New Government, New Hopes

May 16, 2014, was a day that surprised some but impressed all; it marked a historic day on which the “Modi Wave” reached a crescendo with a majority for the Bharatiya Janata Party (BJP). Predicated to this triumph for Modi are the hopes of a nation that has so far been afflicted by a “policy paralysis” for quite a while now. An expectant populace is looking to the new dispensation with hope of ‘good times’ ahead. As far as the industry is concerned, perhaps the most anxious sector is civil aviation which awaits, with bated breath, the initiatives from the new government. Despite predictions of the Indian civil aviation becoming the third largest globally by 2020, the current disarray in the industry is evident from the combined losses of $1.2 billion ( Rs. 7,200 crore) of the Indian carriers in 2013-14. Aircraft operators other than airlines are not much better off financially and their gripes about the environment in which they operate are loud and frequent. The BJP’s election manifesto contained little related to the industry apart from the promise of modernising operational airports and building new ones connecting smaller cities.

The President’s address to the joint session of Parliament mentioned civil aviation briefly. He stated, “Low-cost airports will be developed to promote air connectivity to smaller towns.” Both the manifesto and the President’s speech marginalised the civil aviation sector. So what should the industry expect from the Minister of Civil Aviation, P. Ashok Gajapathi Raju, to bring the much needed succour to a vital but neglected sector?

Immediate Concerns

One major problem afflicting the airlines, the most significant stakeholder in civil aviation, is the price of Aviation Turbine Fuel (ATF) which constitutes 50 per cent of their operating costs. The price of ATF in India is 65 per cent higher than the global average and the reason is a myopic approach to taxation both by the Centre and the state governments. Foreign airlines refuelling outside India have an advantage over Indian carriers. Also, Indian airlines have to pay import duty for the residual fuel in their tanks for fuel uplifted abroad. This anomaly has not been addressed by the establishment so far and entreaties to classify ATF as ‘declared goods’, have been ignored. Currently, sales tax/VAT on ATF, a state prerogative, varies from four to 33 per cent. Classification as ‘declared goods’ would reduce the sales tax/VAT to four per cent. While resistance to this demand by those States that levy high taxes is understandable, the reluctance of the Central Government to list ATF as ‘declared goods’ is not. So far, this inaction was being seen as part of the overall inertia in policy matters. The industry now looks forward to relief through positive action by the Minister.

The other urgent need is for a robust and objective regulatory apparatus which perceives its role not only as a ‘Regulator’ but also as a ‘Facilitator’ for stakeholders in the civil aviation industry. The current state has almost all airline and airport operators postured in an antagonistic stance against the Directorate General of Civil Aviation (DGCA), which ironically, is a public office to which the public has little access. From CEOs to clerical staff of aviation entities, all have to queue up at desks placed near the reception of the DGCA to face representatives of the various departments. These visits often prove to be futile. If this disposition towards the stakeholders would enhance efficiency of DGCA, it might have been acceptable. However, the ignominy of downgrade by the US Federal Aviation Administration (FAA) of the safety ratings of DGCA is a matter of national shame. 77 of the 88 nations inspected by FAA were placed in Category-1 which included Pakistan. India found itself in Category-2 along with Bangladesh, Barbados, Ghana and Nicaragua.

It is painfully humiliating that the existing regulatory mechanism is neither respectful to the legitimate needs of the civil aviation industry nor is it respected as an organisation that fulfils stipulated tasks. The fault does not lie with individuals in the DGCA as they are capable and willing to work to produce results. However, the evolution of the organisation, undermanning and a bureaucratic approach have led to the present state of affairs. According to Kapil Kaul, CEO, Centre for Asia-Pacific Aviation, “Indian aviation needs a fundamental overhaul across the value chain. We remain overregulated and undermanaged and without transparency. We need to reorient the sector to India’s interest.”

There is a need to revitalise the system by revolutionary changes in the structure, thought process and functioning style of the regulator. This is the time for the new government to bring about the Civil Aviation Authority (CAA) legislation which remained a draft bill during the UPA Government. However, there is high possibility that the CAA will be ‘old wine in a new bottle’. Besides, the financial/administrative empowerment and autonomy that is needed for the CAA to be effective and dynamically responsive to the industry’s needs, the single-most important requirement is to have the organisation headed, not by a bureaucrat, but by a competent professional from the civil aviation industry.

Another issue pertains to the scrapping of the ‘5/20 Rule’. This rule, that inhibits airlines with under five years of existence and less than a 20-aircraft fleet from flying internationally, was a result of lobbying by the established carriers who felt threatened by the new players. Tony Fernandes of AirAsia stated, “India is strategically located. And we can operate flights from the South India within a four-hour circle to destinations in Africa and on the Gulf route such as Doha, Nairobi, Maldives, Karachi, Bangladesh and cities in China. It is bizarre that the government has a regulation in place, which allows only those airlines with five years of operations and a fleet of 20 aircraft to fly international. It does not make sense. Probably Naresh or someone put it down.” (Naresh Goyal is the Chairman of Jet Airways founded in 1993.)

The official line that the underlying concern was air safety is pooh-poohed by the newer airlines, especially since this rule is not applied to foreign airlines flying into India. Removing the rule now will benefit only GoAir as the other airlines meet the requirements. However, the new start-ups, Air Costa, AirAsia India and Tata-Singapore Airlines, will stand to benefit should they contemplate international operations. The NDA Government needs to take decisive action soon.

Maintenance, repair and overhaul (MRO) have the potential for creating jobs, saving foreign exchange and increase in direct tax collections but taxation policy is a major impediment for MROs. Plans by Airbus and Boeing have been doddering due to this reason. Even business aircraft operators have to depend on foreign MROs and that involves higher costs.

Middle-Term Concerns

Airport infrastructure remains an area with no clear policy directives. Past decisions have meandered from government management/ownership model to privatisation, intermediately flirting with the publice-private partnership paradigm. Scheduled operations are concentrated largely at the metros with only a small proportion of their capacity being deployed to Tier-II and Tier-III cities. Although regional air connectivity has attracted government attention in the past, a focused policy approach needs to be put into place. What the Minister needs to address is the modernisation of existing airports, development of the non-operational ones and creation of new airports in small cities. The much-delayed privatisation of six major airports at Chennai, Kolkata, Lucknow, Guwahati, Jaipur and Ahmedabad needs to be activated on priority. However, the runaway tariffs resulting from privatisation and the agreements favouring private partners need to be heeded in the drafting of future agreements.

Another aspect that has so far not been given due attention is the development of low-cost airports. The development by the Airports Authority of India (AAI) of 50 new low-cost airports and eight Greenfield airports has been talked about in the past. What the Minister needs to keep in mind is the underlying strand of ‘low-cost’. The privatisation of airports so far has been criticised as adding to the cost of air travel. If civil aviation is to be expanded to all corners of the country, this factor will be an important consideration in airport infrastructure development. Amber Dubey of KPMG is optimistic and says, “The next phase of growth of Indian aviation will be driven by no-frills airports. The new government should focus on enhancing regional connectivity to have an equitable development of air connectivity across the country.”

As for international bilateral seat arrangements, decisions must be taken objectively based on national strategic interests. Other essential criteria are progressive enhancement of international traffic into and out of India, inviting investments and generating employment. Any initiative by the Minister on this front needs to be transparent and with the participation of stakeholders. Some of the past decisions on bilateral air service agreements may need to be revisited to undo the damage to national interest.

A report prepared jointly by Deloitte and the American Chamber of Commerce has strongly recommended that an ‘Open Skies’ Policy be put into place instead of the existing system of bilateral services agreements, whereby airlines get flying rights based on reciprocity and demand assessment determined by the government. Indian airlines are restricted in their international operations. More than two-thirds of international destinations are connected to Indian ones by other global carriers. Some aviation experts feel that there should not be rigid rules for seat allocation and that Indian airlines will benefit from an ‘Open Skies’ Policy.

Flexible Use of Airspace Policy needs the attention of the Minister. Sharing of airspace and airports between civil and military aviation has been an area of disquiet. It is hoped that with a strong Central Government, issues involving two different Ministries, Defence and Civil Aviation, would be resolved amicably.

Long-Term Anxieties

Soon after the NDA Government took over, the Indian Commercial Pilots Association wrote to the Prime Minister suggesting that Air India be privatised as it felt that decisions by the UPA Government had ruined the national carrier. Two options appear possible. The first is placing great faith in Modi’s charisma, administrative acumen and personal honesty to turn round the fortunes of Air India through personal involvement. The other is privatising it in the interest of efficiency and profitability. The first option is fraught with high risk of failure as the work culture in Air India is beyond redemption. In the second option, there will be resistance to converting the behemoth into a private commercial venture. It is doubtful if MoCA will have the will to combat the unions. However, privatisation would be the better option.

Business aviation continues to bleed despite a demand and need for more business aircraft. Due to the high taxes imposed on import of business aircraft, import dwindled to just seven last year. The potential is to grow three times from the present strength of about 680 to about 2,000 in the year 2020, provided the policy framework is conducive to growth. Some other long-term possibilities are the establishment of a task force to fast-track long-pending reforms in air cargo, general aviation, ground handling, flying training and aviation education.

Conclusion

In June this year, Akbar Al Baker, CEO of Qatar Airways, President of the 70th International Air and Transport Association (IATA) Assembly held at Doha, appealed to the Indian Government to slash taxes, restrain private airport operators from levying high charges and relax excessive regulations in the aviation industry to maximise India’s full potential to generate economic growth. The “potential” is there but unless corrective steps are taken by the Minister, the march ahead could be as traumatic as in the past decade. Its list of grievances is endless. The foregoing is not a comprehensive and all-inclusive catalogue of all those gripes but if even the above problems can be addressed, the industry will imbibe much needed succour. The civil aviation industry is waiting to see what moves are made in the days ahead as their tone and tenor will set the stage for the next five years.