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Past Issue • Apr-Jun 2016

Indian Aviation Industry in 2016: Ready for Takeoff

Indian Aviation Industry in 2016: Ready for Takeoff

Indian aviation is in a sweet spot. If the proposed improvements in policy, procedure, safety, security and  infrastructure are implemented in letter and spirit, this could turn out to be one of the best decades for Indian aviation.

India is one of the fastest growing aviation markets in the world. Domestic air travel during April 2015 to March 2016 grew at a whopping 21.2%. With 224 million passenger throughput (domestic plus international) during the period, India is also one of the largest aviation markets in the world. It has the potential to become the third largest in the world by 2020 thanks to increasing disposable incomes, fall in prices of Aircraft Turbine Fuel (ATF), increasing domestic and international tourists and a transparent policy regime etc.

Most of the leading airlines are likely to report profits for FY 15-16, which has not been seen in the last several years.  The profits allow them to retire costly debt, and go for expansion in fleet, routes and manpower.

On July 1 last year price of ATF in Delhi for domestic and international airlines was around `49.2 and 34.9 per litre respectively.  These are still over 60% and 12% costlier respectively than the global ATF price, which is around `31 per litre.  The government can kick off an aviation revolution if it decides to sell ATF at the global rate for an experimental three year period.

India is building new airports and expanding existing ones to meet the growing demand. A slew of new airports are on the anvil to be developed in public private partnership (PPP) mode. Some of these projects include Navi Mumbai, Mopa (Goa), Bhogapuram (Vizag), Agra, Kannur, Singrauli and Kushinagar.
In addition, various state governments are looking to operationalise low-cost, no-frills airports which would further democratise air travel. This highlights a mind-set change that air travel is not an ‘elitist’ product, but a time-saving tool and a necessity. Some progressive state governments are already offering viability gap funding (VGF) for airlines to operate on unserved routes.

Though world class airports have been developed by AAI and the private sector, there are significant challenges related to capacity expansion of airports, land acquisition, fixation of airport tariffs and delays in regulatory approvals. Growth of other key areas like air cargo, maintenance, repair and overhaul (MRO), general aviation (GA) and human resource development have been constrained due to infrastructural limitations and lack of supportive policies in the past.

National Civil Aviation Policy

The National Civil Aviation Policy (NCAP 2016) was cleared by the Union Cabinet on June 15, 2016 paving the way for an ambitious reorientation of the Indian aviation industry. While some of the provisions were proposed in the Union Budget for the FY 16-17, like the revival of 160 regional airports and ten AAI airports that were unserved or under-served, the NCAP 2016 breaks new ground.

The Union Budget had also removed the one year cap on storage of duty-free imported aircraft parts in addition to extending the free stay period of foreign aircraft coming to India for MRO to six months.

The NCAP has many other interesting provisions that may help reduce cost of operations, rationalise taxes and enhance connectivity – both global and domestic. One of the most important initiatives proposed is the Regional Connectivity Scheme (RCS) to boost air travel in smaller towns. Under the scheme the government will work towards revival of un-served airports through a no-frills model, and provide subsidies to stakeholders.

Under RCS, airlines would charge only `2500 for one hour flights. To compensate for these low fares, the Government will fund airlines’ losses by charging a small levy per departure on Cat I and Cat III routes. This will form part of Regional Connectivity Fund to compensate the airlines. NCAP also confers ‘infrastructure’ status on MRO, ground handling, ATF and cargo, and several tax benefits for RCS operations.

NCAP has amended the infamous 5/20 Rule which was discriminatory, anti-competition and unique to India.  We witnessed bitter debates on front pages of newspapers between supporters and opponents of this policy. Airlines will now be able to fly abroad as long as they have 20 aircrafts or 20% of their capacity deployed in the domestic sector, whichever is higher. This 0/20 requirement is a suboptimal compromise but is better than having a permanent stalemate. This amendment will be beneficial for Indian airports, cargo, MRO, ground handling companies and tourism. Passengers – both Indian and foreign will have more opportunities to choose from.

It has the potential to become the third largest in the world by 2020 thanks to increasing disposable incomes, fall in prices of Aircraft Turbine Fuel (ATF), increasing domestic and international tourists and a transparent policy regime.

The largest aviation market – USA – has open skies agreement with over 117 countries including those in EU, Middle East and ASEAN. This means that airlines from these regions can launch unlimited flights to most international airports of USA. With the opening of the US immigration pre-clearance facility in Abu Dhabi, passengers taking off from there can walk off as domestic passengers at the landing airport in US. All these despite strong opposition by the mighty US carriers.

The free flow of passengers and cargo has helped the growth of US economy, tourism and jobs. India should push for a similar facility at Delhi to begin with. It is encouraging to note that NCAP talks of reforms in global connectivity of India by way of open skies with countries beyond 5000 km radius from New Delhi on a reciprocal basis. The draft NCAP spoke of open skies for all countries after April 2020 but was dropped in the final version. NCAP has also liberalised norms for bilateral seat quotas and code share between airlines.

Helicopters and small aircraft will be promoted for last mile regional connectivity and for rapid medical evacuation. They will receive enhanced seat credits that can be traded with larger carriers to meet their obligation under the Route Dispersal Guidelines (RDG). Charter operations have been significantly liberalised.

NCAP lays special emphasis on promoting civil aerospace manufacturing. Incentivising civil aerospace sourcing through defence offsets and reaching out to global Original Equipment Manufacturers are some of the key policy initiatives.

NCAP has amended the infamous 5/20 Rule which was discriminatory, anti-competition and unique to India. We witnessed bitter debates on front pages of newspapers between supporters and opponents of this policy. Airlines will now be able to fly abroad as long as they have 20 aircraft or 20% of their capacity deployed in the domestic sector whichever is higher. This 0/20 requirement is a suboptimal compromise but is better than having a permanent stalemate. This amendment will be beneficial for Indian airports, cargo, MRO, ground handling companies and tourism. Passengers – both Indian and foreign will have more opportunities to choose from.

Action steps for 2016

For maintaining the growth momentum in aviation, urgent remedial measures are required. India needs to be promoted as a trade and tourism hub in order to derive synergistic benefits for the aviation industry. Leading aviation hubs like USA, EU, UAE, Singapore, China etc. have a robust industrial, trading, maritime and tourism ecosystem that feeds into and from their aviation industry.

NCAP has amended the infamous 5/20 Rule which was discriminatory, anti-competition and unique to India. We witnessed bitter debates on front pages of newspapers between supporters and opponents of this policy. Airlines will now be able to fly abroad as long as they have 20 aircraft or 20% of their capacity deployed in the domestic sector whichever is higher. This 0/20 requirement is a suboptimal compromise but is better than having a permanent stalemate. This amendment will be beneficial for Indian airports, cargo, MRO, ground handling companies and tourism. Passengers – both Indian and foreign will have more opportunities to choose from.

Leading aviation hubs like USA, EU, UAE, Singapore, China etc. have a robust industrial, trading, maritime and tourism ecosystem that feeds into and from their aviation industry.

On June 20, 2016 the government opened up FDI in ten sectors including aviation. But DIPP’s Press Note 5 issued four days later thereafter created avoidable contradictions. It allowed 100% FDI subject to zero equity stake by any foreign airline. This is a classic case of one step forward and two backwards. Are we expecting foreign sovereign funds, banks and PEs to set up wholly owned airlines in India with no involvement of their flag carriers? FDI by foreign airlines remains capped at 49%.

Further, allowing 100% FDI in airlines and then stipulating that substantial ownership and control of the same should be vested in Indian nationals is also contradictory, baffling and has created needless confusion. This whole episode has caused damage to the huge goodwill created by NCAP and the FDI reforms.

Once super-sensitive sectors like defence, telecom and banking have been opened up to 100% FDI. One wonders why airline sector in India is treated as a holy cow. India needs huge investments to go for a massive increase in its domestic and international connectivity. It needs the world’s best airlines to come and set up shop here adding to our GDP, jobs, and tourism growth. Opposing foreign ownership in airlines, in the name of ‘national security’ is simple protectionism.  The earlier we enhance FDI limit in airlines to 100% the better.

As Indian aviation grows at a breakneck speed, the biggest challenges are safety, security and capacity constraints.  The month of December 2015 saw four major incidents in one month alone – a landing aircraft got damaged by wild boars, an engineer got sucked into a jet engine, a ferry bus banged into an aircraft and a BSF plane crashed in Delhi.  No heads have rolled, apparently.

Other concerns include delays in the development of second airports in Mumbai, Goa, Chennai, Pune etc.; formation of an independent Civil Aviation Authority (CAA), hive-off of Air Navigation Services (ANS) from AAI, market-listing of AAI and Pawan Hans, privatisation of Air India and revival of Juhu Airport in Mumbai; and engaging with global aerospace majors to enhance their contribution to ‘Make in India’.  Lack of training facilities for pilots, engineers, technicians and air traffic controllers, is a serious issue.

Future airports in India should be low cost, efficient and environment-friendly – akin to the ‘Cochin model’.  Royalties and other charges on MRO, cargo, ground handling and ATF should be bare minimum, and the real profits should be earned through increased traffic flow and non-aeronautical charges.

As Indian aviation grows at a breakneck speed, the biggest challenges are safety, security and capacity constraints.

India is one of the very few countries in the world to have built a satellite based navigation system – called the ‘GPS Aided Geo Augmented Navigation’ (GAGAN) whose payload is already operational through GSAT-8, GSAT-10 and GSAT-15 satellites. GAGAN complements the capability of the existing Global Navigation Satellite System by providing reference signals that have greater accuracy, integrity, coverage and continuity. It is an advanced air navigation system, which has applications beyond aviation. This next generation system is expected to enhance India’s total air capacity, flight safety and overall cost efficiencies. It can also provide help to countries in south and south-east Asia.

Conclusion

Overall, Indian aviation is currently in a sweet spot.  If the proposed improvements in policy, procedure, safety, security and infrastructure are implemented in letter and spirit, this could turn out to be one of the best decades for Indian aviation.

Close collaboration between the Ministry of Civil Aviation (MoCA), related ministries (finance, home, defence, external affairs, commerce and industry, tourism, environment, HRD etc), aviation regulators like DGCA and AERA; and the aviation industry at large is the need of the hour.

We are slowly and surely getting closer to our dream of being the third largest aviation market by 2020 and the largest by 2030.

Assisted by Arun Krishnan, Manager, Aerospace and Defence at KPMG in India. Views expressed in this article are those of the authors.

ABOUT THE AUTHORS

  • Amber-Dubey

    Amber Dubey

    Amber Dubey, Partner and India Head of Aerospace and Defence at global consultancy, KPMG.
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