Jan-Jul 2018

Fly, Nation’s Citizen

Jayant Sinha, Honourable Minister of State for Civil Aviation, visited the Indian School of Business, Mohali campus, as part of the ISB Leadership Summit in September 2017. Professor Siddharth Shekhar Singh, Associate Professor of Marketing and Associate Dean, Research Centres and Institutes Outreach and Engagement at the ISB, caught up with Mr Sinha during his visit to learn more about the government’s exciting vision for the aviation sector. Edited excerpts from the conversation are below.

Siddharth Shekhar Singh: Welcome to ISB, Mr Sinha. We would like to understand your perspective on a few issues regarding the Civil Aviation Ministry, starting with Air India, which has been in the red and in trouble for a long time. What are your short-term, medium-term and long-term goals for Air India? 

Jayant Sinha: As you know, the strategic disinvestment process for Air India is underway. The cabinet has taken an in-principle decision in favour of strategic disinvestment, and the Cabinet Committee for Economic Affairs has created a mechanism to ensure that the processes move forward smoothly. We are at the stage of appointing a transactional advisor, who will go through and speak to potential bidders, and provide them all the information that they need to put their bids together. Obviously, we will have to see the results of the process. But the government is hoping to bring this to a successful conclusion relatively soon.

How has the experience been with regional connectivity through UDAN? 

The acronym UDAN stands for Ude Desh Ka Aam Nagarik. 1 We had a successful roll-out of this regional connectivity scheme. When we inaugurated UDAN in Shimla, the Prime Minister said that our aim is to get people wearing chappals or slippers to travel in an airplane. If you look at most developed countries, flying is very affordable and convenient. It is something that everybody does. The goal with UDAN is to make flying affordable and to ensure that tier 3 and tier 4 towns that are not connected right now are connected to the aviation network.

In 75 years of civil aviation in India, we had only 75 operational airports. Through the bidding for UDAN, we have been able to add 30 additional airports to the aviation network in one year.

Now the reason UDAN has been so successful is because we have thought through very carefully from the point of view of an airline what is going to make it attractive for them to set up flights in underserved cities. These are not all small towns. Ludhiana, Jalandhar, Gwalior, Kanpur, Jamshedpur and Mysore are the kinds of towns we are connecting through UDAN. In any other country in the world, they would have 20, 30 or 50 flights a day. We are talking about adding a flight or two a day to these large cities. Kanpur is a city of about three million people. It did not have any flight service. We had to create an appropriate policy package that would motivate airlines to add flights in these cities. That is what we have done.

The policy package operates at multiple levels. First, we have the support of the state governments. And because we have the support of the state governments, we have reduced taxes on aviation turbine fuel in these UDAN airports from typically 30% to 40% to just 3%. So if you refuel in Mysore, you are going to pay 3% in taxes.

Prior to UDAN, the top eight airports accounted for some 60% or 70% of all traffic in India and those connections were still growing very strong. In other words, an airline found that it was more profitable to add a flight from Delhi to Bangalore than to add a flight from Delhi to Kanpur. We had to change the playing field in such a way that it became more attractive to fly to Kanpur than to fly to Bangalore.

Second, airport charges have been waived. So, when you fly into Mysore, you don’t pay any airport landing charges. You don’t pay for police, you don’t pay for fire. When you land back in Chennai, which is the Mysore-Chennai connection that I kicked off recently, you don’t pay any airport charges in Chennai as well. We waive that off too.

Third, we have provided viability gap funding, and have put a price cap. For an hour of flying, you cannot charge more than ₹2500 and 50% of your seats have to be within that price cap. Airlines bid for the subsidy that they need for 50% of their seats.

What we found is that a lot of airlines bid for very low subsidies. That is because of the fourth and final thing we have done. What has made tier 3 and tier 4 town connectivity attractive is the fact that we provide three-year exclusivity. If an airline wins Delhi-Kanpur, which is what SpiceJet did, they get a three-year exclusive to fly Delhi-Kanpur. And this three-year exclusive was so valuable to them, that they bid zero subsidy to fly Delhi-Kanpur. SpiceJet got the three-year exclusive, got the lower taxes and got the zero airport charges.

The way we are paying for the subsidies is by charging a levy on all non-UDAN flights. When you fly Mumbai-Delhi, very soon, your plane is going to pay a levy of ₹5000, which will be going into the regional connectivity fund which will then pay the subsidy. The total subsidy that we will be giving out through the first round of UDAN is only ₹2 billion. So, for a subsidy of ₹2 billion, which passengers are paying, but the government is not paying, we have been able to open up 30 new airports. And that is because we have designed the policy package in such a way that the exclusivity, the waiving of taxes, the waiving of airport charges—all of this makes it attractive economically for airlines to actually go and open up these airports.

Prior to UDAN, the top eight airports accounted for some 60% or 70% of all traffic in India and those connections were still growing very strong. In other words, an airline found that it was more profitable to add a flight from Delhi to Bangalore than to add a flight from Delhi to Kanpur. We had to change the playing field in such a way that it became more attractive to fly to Kanpur than to fly to Bangalore.

That is when SpiceJet decided to bid for Kanpur. We truly understood the airlines’ economics of flying, their business models. We understood how to provide appropriate incentives so that a change would happen.

What has been the biggest challenge that you have faced in getting UDAN off the ground? What are your next steps? 

There were many challenges. One of the more important ones was to make sure that all states were on-board. But now virtually every single state has signed a memorandum of understanding (MoU) with the Ministry of Civil Aviation to provide the necessary support—namely, the waiving of taxes and the waiving of some airport charges. The states are paying for 20% of the subsidy, because we wanted them to have ownership of it. The other 80% of the subsidy is being paid by the passengers. Having the states think in a nuanced way about changing the incentives for airlines took a lot of work.

The second thing that took us a lot of work was to ensure that all the airports were functional and had passed all the Directorate General of Civil Aviation (DGCA) and safety requirements, so that we could launch these 30 airports quickly.

The third was to persuade the airlines. Initially, the airlines filed a lawsuit against UDAN saying that we could not charge them a cross subsidy. But we convinced the airlines that it was in their best interest to expand the network. UDAN would mean more balanced growth across the network, and the network and hubs would grow. This was in their own interest. And through a series of lengthy discussions, which I led to a large extent, we were able to persuade the airlines. Now they have withdrawn their court case and are fully on-board.

And I would say that the biggest evidence that the airlines are on board is the fact that Indigo, which is India’s leading airline, has placed an order for 50 turbo-prop ATRs. They broke with their business model, as previously they were only flying jets, the A320s. They spent J10,000 crores to place an order for 58 years, because this is how important UDAN and tier 3 and tier 4 connectivity were. Similarly, SpiceJet has placed an order for 50 Q 400s so that they can take advantage of UDAN as well. Jet Airways is coming into the picture. So this whole regional aviation market has just exploded in size.

The national aviation market was only in the top metros. Now we have the regional market and it is growing. The next step with UDAN is to get to the remote aviation market as well. That means, get more flights into Kulu, get helicopters into remote cities in states such as Uttarakhand and in the North-East. In round 2 which has just started, we provided subsidies and incentives for smaller planes and helicopters, so that we can get the remote market going as well.

Civil Aviation is a very critical sector for the economy. Going forward, what are your priorities, say until 2019 and later? 

Our priority is to have a safe and secure expansion of aviation across the country. In fiscal year 2018, we probably will aim for 200 million passenger trips. We have doubled the size of the aviation market in the last four years, which is extraordinary. There is no other large market that is growing at the rate that India is growing right now. But this is just the first day of the test match. We have a long way to go. At 200 million passenger trips, we compare to about 500 or 600 million passenger trips in China and about 900 million passenger trips on a base of only 325 million people in the US.

We have ordered a lot of planes. India today has ordered more planes than any other country. We have 500 planes in the sky, and 650 more planes have been ordered. Our airports are congested, and we are running out of air space with the current space and air force restrictions that we have. So, we have to really plan for a situation where we are going to triple the passenger traffic going forward over the next 15 years or so. We have to work towards a safe and secure expansion of the aviation sector, because people are finding aviation very attractive in terms of their transportation alternatives.

You may know of the term ‘grid parity’ in relation to renewable energy. I have coined the term “real parity,” because today the price of flying is equal to the price of upper-class air-conditioned railway travel. So once you get to that price point, real parity, you find that there is a tremendous amount of traffic that starts to move from the Shatabdis and the Rajdhanis into aviation, and we are seeing that.

The second aspect of real parity is the number of passengers. We have done 160 million passenger trips last year, and we will do close to 200 million passenger trips this year. The total number of people traveling on railways in upper-class air-conditioned travel is about 130 million. If you add domestic and international for airline travel, we have already exceeded upper-class travel for railways. That is another way of thinking about real parity.

And third, if you look at it in terms of revenues, the revenues of Indian railways in total, not including subsidiaries, are about ₹1700- 1800 billion. And if you look at the revenues of the Indian airline industry, domestic flying plus international flying, it is also about ₹1700 or ₹1800 billion. So, we have reached real parity in terms of turnover as well.

Finally, what people haven’t fully understood is that India’s telecommunications industry, which is ₹1800 billion, is at the same scale as India’s airline industry. So, this is a very big industry. Our companies are doing very well. Indigo has a market capitalisation of almost ₹500 billion; SpiceJet and Jet Airways have market capitalisations of ₹80 billion to ₹100 billion. There are GoAir, Air Asia, Vistara, and of course Air India. We have a number of very, very successful large players and as we move forward, I think, like in the U.S., Europe, or China, we are going to have two or three large airline groups that are flying different brands. You can have a full service international carrier, you can have a low-cost domestic carrier and you can have a regional airline. Each of these is a different business model, and our airline groups are going to be the size of airline groups around the world. It is a very exciting future that we see for our aviation industry.

One last question. What is the role of civil aviation under Prime Minister Modi’s vision for new India? 

Of course, aviation is a very attractive transportation alternative. We have multiple transportation possibilities. Along with railways, roadways and waterways, we now have viable airways. In any sophisticated economy, all of these different transportation alternatives are used. Each of them has different strengths and weaknesses. We think that aviation in India will grow. If you see China, they have 500 or 600 million passenger trips. They have also built out a fabulous high-speed railway network. So, it is not either/or. We have to build up all of these transportation alternatives. We have 1.3 billion people; they will travel for work, for business, for family, for social purposes. And we have to provide them all these different transportation alternatives.

I truly appreciate you spending time with us. Thank you

Endnotes 

1 Editor’s Note: The Hindi translates to “The Nation’s Common Citizen Flies.”

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