The Reformation

There is unanimity amongst aviation experts and the government about the issues shackling the Indian aviation industry—lack of aviation infrastructure, exorbitant airport charges and high ATF prices due to state tax levies. However, the truth is that there has been lack of strategic planning and policy execution to address these impediments.

The history of the Indian civil aviation industry speaks volumes about vision, priorities and execution capabilities. Back in 1912, India was one of the first few countries to foray into commercial civil aviation. Although the population and economy have grown manifold since then, the country has not been able to realise its rightful place in the world in the domain of civil aviation. While aviation hubs have emerged in the region, both in the Middle East and in South East Asia, despite its strategic location, India has lagged behind primarily due to lack of strategic planning and a reactive approach in formulation and implementation of policies.

Liberalisation Saga

Post-nationalisation in 1953 through to the late 1980s, the Indian air transport industry was highly regulated with airports and airlines being government-owned monopolies. Indian commercial aviation needs were served by two inefficient state-owned carriers. However, in the early 1990s, domestic air services were deregulated as part of the reforms following economic liberalisation. The Air Corporation Act of 1953 was repealed to remove government monopoly and enable private airlines to operate scheduled services. Private operators emerged on the scene and soon cornered 30 per cent domestic market share. Thereafter, along with gross domestic product (GDP) and the middle class, India’s domestic traffic too experienced unprecedented growth. However, following the entry of the first low-cost carrier (LCC) Air Deccan in 2003, the market dynamics changed dramatically. Today, private airlines account for about 75 per cent of the domestic passenger traffic with LCCs such as IndiGo and SpiceJet giving full service airlines (FSAs) a run for their money.

India has been cautiously pursuing liberalisation of its international services. Since 1990, air cargo services have been liberalised. After prolonged negotiations, the first Open Skies Agreement with USA was signed in 2005. In the airport sector, foreign direct investment (FDI) up to 100 per cent has been permitted since the year 2000. The government has been moving towards privatisation of the airport infrastructure, with handing over of the management of Delhi and Mumbai airports and commissioning of Greenfield airports at Bangalore, Hyderabad and Cochin. However, the tardy pace of liberalisation of the aviation sector has inhibited competition between the FSAs and LCCs as also among airports. There are still no low-cost airports for general aviation aircraft.

In the absence of low-cost terminals and low-cost secondary airports, it is difficult for LCCs to sustain the price differential with the FSAs. Now with Kingfisher Airlines grounded and the changed market dynamics with LCCs hiking fares in the face of rising demand, the difference between the fares of FSAs and LCCs have narrowed considerably. The current state of Kingfisher and Air India has destroyed the competitive market, resulting in higher fares and drop in passenger traffic. While current market conditions are beneficial for the LCCs, passengers suffer due to lack of competition.

Till October 2012, foreign airlines were not permitted to invest in Indian carriers. However, the recent policy decision to permit foreign airlines to invest up to 49 per cent in Indian carriers is being projected as a panacea for the current woes of the industry. Although there are unconfirmed reports about the possible stake acquisition in Jet Airways and Spice Jet, it would be naïve to believe that foreign carriers can be enticed to invest in Indian carriers under the prevailing uncertain business and regulatory environment. Besides many of the airlines in the world are struggling to remain afloat. As for Kingfisher, given its debt burden of Rs. 11,000 crore, loss of credibility and licence suspension, it would be a miracle to find an investor among airlines abroad.

Other maladies afflicting the sector are the price of aviation turbine fuel (ATF) and airport charges in India that are among the highest in the world. Compared to foreign airlines, for Indian carriers, fuel accounts for over 40 per cent of operating cost. Also, steep airport tariffs make airports such as Delhi and Mumbai the world’s costliest. The depreciating value of the Indian rupee further compounds the financial mess the airlines are in.

Shortage of parking space and higher lease/tariffs at metro airports is a major disincentive for the growth of general aviation in India. A case in point is the Mumbai International Airport Limited (MIAL) which levies stiff penalties to privately-owned aircraft, registered outside Mumbai, for exceeding the usage of the parking slots beyond pre-determined hours. It is ironical that Mumbai, the financial capital of India, home to India’s biggest industry houses and business magnates, is serviced by an airport which can hardly accommodate 25 privately-owned aircraft. General aviation in India, having its unique requirements and characteristics, has no dedicated regulatory framework or infrastructure. The current regulatory environment has many disincentives for general aviation and invariably their operational and infrastructural needs are often ignored. An important aspect critical to the growth of the aviation industry is the liberalisation of the mindset and thought process. In this context, a very pertinent question is whether the destiny makers and regulators of the air transport industry are in tune with the economic and technological changes? The present lack of credibility resulting from the prolonged Kingfisher saga, wherein the regulator and government’s action/inaction, further accentuates the crisis of confidence in the Indian air transport industry. An analysis of the liberalisation process in India reveals that it is evolutionary and reactive rather than being a well-thought out and proactive policy.