Indian Aviation in Danger

Go first, one of the budget commercial airline in India is going for insolvency now. This has proved that Indian aviation sector is built on the outlines of fancy pricing and hollow management capabilities. Few years ago, it was Kingfisher airlines and Jet airways who faced the same gruesome sitution of Indian aviation sector. Here, I have analysed the current outstanding issues and concerns faced by the airliners in India and why it is hard to accommodate in Indian aviation industry.

This article is based on the readings from:

1. prsindia.org
2. Financial express
3. The Hindu
4. ibef.org
5. Global market insights
6. Ministry of civil aviation

Why this airline failure?

·??????Ever-increasing number of failing engines supplied by Pratt & Whitney, which it claimed had resulted in half its Airbus fleet being grounded.

·??????Given the high capital and operational costs, the commercial air transport industry operates with wafer thin margins. This has impacted the overall profits of the company.

·??????Since last one-and-half decade, rival airliners have adopted an aggressive pricing strategies to gain market share that stretched balance sheets and made companies more vulnerable to shocks.

·??????External shocks such as COVID crisis and long drawn lockdowns had impacted the operations of many airlines. Similarly, last year’s Ukraine-Russia was has shocked the global prices of oil.

·??????Prolonged rupee’s depreciation against the dollar has sent aviation turbine fuel (ATF) costs soaring for domestic carriers.

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Challenges faced by Aviation sector in India?

Aviation Industry scenario

Industry trend

·??????Airport Authority of India to spend $ 3 bn on non-metro projects over 2016-2020

·??????$ 3 bn investments in green-field airports – Navi Mumbai and Goa

·??????Authority of India (AAI) has taken up a development programme to spend around INR 25,000 crore in next five years for expansion and modification. Furthermore, Three Public Private Partnership (PPP) airports at Delhi, Hyderabad and Bengaluru have undertaken major expansion plan to the tune of INR 30,000 Crores by 2025. Additionally, INR 36,000 Crores have been planned for investment in the development of new Greenfield airports across the country under PPP mode.

·??????The civil aviation industry in India has emerged as one of the fastest growing industries in the country during the last three years and can be broadly classified into scheduled air transport service which includes domestic and international airlines, non-scheduled air transport service which consists of charter operators and air taxi operators, air cargo service, which includes air transportation of cargo and mail.

·??????In 2010, 79 Mn people travelled to/from/or within India. By 2017 that doubled to 158 mn, and this number is expected to treble to 520 mn by 2037. The nation’s airplane fleet is projected to quadruple in size to approximately 2500 airplanes by 2038.

·??????Currently, the country has 131 operational airports including 29 international, 92 domestic, and 10 custom airports. To meet the growing demand for air travel in India, it has become imperative to increase the capacity of airport infrastructure.

·??????To augment the airport infrastructure the government aims to develop 100 airports by 2024 (under the UDAN Scheme) and expects to invest $1.83 bn in the development of airport infrastructure by 2026.Till date 74 airports have been developed. More than 2.15 lakh UDAN flights have operated and over 1.1 crore passengers have availed the benefits in UDAN flights so far.

·??????The projected upsurge in air travel in India would require more aircraft usage, further igniting the demand for Maintenance, Repair & Overhaul (MRO) services. The Indian Civil Aviation MRO market, at present, stands at around $900 mn and is anticipated to grow to $4.33 bn by 2025 increasing at a CAGR of about 14-15%. Unmanned aerial vehicles, also known as drones have been welcomed across industries. Indian drone industry is expected to have a total turnover of up to US$ 1.8 billion by 2026.

·??????Up to 100% FDI is permitted in Non-scheduled air transport services, Helicopter services and seaplanes under the automatic route.?

·??????Up to 100% FDI is permitted in MRO for maintenance and repair organizations; flying training institutes; and technical training institutes under the automatic route.?

Government Initiatives

·??????Through the National Civil Aviation Policy 2016 (NCAP) the government plans to take flying to the masses by enhancing affordability and connectivity. It promotes ease of doing business, deregulation, simplified procedures, and e-governance.

·??????In April 2020, the Goods and Services Tax for MRO services rendered locally was reduced from 18% to 5%. The ‘place of supply’ for B2B MRO services was changed to the ‘location of recipient’, enabling Indian MRO facilities to claim zero-rating (i.e., export status) under GST laws on MRO services rendered to prime contractor/OEM located outside India. This has been an extremely crucial policy amendment as it will encourage global participation in the Indian aviation sector by allowing foreign MRO operators to subcontract MRO work to Indian entities without any extra tax liability.

·??????The Regional Connectivity Scheme or UDAN (‘Ude Desh ka Aam Nagrik’) is a vital component of NCAP 2016. The scheme plans to enhance connectivity to India's unserved and under-served airports and envisages to make air travel affordable and widespread. More than 2.15 lakh UDAN flights have operated and over 1.1 Cr passengers have availed the benefits in UDAN flights as on 30th November 2022. The Government has set a target to operationalize 1,000 UDAN routes and to revive/develop 100 unserved & underserved airports/heliports/water aerodromes (including 68 aerodromes) by 2024.

·??????The aircraft leasing and financing businesses are operated from the International Financial Services Centre (IFSC) and GIFT City provides the off-shore status for financial services.

·??????Ministry of Civil Aviation released Krishi UDAN 2.0. The Scheme lays out the vision of improving value realization through better integration and optimization of Agri-harvesting and air transportation and contributing to Agri-value chain sustainability and resilience under different and dynamic conditions. After a 6-month successful pilot of Krishi Udan 2.0 it was decided to add 5 new airports namely Belagavi, Jharsuguda, Jabalpur, Darbhanga and Bhopal to the existing list of 53 airports, taking the number of airports actively participating in Krishi Udan to 58.

·??????Monetising Assets: AAI has formed joint ventures in seven airports. Recently, it awarded six airports — Ahmedabad, Jaipur, Lucknow, Guwahati, Thiruvananthapuram, Mangaluru — for operations, management and development under PPP for a period of 50 years. As per National Monetisation Pipeline (NMP), 25 AAI airports have been earmarked for asset monetisation between 2022 and 2025.

·??????NASP 2022 lays out the vision of making India as one of the top sports nations by 2030, by providing a safe, affordable, accessible, enjoyable, and sustainable air sports ecosystem in India. Air sports, as the names suggests, encompasses various sports activities involving the medium of air. These include sports like air-racing, aerobatics, aero modelling, hang gliding, paragliding, para motoring and skydiving etc.

·??????The Central Government has approved the Production Linked Incentive scheme for drones and drone components. The PLI scheme comes as a follow-through of the liberalized Drone Rules, 2021 released by the Central Government on 25 August 2021. The PLI scheme and new drone rules are intended to catalyze super-normal growth in the upcoming drone sector. The total incentive of INR 120 crores and the total PLI per manufacturer is capped at INR 30 crores.

·??????NABH (NextGen Airports for Bharat): Nirman is a government initiative to expand airport capacity more than five times to handle bn trips a year, in the next 10-15 years.

·??????AAI Startup Policy: Delivering a framework & mechanism for the interaction of AAI with internal and external stakeholders that catalyze innovation at airports and leveraging technology for addressing challenges and enhancing the delivery of services to passengers.

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Way forward

Here are some proposals that the government could look at closely to achieve our long-term vision of becoming the biggest aviation market in the world.

1. Tightening the PPP (Public Private Partnership) procurement and concession framework

With more private airport concessions on the anvil, there are three things that the government should look at prioritising as part of its reform agenda to enhance competition, attract more foreign investments and deliver better commercial and economic outcomes.

(i) Implement the recommendations of the Kelkar Committee report on revitalizing PPPs (2015), of which two key elements stand out

(a) defining triggers and commercial principles for renegotiation of contracts – a necessity in long-tenure concessions with volatile and uncertain market variables

(b) disallowing public-sector entities from participating in PPP projects – a good and effective approach to not vitiate the fundamental rationale of private sector procurement

(ii) Providing tariff certainty – an essential tenet in any private sector contract to give comfort to both investors and users.

(iii) Ensure tight procurement timelines – process from tender invitation to award of contracts not exceeding 9 months.

In addition, making airport connectivity or other mobility solutions an integral part of the concession and project agreements. They also need to be co-terminus with airport commencement timelines, with clearly defined obligations and penalty provisions for delays or defaults by contracting parties – the economic costs of non-compliance can be significantly minimized or avoided if properly structured.

2. Redefining our regulatory philosophy

With tariff setting and commercial renegotiation mechanisms internalised in PPP contracts, regulators can focus more on monitoring and enforcing the efficient preferred outcomes on service quality, including security, safety and sustainability KPIs that are essential elements of the airport and aviation businesses.

3. Making Air Cargo Infrastructure a national priority?

Building capacity at Tier-2 and newer airports is now important as well. The UDAN and Krishi UDAN schemes offer great opportunity to build a logistics backbone linking nodal production and distribution centres in the country to serve both domestic and export markets seamlessly and lucratively. The scope for use of unmanned aerial systems (drones) and new mobility solutions (use of urban rail transit for last mile distribution and hyperloop) adds a completely new dimension to the planning, design, implementation and economics of cargo logistics with far reaching implications on utility, safety, security, reliability and viability of services.

4. Rationalizing taxes across the board?

Below are a few examples of discrepancies and value eroders in our industry that may need a fix:

1. Withholding taxes (WHT) on aircraft lease rentals?–Foreign lessors pass on domestic taxes, including WHT on aircraft lease payments to the Indian carriers, increasing the cost burden. WHT can range from 0-11% of lease rentals subject to availability of double-tax avoidance treaties. Waiver of WHT on lease payments with a sunset clause, would leave more cash in the pockets of carriers and help expedite recovery in a situation where the government is unable to provide direct financial relief.
2. Rationalising GST on Aviation Turbine Fuel?(ATF) – ATF in India costs 30-35% more than neighbouring markets killing airline margins. ?VAT on ATF varies from 0% to 29% across states in India. This is over and above excise duties, marketing and logistics costs on production and distribution of fuel. Carriers would benefit immensely if ATF is brought under GST with a flat rate of say 5% or lower.?
3. Relief for MRO?(Maintenance, Repair, Overhaul)?services?- Indian carriers spend an estimated USD 1.2 billion every year for MRO services performed abroad because of high tax rates on such services in India. Government recently reduced the GST on aircraft MRO services from 18% to 5% , allowing full input tax credit. But this may not be enough to make Indian carriers change their preferences. Service centres should be stationed in India itself. Other solutions could be:

(i) A full waiver of royalty payments for the next five years (NCAP, 2016)

(ii) Rationalization of lease rentals charged by airport operators.

(iii) A tax incentive for Indian and foreign carriers to procure services in India.

5. Roll-out GAGAN with firm timelines

The advantages of GAGAN are many. For example, it would obviate the need to have instrument landing systems (ILS) at smaller airports with limited air-traffic movement, avoid flight diversions, save fuel for airlines and bring down air navigation charges by allowing ground infrastructure and manpower to be optimized. The biggest beneficiaries of this initiative will be general aviation and helicopter operators who depend on visual flight rules (VFR) and are constrained to perform safe and effective night operations.

6. Unlocking value from Open Skies and Liberalized ASAs

Current bilateral air service agreements with some of these countries continue to be restrictive to protect Indian carriers, but it is time for us to take a more pragmatic view of the economic losses associated with this artificial stifling of demand, that is costing us investments, jobs and other multiplier benefits of traffic growth to Tier-2 and Tier-3 cities and towns, especially on routes where domestic carriers may be constrained to deploy reciprocal capacity.

7. Revamping the UDAN scheme

The challenge is not demand but the operational and financial sustainability of the program. The solution lies in revamping the scheme to allow newer operators and carriers to come into the system and provide the fleet and flexibility required to deepen regional air travel markets.

1) providing adequate long-term low-cost capital to support new ventures;

2) creating a strong local leasing market;

3) incentivizing use of the NSOP (non-scheduled operators) fleet through code shares; and

4) opening up the industry for air transport aggregators that can significantly multiply the number and frequency of users, much like the ride-hailing market in the urban transport ecosystem, which has transformed intra city travel globally.

8. Making India an aviation manufacturing hub

Our challenge has been in moving up and across the manufacturing value chain in the civil aviation industry. For example, the helicopter and small-aircraft market in India is still nascent and can grow exponentially in the next ten years triggered by demands for regional connectivity, medical and emergency services, disaster management and pilot training requirements. The increasing adoption of unmanned aerial systems for commercial and defence purposes presents another unprecedented opportunity for localizing production and globalizing the value chain.

9. Revitalizing India as a global tourist destination

We need to revamp our tourism infrastructure and global marketing initiatives with razor-sharp focus and urgency, especially in a post-COVID world which is likely to trigger a distinct preference for leisure travel and medical tourism. India has plenty to offer on both fronts.

We can triple our foreign tourist arrivals if we get our act together on three strategic elements that have proven to be critical success factors for other tourism economies

(i) High-quality tourism destinations with consistent best in-class infrastructure and state-of-the art mobility solutions

(ii) Unrestrained and reliable connectivity options by air and surface transport.

(iv) Business friendly fiscal and regulatory environment including friendly visa and immigration policies.

?#civilaviation #gofirst #airlines #insolvency #ministryofcivilaviation #airtransport