Budget 2022 expectations for aviation sector: Accelerating aviation financing, feasible support packages & more

The pandemic has affected the Indian operators severely and the industry continues to grapple with the disruption of service that is caused by it.

Investment of up to $6.5b is expected in airports by 2023, with AAI taking the necessary steps in terms of operationalization of airports under PPP model and committing to an investment of approx. INR 20,000 crore in the upgradation and expansion of existing airports.
Investment of up to $6.5b is expected in airports by 2023, with AAI taking the necessary steps in terms of operationalization of airports under PPP model and committing to an investment of approx. INR 20,000 crore in the upgradation and expansion of existing airports.
  • By Neha Singh

The Indian aviation sector has been continually showcasing immense potential and growth prospects. Despite the hiatus caused by the pandemic, the sector continues to demonstrate some strong indicators of growth such as passenger load factor and traffic, capacity expansion in terms of operationalization of more airports, monetization in the form of PPP models, incremental cargo business, strong aircraft purchase order, competitive leasing platform in the form of GIFT- IFSC, strong and growing MRO sector, disinvestment of Air India etc. 

India is the 10th largest market with a market size of about $16b and constantly increasing. Multiple infrastructure plans have been initiated by the government to prepare for the capacity expansion. Investment of up to $6.5b is expected in airports by 2023, with AAI taking the necessary steps in terms of operationalization of airports under PPP model and committing to an investment of approx. INR 20,000 crore in the upgradation and expansion of existing airports.

Some of the expectations of the aviation sector in India may include:

Identify drivers for accelerating aviation financing through IFSC

The tax incentives provided for aircraft leasing and financing companies through the GIFT IFSC in the form of no income tax for any 10 consecutive years (out of the first 15 years of operation), no capital gains tax on disposal of aircraft, effectively no MAT, tax exemption on payments made to foreign lessors by an IFSC entity, no customs duty on import by a scheduled operator, no WHT on interest payment, etc., makes the platform very competitive and in certain aspects better than the traditional benefits provided by the Irish model.  

Lessors have started setting up shop at the GIFT IFSC, however, the participation is primarily driven by small, domestic leasing and financing transactions, which could partly be attributed to the pandemic and the looming uncertainty. The international lessors are still closely evaluating the IFSC model and probably looking for something more from the government in the form of a government backed aviation fund or some other alternative form of public intervention/ support. Another important player who may not have been directly incentivized by the GIFT IFSC is the lessee/ operator, and a closer look at how their position can be leveraged to bring more investment into the IFSC seems imperative.

Explore feasible support packages for the pandemic-stricken industry

The pandemic has affected the Indian operators severely and the industry continues to grapple with the disruption of service that is caused by it. The combined loss of Indian operators in the last two fiscal years would be close to $8b.

Multiple countries like Korea, USA, France, Netherlands, Japan, Germany and others provided fiscal support for the continued operation of their carriers and so employment and business could be preserved. Similar measures need to be taken by the government of India, particularly keeping in mind the fine balance of the Indian aviation sector (still recovering from the recent loss of a major airline). Measures in the form of loans and government guarantees for commercial loans or other support in the form of tax deferral or benefits in the form of deferral or holiday in payment of airport landing and parking charges or measures towards recapitalization could be a much-needed breather for the aviation sector.

Enhance tax incentives for different components of the aviation ecosystem

Given the centrality of aviation infrastructure to India’s economic growth, the government must closely look at supporting different components beyond the airline, aircraft, and airports. This may include a further reduction in import duty (and VAT) on ATF, incentives for setting up flight training academies and other organizations contributing to aviation specific skilling etc. would be a welcome and a needed step on a more macro level.

Ramp up monetization for productive deployment within aviation

Monetization of airports under the PPP model and raising funds to build more airports is indeed a very positive step by the government. More such schemes will need to be put in place and private participation incentivized and where possible supported by government backed funds and instruments. 

In a related vein, while the successful disinvestment of Air India is an encouraging step, the aim would now be to monetize the subsidiary companies of Air India which have been put under AI Asset Holding Company (which holds approx. INR45,000 cr of AI’s debt). Effective privatization of Air India Engineering Services Ltd., and Alliance Air and monetization of immovable properties and other non-core assets could to a large extent set off Air India’s debt. Disinvestment plans for Pawan Hans should also remain in focus.

Make MRO investments more attractive

Some of the measures rolled out during the last budget were extremely necessary for the MRO sector. Measures such as no royalty to be paid to AAI, lease length for setting up an MRO revised to 30 years (as against 3 to 5 years), GST on repair and maintenance work reduced to 5%, change in the place of supply for b2b MRO services to the location of recipient, indeed have worked for the domestic MRO.

The objective, however, is to attract more investment in the sector which could be addressed by necessary tax incentives or last mile viability funding by the government. 

In conclusion, whilst India has the potential to go from a fleet size of about 700 to 2,350 by the year 2040, enormous budgetary and policy support will need to be provided by the government to ensure rapid capacity expansion, development of a stable network of MROs, adoption of new technologies and promotion of manufacturing (where PLI becomes invaluable). 

(The author of the article specializes in Aviation Leasing and Finance and is an Associate Partner at Link Legal. Views expressed are personal and do not reflect the official position or policy of the Financial Express Online.)

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