Modi government’s triad of reforms for aviation decoded – what they mean for airlines & the sector

June 8, 2020 12:52 PM

While reforms announced by govt will boost the aviation industry's prospects in the long term, there is a need for specific measures to alleviate airlines' woes owing to Covid-19

fiscal 2020 saw passenger traffic slump under the impact of a weak economy and grounding of Jet Airways, and the pandemic taking hold towards the tail end.Fiscal 2020 saw passenger traffic slump under the impact of a weak economy and grounding of Jet Airways, and the pandemic taking hold towards the tail end.

By Jagannarayan Padmanabhan and Meghna Goradia

The triad of reforms announced by the government to lift the domestic aviation sector are good long-term auguries, and will help it get back on its growth trajectory once the Covid-19 pandemic eases. In the decade through fiscal 2019, India was among the fastest-growing aviation markets with a compound annual growth rate of more than 11%. However, fiscal 2020 saw passenger traffic slump under the impact of a weak economy and grounding of Jet Airways, and the pandemic taking hold towards the tail end.

With Covid-19 afflictions darting up since the start of the current fiscal, revenue loss for the aviation industry was expected to be Rs 24,000–25,000 crore, assuming a complete shutout of business in the first quarter. Now, considering the resumption of domestic flights since May 25, the losses may reduce by about Rs 1,000-1,500 crore – with operations below 30% of capacity.

Airlines will bear 70% of the overall expected revenue loss. Airport operators will have to bear ~20% and airport retailers (including retail, food and beverage, and duty-free) ~7%. These are preliminary estimates and aggregate losses may increase with overall operational capacity hovering at 50-60% for the rest of this fiscal.

The reforms assume importance in this context. Let us take a closer look at each. The first announcement pertains to opening up of the airspace, of which only 60% is utilised at present, with the remaining restricted for defence use. With more airspace available, air routes can be shortened, benefiting airlines and passengers alike by bringing down both travel time and fuel costs. The benefits accruing from these would amount to Rs 1,000 crore a year for the sector.

The second announcement is about accelerating the privatisation of AAI airports. The first round of privatisation in February 2019 had seen six AAI airports – Ahmedabad, Jaipur, Lucknow, Guwahati, Thiruvananthapuram and Mangalore – being auctioned to overwhelming market response, with more than 25 independent bids. The second round, of six more AAI airports, will be taken up as a priority in the next three months. The airports in focus are Trichy, Varanasi, Amritsar, Indore, Bhubaneshwar and Raipur, all of which logged growth of over 20% between fiscals 2014 and 2019. The combined potential investment in these six is expected to be Rs 4,000-6,000 crore. Six airports are due to be privatised in the third round as well.

The first wave of airport privatisation had happened during 2004-05, with Mumbai and Delhi being bid out on a revenue share basis. Given the success of these two airports, private airports have become synonymous with better quality of services, world-class infrastructure, enhanced connectivity and significant growth in air passengers.

The third announcement reiterates the Budget announcement for making India a hub for maintenance, repair and overhaul (MRO). It aims to attract global players to establish facilities in India for engine repair, upscaling of aircraft component repairs, and airframe maintenance. This would help bring down maintenance costs for airlines due to reduced dependency on international MRO hubs.

If anything, the announcements do not include specific measures to alleviate the pain of airlines, which saw their entire fleet being grounded when the lockdown was imposed on March 25, though discussions in the finance minister’s media briefing session do indicate relief measures will be taken up. This becomes a monitorable for how and when the operations of airlines will stabilise.

Jagannarayan Padmanabhan is Director and Meghna Goradia is Manager – Transport & Logistics, CRISIL Infrastructure Advisory

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