The author is partner and India Head of Aerospace and Defence at

KPMG. Views are personal