Airlines - Centres of Attraction

Though the challenges might seem great, there is tremendous opportunity to make India an international travel-and-transit hub, provided government and industry work in unison to make the country’s airports true centres of excellence—attractive to domestic and international airlines and passengers alike

The commercial airline industry in India is a study in contrasts. According to the International Air Transport Association (IATA), growth in the domestic aviation market is the strongest in the world, which has tripled in the past five years. Over the last decade, domestic air traffic quadrupled from 13 million to 52 million yearly, while international traffic more than tripled to 38 million travellers. This decade is also predicted to be as exciting with domestic travellers surging to 160-180 million and international numbers exceeding 80 million. If the forecast is sound, it would be enough to propel India into third spot on the global aviation stage.

And yet, despite these impressive figures, the industry is in a colossal mess. Indian carriers stand to lose an estimated $2.5 billion ( Rs. 12,500 crore) in the financial year ending March 31, 2012. This amounts to around a third of worldwide losses, even though the country’s airlines carry just two per cent of the global traffic. Every airline, with the possible exception of IndiGo, is running at a loss. Their debts are crippling. Kingfisher Airlines is just managing to keep its head above water. As for Air India, government largesse at the cost of the long-suffering taxpayer continues to preserve it on its profligate path, but for how long?

Big Growth

The problems afflicting the airline industry seem grave but the heartening aspect is that all indicators are favourable for continued growth. A burgeoning middle class with higher discretionary incomes is eager to exchange the rigours of rail and road travel for the luxury of flying. Much of the current passenger traffic originates in the metros and larger cities. However, as the benefits of an expanding economy touches more distant regions, there is growing demand for aviation services from smaller cities, and aviation penetration is steadily rising. Business travel is also increasing. Since India is located at the geographical crossroads, it attracts a great deal of international traffic as well.

India has bilateral air services agreements with 108 countries and 87 foreign airlines already operate to various destinations in India. Five Indian carriers fly to 40 countries. Air India has been flying overseas for decades, and is still the largest Indian carrier in the international market with 38 per cent seat share. Private carriers got into the act only from 2004 and are steadily improving their market share. However, they mainly frequent tried-and-tested routes rather than venturing to explore the potential of new destinations. Their international expansion is also stymied by the government’s skewed allocation of traffic rights designed to protect Air India. Since Air India itself has limited capability to operate new routes, the only winners, it appears, are the foreign airlines.

The Hub of the Matter

Indian businesses are increasingly plugging in to the global economy and thriving on rapid travel between domestic economic centres and their overseas trading partners. But international traffic needs to be attracted by the availability of good transit hubs. And hubs do not just happen, they must be carefully crafted.

A good aviation hub should be capable of all-weather operations. It should have ample parking bays and should facilitate smooth and speedy processing of aircraft, passengers and baggage. Without unnecessary expensive infrastructure it should have good functional efficiency. The airport management should have a strong entrepreneurial outlook and the ability to generate revenue and keep the hub viable without making passengers feel the pinch. Airports have a range of non-aeronautical revenue options to set their cash registers ringing. What better way to make travellers happy than by attractive shopping facilities and well-appointed food courts? For passengers who wish to sally forth into the city before catching a connecting flight, there should be good airport transit services—road, rail or metro. At present, only the country’s largest airports meet the definition of an aviation hub. However, they are vastly inadequate to meet anticipated domestic and international traffic. Other airports too need to be brought up to the mark so as to persuade transit traffic to avoid the congested metros.

The government’s role in making the country an aviation hub cannot be overstated. Only the government commands the massive resources needed to improve airport infrastructure and air traffic management capability. It would be churlish to deny the sterling effort put in by the government and the Airports Authority of India (AAI) to improve facilities in the metro and 35 important non-metro airports. But why do the authorities always seem to be playing catch-up with past demand, rather than taking a long-term view? Off-and-on hopes are raised of 500 airports by 2020, but the political will to make things happen in the face of local opposition appears lacking.

It is also the government that fixes many input prices through taxes and fees. An important characteristic of the airport business is that an increase in the demand for flights from a particular airport increases the demand for related goods and services and rental property at that airport, thus putting it on the path to economic viability. The airport makes money from the services it provides to transit passengers and to the airlines that bring them. The city where the airport is located benefits because the increased transit traffic justifies more direct flights to a range of destinations.

Increasing flight traffic, not charges, is the only sustainable way to improve airport utilisation and revenues. Yet the authorities seem to prefer soaking the airlines via high airport charges and taxes. An international airline doing preliminary planning for a route, say between Europe and Australia, may survey a range of options such as Dubai, Mumbai, Chennai, Colombo and Singapore as a transit halt. It will probably choose the airport with the best facilities and the lowest charges. Currently, just 7.5 per cent of the passengers using Delhi are in transit, although the airport hopes to increase this to over 25 per cent within five years. In contrast, perhaps half the passengers at airports in Singapore and Dubai are in transit, contributing 30 per cent to the total airport sales. Recently, the AAI, which operates 125 airports (86 operational), filed a tariff proposal with the Airport Economic Regulatory Authority (AERA), for an increase in airport charges ranging from 100 to 400 per cent. Like the proposed hike of airport charges through a user development fee (UDF) at Delhi, such moves are counterproductive. India could well find itself priced out of consideration as an international transit hub. Already, leading airlines like Deutsche Lufthansa, KLM Royal Dutch Airlines, British Airways and Air France-KLM, are threatening to reduce or cease services out of Delhi airport citing high tariffs. Last year, AirAsia pulled out of Hyderabad airport because of excessive fees.