Taking Stock

As the curtains for the fifth edition of India Aviation 2016 go up at the Begumpet Airport, Hyderabad, from March 16 to 20, we see that the Indian civil aviation sector is at the cusp of major transformation and is well on course to be among the top three nations in terms of domestic and international passenger traffic, after China and the United States. After turbulent years, the Indian aviation industry is looking up. As per 2015 statistics, about 81.1 million people travelled by air which is expected to go up to a whopping 280 million by 2029, catapulting India to third place in global ranking. As per the International Air Transport Association (IATA), the projections are 360 million passengers by 2034 which is amazing growth and is expected to bring untold benefits to India’s economic development. Presently aviation and aviation-related tourism support over seven million jobs and contributes more than $23 billion to the GDP.

The government is preparing for this growth. The airlines are getting ready to tap this potential. The airports are working to get their act together. The other related players – air cargo, MRO (maintenance, repair and overhaul), ground handling, training, etc – are also catching up. There are positive sentiments, these are positive moves and a positive government and industry which is on course to take-off in the right direction.

Creating an ecosystem

The government is expected to announce the National Civil Aviation Policy soon and for all we know, the announcement could happen at the India Aviation event. The vision of the policy is to create an ecosystem to enable 300 million domestic ticketing by 2022 and 500 million by 2027 and international ticketing to increase to 200 million by 2027. The mission is to provide safe, secure, affordable and sustainable air travel with access to various parts of India and the world.

The government has proposed to promote the growth of Indian aviation sector in a significant manner as the development of this sector has a multiplier effect on the economy. As per an ICAO (International Civil Aviation Organisation) study, the output multiplier and employment multiplier are 3.25 and 6.10 respectively. The aim of the government is to create an ecosystem and a level playing field to various aviation subsectors—airlines; airports; cargo; MRO services; general aviation and business aviation; aerospace manufacturing; skill development, etc.

300 million tickets sale target

The government has proposed to take flying to the masses by making it affordable. The policy says that if every Indian in the middle class income bracket takes just one flight every year, it would result in a sale of 300 million tickets, a big jump from the 70 million domestic tickets sold in 2014-15. This will be possible if the air fare, especially on the regional routes, is brought down to an affordable level. The reduction in costs will require concessions by the stakeholders, primarily the Central and state governments and airports.

Airlines are soaring yet again

The health of the aviation industry is directly related to the health of the airlines in India. Barring IndiGo and GoAir, all other airlines in the recent past have gone through financial crisis, going deeper and deeper in debt with accumulated losses. The combined losses of airlines in India have been pegged at $1.77 billion during fiscal 2013-14 according to data of the Centre for Asia Pacific Aviation (CAPA). The accumulated losses of Indian airlines touched $10.6 billion during the past seven years, with Air India accounting for a major share. Air India is saddled with a debt of Rs. 40,000 crore that includes a long-term loan taken for aircraft purchase and working capital loan. It has accumulated a loss close to Rs. 30,000 crore. However, thanks to the falling prices of aviation turbine fuel (ATF) the airlines have returned to growth and are strategising accordingly to keep the momentum going. Air India too has raked in profits in the quarter gone by.

15 scheduled operators

Presently, there are 15 scheduled operators in the country as per the Directorate General of Civil Aviation (DGCA). Of that, two are cargo operators— Blue Dart Aviation and QuikJet Cargo. Of the remaining 13, there are four regional aviation operators – Air Costa; Air India Regional, Air Pegasus and Turbo Megha Airways. The rest are either full-service carriers—Air India, Jet Airways (Jetlite though has merged, DGCA is showing it as a separate entity) and Vistara; and low-cost airlines—IndiGo, SpiceJet, GoAir, Air India Express and AirAsia India. That is a number which does not reflect India’s size and also the growing aviation sector, but the heartening factor is that these airlines are on an aircraft acquisition spree and are becoming ‘healthy’.

The good news is that IndiGo continues its amazing run, while other airlines are also faring well, coming out of financial mess. The best turnaround of an airline has been that of SpiceJet which gives hopes for airline business. Airlines are building capacities in the hope that passenger/cargo growth is going to grow as per predictions. IndiGo recently announced a record breaking order for 250 Airbus A320neo aircraft. SpiceJet has bounced back with its co-founder Ajay Singh investing and taking over the reins from Kalanithi Maran of Sun Group, to turnaround the company. GoAir had earlier ordered 72 A320neo planes. Regional airline Air Costa has got the no-objection from the government for pan-India operations and it is awaiting delivery of the 50 Embraer E-Jets it had ordered at the Singapore Airshow in 2014. Both the joint ventures of Tata Group – one with Singapore Airlines—Vistara and the other with AirAsia – are in an expansion mode, though the latter has deferred it for a while.

The government is laying emphasis on regional connectivity and it is hoped that we may see some more regional players emerging in the near future. Presently, only the South has regional airlines – Air Costa, Air Pegasus and TruJet (Turbo Megha Airways), with another FlyEasy waiting in the wings to start operations. The north should follow suit.

Airports, big and small on modernisation mode

There are 426 airstrips and airports in India, but not all are operational. The Airports Authority of India (AAI) has 125 airports under its belt and 95 of them are operational with 71 having scheduled operations. The AAI has taken up work in creating/modernising smaller airports which should help in regional connectivity. Though there may be instances of some airports not finding takers, it will have to wait for airlines to turn up which they will, considering that Tier-II and Tier-III are becoming pockets of growth.

The policy states that AAI will take up development of airports as per the following broad framework:

• AAI will take up new greenfield or brownfield airports subject to the following conditions:
  • Project should be financially viable with non-zero IRR (internal rate of return), except for no-frills airports developed under the regional connectivity scheme (RCS).
  • State/Central government will provide VGF (viability gap fund) to AAI if the project is strategically important but financially unviable.
  • Land will be provided free of cost by state government without treating it as equity.
  • Land will include sufficient space on city side for commercial use subject to land use regulations of the state governments.
• In order to fast-track capacity enhancement at the existing airports to meet the demands of increasing traffic and to avoid air congestion, brownfield airport projects as well as expansion projects will be exempted from obtaining environment clearance.
• AAI may be suitably compensated by the Government of India and/or the relevant state government in case a new greenfield airport is approved in future within a 150 km radius of an existing operational AAI airport (not applicable to civil enclaves).
• Alternatively, AAI may be given option to have the right of first refusal or equity participation up to 49 per cent in the new airport at its discretion.
• AAI will continue to modernise existing airports and upgrade quality of services.
• AAI will maintain an ASQ (airport service quality) rating of 4.5 or more across all airports with throughput above 1.5 mppa and ASQ rating of 4.0 or more for the rest.
• AAI will also explore the possibility of giving out operations and maintenance contracts for a cluster of existing and/or new airports.
• AAI airports with throughput above 0.5 mppa will strive to generate non-aeronautical revenue in excess of 35 per cent of the airport’s total revenue.

Air Cargo, key source of revenue

According to market research analysts Frost & Sullivan, air cargo demand in India is expected to boost airfreight market to 2.8 million tonnes by 2018, going by the present compounded annual rate of growth at 5.5 per cent. Most of this growth, however, will benefit foreignowned airlines, rather than domestic carriers. However, with the e-commerce market making impressive gains, the domestic air cargo sector is likely to benefit much more than it has been in the past. E-commerce will drive the domestic air cargo market and airlines have already started working in tandem with this trend.

Keeping the potential in mind, the policy states promotion of air cargo is a key objective of the government, given its importance from a ‘Make in India’, e-commerce and exports perspective. Revenue from air cargo helps airlines subsidize the cost of passenger tickets and take flying to the masses. Air cargo has a high employment potential, especially for semi-skilled workers. Currently air cargo volumes in India are extremely low as compared to other leading countries due to high charges and high turnaround time.

Infrastructure status

The policy states that air cargo will be accorded ‘infrastructure’ status if co-located with an airport and will be eligible for Sec 80IA benefits. The Ministry has constituted the Air Cargo Logistics Promotion Board (ACLPB) to encourase growth in air cargo by way of cost reduction, efficiency improvement and better inter-ministerial coordination. The Board and the industry will submit a detailed action plan after stakeholder consultation, with the objective of reducing dwell time of air cargo from ‘aircraft to truck’ to below 24 hours by December 31, 2016, and to 6 hours by December 31, 2017. The government has said it will streamline and simplify customs procedures.

The government has said it will endeavour that all relevant Central Government authorities are available under one roof, at the cargo terminals. These include Ministry of Finance (customs), Ministry of Environment and Forests (wildlife clearance for handicrafts, etc), Ministry of Chemicals and Fertilisers (drugs controller), Ministry of Animal Husbandry (plant and animal quarantine), etc. Clearances will be given promptly and online after necessary checks.

MRO hub

The MRO business of Indian carriers is alone around Rs. 5,000 crore, 90 per cent of which is currently spent outside India – in Sri Lanka, Singapore, Malaysia, UAE, etc. Given India’s technology base, the government is keen to develop India as an MRO hub in Asia, attracting business from foreign airlines.

The policy states that service tax on output services of MRO will be zero-rated. Aircraft maintenance tools and tool kits will be exempt from customs duty. The exemption shall be given on the basis of list the tools and tool kits notified by the DGCA from time to time. MROs are at present required to provide proof of their requirements of parts, or orders from their client airlines. However, aircraft parts are used exclusively in the aircraft and are designated by part numbers as given by aircraft and related original equipment manufacturers. Therefore, the process for the clearance of the parts shall be simplified by allowing for self-attestation by the MROs. To enable economies of scale, the period for which the spare parts imported by MROs can be stored tax-free shall be extended to three years. Foreign aircraft brought to India for MRO work will be allowed to stay for the entire period of maintenance or up to six months, whichever is lesser, provided it undertakes no commercial flights during the stay period. The aircraft may, however, carry passengers in the flights at the beginning and end of the stay period in India. For stay beyond six months, DGCA’s permission will be required.

General Aviation/Business Aviation needs push

Canadian aerospace and transportation company Bombardierhas in its 2015-24 outlook forecast that South Asia will receive 310 deliveries valued at $12 billion and this number does not reflect the kind of growth one would expect in the region. For instance the ultra high networth individuals in India is on the rise and they seem to be on a buying spree. Credit Suisse Global Wealth report has pegged the ultra high networth individuals in India at 2,080. Besides this surge in purchasing power, the government is also opening up the sector with liberal policies and yet the demand for business jets is not that exciting.

As per the DGCA there are 122 non-scheduled operators as on February 10, 2016. And the number of aircraft, helicopters and hot air balloons registered with DGCA are 353, including nine hot air balloons. Then there are private jets with many individuals but regulatory and licensing issues are bottlenecks which the government will have to clear first.

Skill development a neglected area

There is shortage of pilots and other staff which has been impacting adversely the industry. As per reports only 17 of the 40 approved flying schools were functional in India, to produce about 100 pilots per year. The requirement in India according to the projected growth is for around 900 pilots per year. Similarly, there are 77 institutes for Aircraft Maintenace Engineers (AME) training in India which provide basic training to issue a basic licence. These institutes provide about 5,000 AME graduate trainees per year, many of them go overseas for jobs.

In view of this the government will expedite the commencement of courses by the National Aviation University (NAU). The Ministry will provide full support to the Aerospace and Aviation Sector Skill Council (AASSC) for imparting skills for the growing aerospace and aviation industry in India. The Ministry said it will facilitate greater involvement of private sector in sponsoring aviation institutions, industrial training and R&D projects.

Manufacturing, the new mantra

This is the new dimension that is coming on the aviation radar and thanks to the aggressive push being given by the Modi Government on ‘Make in India’, we see a number of ventures coming up where the foreign OEMs are collaborating with Indian companies, some as defence offsets, some as stand-alone joint ventures and partnerships. Majors such as Airbus, Boeing, Saab, Honeywell and others have started projects which have already been successful and we are going to see more of that happening in the near future.

The policy also mentions how Ministry of Civil Aviation (MoCA) will be a nodal agency for developing commercial aerorelated manufacturing and its ecosystem in India. MoCA and the Ministry of Defence will work together to ensure that commercial aero-manufacturing is covered under defence offsets requirements. The government will negotiate with global OEMs to facilitate establishment of a complete aircraft assembly plant in India along with its ancillary industries. The area where aero-manufacturing takes place will be notified as SEZ. The government will provide fiscal and monetary incentives and fast-track clearances to global OEMs and their ancillary suppliers. In case the cost of ‘Made in India’ aircraft and components work out to be higher than those supplied from their original sources, the government will consider an incentive package to nullify the cost differential.

One can see that a lot of work is going on in the different segments of aviation and it is like a jigsaw puzzle waiting to be completed. And it sure will happen. The momentum is there.