1. 2 years of Modi govt: Second year good for aviation, but more needed says KPMG’s Amber Dubey

2 years of Modi govt: Second year good for aviation, but more needed says KPMG’s Amber Dubey

Second year of Modi Government has been good for aviation, but lot more needs to be done. The anti-competition ‘5/20 Rule’ should have never been there in the first place. NCAP is expected to still retain it, albeit, in a watered down ‘0/20’ version. It effectively means ‘3/20’ since any new airline would typically take 3-4 years to reach a fleet size of 20 aircraft

By: | Updated: May 27, 2016 9:06 AM
Modi government, Narendra Modi, NCAP 2016, aviation sector, air India Second year of Modi Government has been good for aviation, but lot more needs to be done. The anti-competition ‘5/20 Rule’ should have never been there in the first place. NCAP is expected to still retain it, albeit, in a watered down ‘0/20’ version. It effectively means ‘3/20’ since any new airline would typically take 3-4 years to reach a fleet size of 20 aircraft

Exactly twelve months back, the industry feedback on Modi government’s first year in aviation was extremely negative (‘Engines revving, but yet to take off’, Financial Express, May 26, 2015 goo.gl/0WFgJY). Thankfully, the government took the feedback constructively and in less than two weeks, RN Choubey, a hard-working, no-nonsense officer was brought in as the new aviation secretary.

By October 2015, the aviation ministry came up with a comprehensive, forward-looking draft, National Civil Aviation Policy (NCAP). Seven months later, the final NCAP is yet to be released, highlighting a strange lack of alacrity and decisiveness.

FY16 saw spectacular growth

Overall, FY16 was a good year with a growing economy and low airfares, thanks to low price of aviation turbine fuel (ATF), growing aircraft fleet and

cut-throat competition. The year saw restoration of India’s category I status by FAA, a spectacular revival of SpiceJet; IndiGo’s large 250-aircraft order and highly successful IPO.

The average price of ATF in FY16 was around R44.6 per litre, a 30% reduction over the R63.5 per litre in FY15. Domestic passenger throughput in FY16 grew by 21%, the highest in the world. Average seat occupancy in FY16 was a healthy 83%. Most Indian carriers reported higher profits or smaller losses in FY16.

International traffic growth declined from 9% in FY15 to around 7.7% in FY16, due to a sluggish global economy and not-so-great growth in foreign tourist arrivals. The ‘Incredible India’ campaign, visa procedures and the tourism experience in India need improvement.

December 2015 saw a landing aircraft being hit by wild boars in Jabalpur, an engineer getting sucked into a jet engine in Mumbai, a BSF aircraft crashing in Delhi and a bus ramming into an aircraft at Kolkata, all in a space of one month. It was a rude awakening.

NCAP 2016 will catalyse growth

The key pillars of draft the NCAP were connectivity and affordability. It proposed removal of arbitrary restrictions on domestic and international airlines; subsidising no-frills airports and regional connectivity; providing tax-beaks and promoting sub-sectors like maintenance, repair and overhaul (MRO), cargo and general aviation etc. Full ‘open skies’ and removal of the 49% cap on FDI will be considered in 2020.

The anti-competition ‘5/20 Rule’ should have never been there in the first place. NCAP is expected to still retain it, albeit, in a watered down ‘0/20’ version. It effectively means ‘3/20’ since any new airline would typically take 3-4 years to reach a fleet size of 20 aircraft.

The draft NCAP is unfortunately silent on the creation of an independent Civil Aviation Authority (CAA), privatisation of Air India, hiving-off of air navigation services from Airports Authority of India (AAI) and the market listing of AAI and Pawan Hans. Hopefully these reforms will be carried out outside the realm of the NCAP, since these entities are entirely government-owned.

Imperatives for Year 3

With global crude oil prices expected to remain below $50 per barrel, the next three years are critical for India. A sustained 18-20% growth in traffic can help India reach a throughput of around 430-450 million in 2020 and achieve the number-3 slot behind USA and China. Many had sounded dismissive when the author predicted this way back in 2010.

With growth, comes challenges—the biggest being choked airports, safety and security. Peak hour traffic at some leading airports is already clogged-across the airspace, runway, apron, terminal and the city-side. India’s top 20 airports need immediate augmentation, which may require billions of dollars and at least three years from concept to commissioning. New airports are being planned at Navi Mumbai, Mopa, Vizag, Agra, Kannur, Kushinagar, etc, but they need to come up on a war-footing.

Regulatory challenges in airport tariffs have created severe heartburn with most private airports taking the regulator, AERA, to court. Leading private investors are divesting their stakes. The response from global airport developers for Indian greenfield airports has been muted. NCAP’s provision of hybrid-till approach for tariff-fixation and the traffic growth may help improve sentiments.

Despite the fall in ATF prices in India over the last year, they are still a whopping 60-70% higher than global levels. The Modi government can kick off an aviation revolution if it decides to sell ATF on par with the global price for the next three years on an experimental basis. The growth in traffic, tourism and jobs will more than offset the small amounts foregone in terms of customs and excise duties, refinery margins and state taxes.

The route dispersal guideline (RDG) is an outdated rule that forces Indian carriers to fly to unviable routes. It should be abolished and remote areas should be brought under the proposed regional connectivity scheme (RCS).

The defence offsets have failed to create a robust aerospace sector in India. Most global OEMs use their Indian offset partners for low-end, non-critical ‘metal-bashing’ and sub-assemblies. OEMs need to be prompted to build entire platforms and their ecosystem in India. This can happen by way of strategic government-to-government deals than by imposing the 30% offset on each individual defence equipment that we import. FDI in defence should be enhanced to 74% to facilitate real transfer of technology.

The government’s third year is perhaps the perfect time to bite the bullet and privatise Air India. One option is to lease Air India’s aircraft, slots, brand and other assets to an SPV and keep the liabilities in the parent company. The SPV can then sell 51% or 74% stake to a private player. The lease rental paid by the SPV to Air India can help discharge the latter’s huge liabilities.

While the Modi government’s second year has brought hope and cheer, the delay in releasing the NCAP has been a dampener. The performance merits a score of 5 out of 10, a marked improvement over the 2 out of 10 last year.

Indian aviation industry has the potential to be world No 1 in 2030. The foundation has to be laid today. Here’s hoping year 3 turns the tide.

(Assisted by Dr S Vasudevan, director, aerospace and defence, KPMG, India)

The author is partner and India head, aerospace and defence, KPMG

Views are personal.

  1. No Comments.

Go to Top