Column: SpiceJet lessons for aviation

By: | Published: January 7, 2015 12:18 AM

Only a telecom-type revolution can help the sick aviation sector

For the Indian aviation sector, 2014 was a year that is best forgotten. It started with the humiliating FAA downgrade of Indian aviation safety to Category-II, and ended with the near-closure of SpiceJet. Airlines continue to make losses while buffaloes roam on the runways. Aviation hubs like the UAE and Singapore, with populations less than that of South Delhi, continue to thrive at our expense.

The good news is we have perhaps reached the nadir. There’s only way we can go from here—up.

Experts have blamed SpiceJet’s mixed aircraft fleet, rapid network expansion, below-cost fares, etc, for its woes. While some of that may be true, the fact remains that most airlines are in distress. Nine airlines have shut shop since the mid-1990s. More may follow.

The problems are systemic—high taxation, high operating costs and low purchasing power of the aam Hindustani—not very different from those that affected mobile telephony during the NDA rule in the late-1990s. What Indian aviation needs is a ten-year tax holiday. The growth in investments, jobs, tourism, etc, and taxes from downstream consumption will more than compensate for the taxes foregone. Policymakers in the UAE and Singapore understand this well. Why not us?

Aviation Turbine Fuel (ATF) in India is nearly 60% costlier than that in competing hubs like the Middle East and South East Asia. Annual per capita income in India is $1,600, way below the $44,000 in the UAE, and the $55,000 in Singapore. Crude oil prices crashed from $116 in June 2014 to $57 in December 2014. ATF prices have only come down by 26% in the same period. No wonder, nearly 98% of Indians haven’t seen the insides of an aircraft.

Delhi and Maharashtra account for over 40% of domestic traffic and are both ruled by the NDA (Delhi is under direct rule of the Centre at present). If they reduce tax on ATF to below 4%, other states will be forced to follow suit. Else, the Union Cabinet should simply notify ATF as a ‘declared good’, limiting the sales tax on it to a maximum of 4%. Right now, only ATF sold to aircraft weighing 40 tonnes or less is a ‘declared good’. Given the likely opposition, this reform may need to be driven by the PMO.

If the 300-million-strong Indian middle-class just takes one flight per person per annum, we are looking at 300 million domestic travellers, nearly 5 times the 65 million-odd air-tickets sold in 2014. That is the opportunity India is missing out on.

The PMO should review the practice of posting non-aviation personnel at the helm of aviation entities like the ministry of civil aviation (MoCA), the Directorate General of Civil Aviation (DGCA), Airports Economic Regulatory Authority, Air India, Airports Authority of India (AAI), etc. If professionals like Nandan Nilekani and Raghuram Rajan can be posted as heads of sensitive entities like the UIDAI and RBI, why can’t the same be done in a highly technical sector like aviation?

IAS, IPS and IRS officers posted in aviation entities must undergo a mandatory two-year training in private airlines, airports, maintenance, repair and overhaul (MRO) and manufacturing before taking charge. Interestingly, most developed countries, with larger aviation industries, do not have a civil aviation ministry in the first place.

The MoCA should shift its focus from Air India (AI) to India itself. Auctioning off AI would save over R3,500 crore per annum—more than enough to compensate states for the ATF taxes foregone. But then, the private owners of AI may not be as servile towards the politicians and the babu-brigade. That’s what makes it tough to let go.

Interactions between the industry and DGCA should be nearly 90% online. DGCA should clear all licences and permits within 90 days, except in doubtful cases. That may leave DGCA with more time to do real regulatory oversight and go hard after defaulters. Selective leaks by DGCA to the media should be banned.

Press reports indicate that the MoCA is intent on fixing upper and lower caps for airfare. Airfare regulation also means that the

MoCA shall ensure 16% post-tax return on equity to airlines, irrespective of traffic volume, a la the airport sector. Equally ill-advised is the idea to restrict new flights by foreign carriers to six airports only. The ministry will do well to focus on reforms than interfering with market forces.

With the type of growth projected in its civil and military aircraft fleet, India is an ideal location for aerospace manufacturing. Local manufacturing will reduce aircraft leasing and maintenance cost, like in the case of Airbus A-320s assembled in China for their airlines.

The government is working hard to improve India’s ease-of-doing-business rank from a lowly 142 to the top 50. Many states like Madhya Pradesh, Gujarat, Andhra Pradesh, etc, are coming up with their aerospace manufacturing policies.

The government should set up an independent Aeronautics Commission, in line with the ones created for atomic energy and space. The Commission should be headed by a technical expert and report directly to the PM.

Aviation should be given infrastructure status. External commercial borrowing should be made unlimited. Like aerospace manufacturing, aviation should be allowed 100% FDI. If greenfield airports, general aviation, MRO, etc, can have 100% FDI, why should airlines be treated like a ‘holy cow’?

Tax-free status and zero harassment by Customs may ensure that Indian carriers go for MRO in India, instead of flying empty aircraft abroad, paying in foreign exchange and helping grow the GDP of our competing countries.

Airport charges and royalties need to be rationalised in line with global norms. Air Navigation Services (ANS) need to be hived off from the AAI and converted into a not-for-profit entity, reducing navigation charges in India by at least R1,000 crore. The civil aviation and defence ministries should collaborate towards flexible use of airspace (FUA) to reduce flight distance and, hence, ATF wastage.

The 5/20 rule and Route Dispersal Guidelines need to be abolished. Air connectivity with Tier 2/3 areas should be funded by the Essential Air Services Fund (EASF). Thanks to the land acquisition Ordinance, new airports, especially at Navi Mumbai, Mopa and Chennai, have been announced and their construction should be hastened.

The PMO should facilitate a well-informed debate on the need to have ‘Open Skies’ in India for an experimental 5-year period, with all global airlines free to land any number of aircraft anywhere in India. Our abysmally low tourist arrivals—6.8 million versus the 15.6 million in the small island of Singapore—may improve significantly, subject to other tourism-friendly reforms.

Rapid growth of the helicopter network for tourism, corporate travel and internal security would bring in more traffic. Reforms are also overdue in airline bankruptcy protection, code-shares, air-cargo, private jets and aviation training. Stamping of boarding passes and hand baggage tags, 100% frisking, pre-boarding check by CISF, etc, are unique Made-in-India procedures that need to be junked immediately.

2015 is a watershed year for Indian aviation. The growing economy and low oil prices are an ideal launch-pad. Only a telecom-type revolution, minus the associated controversies, can pull Indian aviation out of coma. Every day counts!

Assisted by S Vasudevan, Associate Director, Aerospace and Defence, KPMG in India

The author is Partner and India Head of Aerospace and Defence, KPMG. Views are personal

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