Tool for Economic Growth

In order to reap the country’s demographic dividends, benefits of strategic location and rising urban population, the government must treat the aviation industry as a strategic tool for economic growth rather than as just a golden goose

The air transport industry has a multiplier effect on the economic development of not just one nation but of the entire region. An airport provides connectivity to boost travel and trade, thereby benefiting the industries which are both directly and indirectly related. Air traffic has a strong correlation with economic growth wherein a rise of one per cent in GDP relates to two per cent increase in air traffic in India. As per the International Civil Aviation Organisation (ICAO), every $100 ( Rs. 5,500) spent on air travel, produces benefits worth $325 ( Rs. 17,875) to the economy and generates 100 additional jobs in air transport and 610 related jobs.

Since the beginning of commercial civil aviation in India in December 1912, the air transport industry was completely regulated till the late 1980s with government ownership of airport and airlines. However, policy initiatives in mid-1990s ended government monopoly through an emerging competitive environment. These policy changes altered the aviation landscape permanently with low-cost carriers (LCC) and private airlines dominating the sector. The share of private airlines in domestic passenger traffic is now over 75 per cent.

Regulatory Barriers

However, the aviation policy has a few regulatory inherent barriers which are anti-competitive and restrictive for aspiring entrants. While the regulations governing minimum fleet size and Route Dispersal Guidelines (RDG) for domestic operations act as an entry barrier; the regulations governing minimum fleet and experience for international operations is discriminative as these restrictions are not applicable to foreign carriers who wish to operate in India. On the domestic scene, it also inhibits new entrants thereby strengthening those carriers already established in the field. Notwithstanding the recent policy initiatives, the sector continues to be plagued with systemic problems and requires strategic planning and timebound solutions.

Airport infrastructure is being modernised albeit at less than the desired pace. Despite transfer of operations and management of state-owned Delhi and Mumbai airports to private companies and allowing privately-owned Greenfield airports at Bengaluru, Hyderabad and Kochi, the growth of the Indian aviation industry continues to be subdued by airport and airspace constraints and a high taxation regime. Delhi airport is one of the costliest in the world as it levies high airport charges. To make matters worse, the Airports Economic Regulatory Authority (AERA) recently approved a 346 per cent hike in airport charges ostensibly owing to its commitment of 46 per cent top-line revenue share to the government.

There is a lack of strategic approach to the development of airport infrastructure in the country. Many a time, the decision to build an airport is dictated by political considerations and power equations. Even when a decision is finally taken, it may take decades to complete the airport project. The proposed Navi Mumbai airport is a case in point, wherein although the existing airport is under tremendous stress with 100 per cent capacity utilisation, the proposed new airport continues to remain a distant dream. Similarly, the location of the proposed airport as an alternative to Delhi keeps changing depending upon the power equation between the Central and state governments.

The growth of the air transport industry depends on development of new airports and modernisation of existing airports including high speed road and rail connectivity to the city. So as to enable seamless movement of people and cargo across the nation and beyond, airports must be developed as an integral part of a multi-modal transport hub and integrated with other modes of transportation like rail, road and sea. Since this requires large private sector investments, the government needs to implement the lessons learnt from airport privatisation and formulate policy guidelines to provide a stable and transparent policy framework and taxation regime.

Aviation Intrastructure Development

Thus, there is an urgent need to develop a national strategy for aviation infrastructure development which is above politics or ideology and facilitates the execution of projects in a time-bound manner. The Ministries of Aviation, Home, Commerce, Environment, Finance and Railways must all be involved as key stakeholders along with states in development and execution of this strategic plan. It is important that this task be taken up as a strategic initiative and commissioned in a time-bound manner so as to develop the regional market to feed the metro hubs. However, this requires political will and a sense of urgency similar to that displayed for the Golden Quadrilateral road project.

With the collapse of Kingfisher Airlines, the fleet size in the airline industry has reduced from 340 to 274, translating to a 20 per cent decrease in capacity. Except for the year 2008-09, that witnessed a reduction in passenger traffic by 11 per cent and the year 2011-12 during which there was no growth, domestic passenger traffic has seen an average growth of 17 per cent in the last five years. As per the available data, from January to November 2012, domestic carriers ferried 53.4 million passengers as against 55 million during the corresponding period the previous year. This negative growth of 2.94 per cent was possibly on account of capacity reduction and airfare hike. However, it is estimated that by 2020, the total traffic, both domestic and international, would be three times the current level.

A significant trend in the last few months was the shrinking price differential between LCCs and full service airlines (FSA). It is observed that despite the low price differential, Jet Airways’ (FSA) load factor has been less than that of IndiGo Airlines (LCC). As per the data for November 2012, passenger load factor was between 74 per cent for Jet Airways and 84 per cent for IndiGo. In the prevailing environment of high operating cost and cumulative loss, the viability and sustainability of airlines remains in question. Airlines are the core of the aviation industry and the government needs to urgently bring down the price of aviation turbine fuel (ATF) which is nearly 60 per cent higher than at other major international hub airports in the region. ATF needs to be made available to Indian carriers at a price that is on a par with international benchmark. The government needs to incentivise air connectivity to Tier-II and III cities as also abolish the existing restrictions on the minimum fleet size and years of experience for Indian carriers to fly on international routes.

Consolidation in the airline business was witnessed in the recent past that pushed up air fares. The default by the Kingfisher Airlines to its lessors, oil companies, government, financers, airports and employees along with perceived regulatory inaction by the government, created a crisis of confidence in the industry. The issue assumes international dimensions with International Lease Finance Corporation (ILFC) unable to recover their planes impounded by Indian tax authorities and Germany’s DVB Bank, filing a writ petition in Delhi High Court against the Directorate General of Civil Aviation (DGCA) for not deregistering two of the planes it financed. The Kingfisher saga adversely affected the credibility of both the government as well as the airline. Against this backdrop, Air India’s management issues and financial troubles further compounded the industry’s problems last year. However, improvement in the market share of Air India in recent months is a positive development.