Low ATF prices and a pro-reform policy could set the stage for future growth
Around seven months ago, the feedback of the aviation industry to the government on its first year’s performance was scathing (‘Engines revving, but yet to take off’, FE, May 26, https://goo.gl/CJo3Pi). Fortunately, the government took the feedback constructively and, within 10 days, RN Choubey, a hard-working, no-nonsense administrator was brought in as the new aviation secretary. By October 2015, the ministry came out with a draft National Civil Aviation Policy (NCAP) which had been pending for decades.
The NCAP has been welcomed by the industry. It sets an ambitious goal of 300 million domestic tickets by 2022, a massive jump from the 80-odd million tickets sold in 2015. The government plans to achieve this by increasing India’s domestic and international connectivity, and reducing the cost of flying.
Overall, 2015 was a good year. Traffic during the January-November period grew to 73 million, a 20.4% growth year-on-year, making India the fastest-growing aviation market in the world. The year will also be remembered for the spectacular revival of SpiceJet from near-death; restoration of India’s category-I status by the US Federal Aviation Administration; continued slide in oil prices; reduction in ATF taxes by many states; and IndiGo placing a headline-grabbing order for 250 aircraft and following it up with a highly-successful IPO.
As India embarks on a high-growth phase, safety and security would be key. 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 New Delhi, and a bus ramming into an aircraft in Kolkata … all in a space of one month. Heads must roll, starting from the top.
The safety watchdog, Directorate General of Civil Aviation (DGCA), needs a strong, reform-oriented director general for an uninterrupted five-year tenure. The person needs to ensure e-governance, transparency, efficiency and minimal harassment of the industry. Currently, the director general post is an ad hoc posting for ministry of civil aviation officials waiting for next assignment.
On January 1, 2015, the price of aviation turbine fuel (ATF) for international and domestic airlines fell to Rs 30 and Rs 40 per litre, respectively. These are still 35% and 80% costlier, respectively, than the global ATF price, which is Rs 20-24 per litre. The government can kick off an aviation revolution if it decides to sell ATF at the global rate for just one year, as an experiment.
The infamous, oligopolistic ‘5/20 Rule’ of 2004 prevents new Indian airlines from flying abroad till they complete five years and have 20 aircraft. Its abolition is long overdue. A simpler approach of 1 year/5 aircraft or 2 years/10 aircraft may adopted, if its outright abolition is politically risky. Linking it to the complicated domestic flying credit system should be avoided.
Most global tourists bypass India for places such as Bali, Phuket and Genting primarily because of reasons such as poor connectivity, visa hassles, safety issues and poor marketing. In 2014, India’s foreign tourist arrival count stood at an abysmal 7.4 million per annum, as compared to Singapore (12 million), Thailand (25 million), Malaysia (27 million) and China (56 million).
Six decades of protection and government interference have made Air India an operational and financial disaster—with accumulated losses of over Rs 40,000 crore and a debt of over Rs 50,000 crore. Late entrants such as Singapore Airlines, Emirates, Qatar and Etihad have left Air India far behind in terms of fleet size, global connectivity, brand value, revenue and profits. One reason was that these city-states had no domestic market to hide behind and had no option but to fight it out in the tough global airline market.
This year is perhaps the best time to bit the bullet and privatise Air India. One way is to lease its assets to an SPV and keep the liabilities in the parent company. The SPV can then sell majority stake to a private entity and give it compete autonomy.
No purely Indian-held airline other than Air India has a wide-body fleet. Our share in the long-haul traffic to and from India is likely to go down. The draft NCAP allows open skies to airlines of countries beyond 5,000 km from India. It should be extended to all countries. It will lead to an increase in inbound traffic, tourism dollars and job creation. Indian airlines, airports, cargo, MRO and ATF industries will all gain.
FDI limit in airlines should be raised to 100%, like in far more risky sectors such as energy and telecommunications. Other sectors within aviation—airports, cargo, MRO, general aviation, etc—allow 74% or 100% FDI. There’s no reason why airlines should be treated as a holy cow.
The Route Dispersal Guidelines (RDG) is an outdated rule that forces Indian carriers to fly to unviable routes. The government should consider a compensation of, say, Rs 2 per available seat kilometres (ASKM) deployed on Cat-IIA routes, through the Regional Connectivity Fund (RCF). It may cost just around R200 crore but may provide welcome relief to the airlines. This can be increased further as the RCF kitty grows.
All future airports should be functional, low-cost and environment-friendly—akin to the ‘Cochin model’. Royalties and other charges on MRO, cargo, ground handling and ATF should be bare minimum, and the real profits should be earned through increased traffic flow and non-aeronautical charges.
Other key imperatives for 2016 include the long-pending hive-off of Air Navigation Services from the Airports Authority of India (AAI); market listing of AAI; fast-tracking of the second airports in Mumbai, Goa, Chennai and Pune; convincing leading states to pro-actively reduce the high VAT on ATF; launch of the Regional Connectivity Scheme; support to helicopters and private jets; and engaging with global aerospace majors to enhance their contribution to the Make-in-India initiative.
Should the Indian aviation industry receive the right policy push, it has the potential to grow by 18-20% continuously for the next four years, giving a massive fillip to investments, tourism and jobs. That may take Indian aviation, currently ranked ninth in the world, to number three by 2020.
(Assisted by S Vasudevan, director, Aerospace and Defence at KPMG in India)
The author is partner & India head of Aerospace and Defence at global consultancy KPMG.
Views are personal