Time for hard de­ci­sions

The avi­a­tion sec­tor, no longer a pre­serve of the rich, is in a fi­nan­cial mess that needs to be sorted

DNA (Daily News & Analysis) Mumbai Edition - - FRONT PAGE -

Of all the spheres of the econ­omy at the end of NDA-1, avi­a­tion was one sec­tor that was shining in terms of dou­ble-digit growth in pas­sen­ger traf­fic for many years.

But that too had taken a bit of a beat­ing to­wards the end, re­flect­ing the ad­verse growth in the gen­eral econ­omy. It would be in­struc­tive to re­mem­ber that the avi­a­tion sec­tor is a very high mul­ti­plier of both eco­nomic growth and em­ploy­ment and any down­turn would im­pact the econ­omy it­self.

How­ever, schemes like Re­gional Con­nec­tiv­ity 2017, along with ex­ist­ing Group Dis­per­sal Guide­lines and the pro­posed In­ter­na­tional Con­nec­tiv­ity Schemes will cer­tainly give a fil­lip to the econ­omy.

On the flip side, how­ever, is the un­for­tu­nate de­cline and fall of Jet Air­ways, which had taken over the man­tle of Air In­dia as the coun­try’s lead­ing air­line, both do­mes­ti­cally and in­ter­na­tion­ally.

Air­lines con­sti­tute the heart of the avi­a­tion sec­tor, with­out which air­ports and other al­lied sec­tors such as ground han­dling and tourism can­not thrive.

After Air In­dia’s Rs 50,000 crore-plus debt, King­fisher Air­lines’ over Rs 14,000 crore and Jet Air­ways’ debt that is in ex­cess of Rs 10,000 crore, the avi­a­tion sec­tor ap­pears to be in a fi­nan­cial mess.

While newer air­lines like Indigo, Goair, Spice­jet or Vis­tara will no doubt fill the vac­uum and dou­ble-digit growth will soon be back, there is a need for the new gov­ern­ment to go in for some deep in­tro­spec­tion.

What is caus­ing this dis­tress? Is it only mis­man­age­ment, as in the case of King­fisher or bad de­ci­sions and mis­man­age­ment by Jet Air­ways? Or is it also due to faulty gov­ern­ment poli­cies? The an­swer is not sim­ple. There is, no doubt, mis­man­age­ment in the above three cases, but gov­ern­ment poli­cies have con­tributed to their woes.

Air In­dia, an enigma, con­tin­ues to op­er­ate on tax­pay­ers’ money. It’s shoot­ing it­self in the foot by re­duc­ing its global dis­tri­bu­tion sys­tem oper­a­tors, thereby slash­ing its catch­ment ar­eas of pas­sen­gers.

No se­ri­ous at­tempt at its re­vival is be­ing made ei­ther.

As far as the do­mes­tic sec­tor is con­cerned, air­lines work at a huge dis­ad­van­tage. They are bur­dened with taxes and levies at one end and high Air Tur­bine Fuel (ATF) prices at the other. While an in­dus­try’s ideal cost of ATF should not ex­ceed over 25% of the to­tal op­er­at­ing cost, in In­dia due to oligopolis­tic

Sanat Kaul na­ture of ATF sup­ply, the do­mes­tic price is much higher than in other coun­tries.

In ad­di­tion, a cen­tral ex­cise im­po­si­tion of 14% and sales tax levied by states on ATF, can be as high as 30%. At­tempts to bring ATF un­der GST, cut­ting it down to 12% has not been ac­cepted by the GST Coun­cil.

Any de­te­ri­o­ra­tion of the ex­change rate of ru­pee to the US dol­lar also im­pacts ad­versely on prof­itabil­ity. De­te­ri­o­ra­tion in in­ter­na­tional fuel prices also plays a role. As a re­sult of this toxic mix, the cost of op­er­a­tion in the do­mes­tic sec­tor re­mains very high.

Com­pare this with the sup­ply side in air­line op­er­a­tions. With a very large or­der of new planes, the to­tal ca­pac­ity of seats is in­creas­ing by the month, but air­lines are un­able to in­crease ticket pric­ing in or­der to fill up the grow­ing availabili­ty of seats. They, there­fore, go for com­puter-based dy­namic pric­ing, which causes pas­sen­gers acute dis­tress dur­ing hol­i­days/fes­ti­vals or calami­ties, when prices go through the roof.

With low-cost car­ri­ers now dom­i­nat­ing the do­mes­tic scene, the model fol­lowed by full-ser­vice air­lines is un­der stress.

All air­lines in In­dia send their air­craft to neigh­bour­ing coun­tries like Sri Lanka or Thai­land for manda­tory inspection­s known as C&D check. This bil­lion-dol­lar busi­ness is be­ing thrown away along with em­ploy­ment po­ten­tial be­cause of bu­reau­cratic bungling in­volv­ing the min­istry of fi­nance. In the nor­mal scheme of things, Main­te­nance and Re­pair Or­gan­i­sa­tion (MRO) should have been a cap­tive busi­ness for the In­dian in­dus­try but has been al­lowed to slip away. This also adds to the op­er­a­tional cost of air­lines.

As about the air­ports, while much work has been done, there is still a lot more to do. The Air­ports Au­thor­ity of In­dia (AAI) is the cus­to­dian of all civil air­ports in In­dia. It is cor­rect to say that about a dozen air­ports are prof­itable, while the rest are cross-sub­sidised by AAI.

Air­port im­prove­ment in­volves not just up­grad­ing the ter­mi­nals, but also the run­way, nav­i­ga­tional aids and equip­ment needed for safety and se­cu­rity.

Slowly, the AAI is leas­ing out big­ger air­ports on a long term ba­sis.

How­ever, the lessee com­pany is se­lected on the ba­sis of the high­est per­cent­age of rev­enue it can share with AAI.

The Delhi In­ter­na­tional Air­port shares 46% of its rev­enue while Mum­bai is a lit­tle less; newly-pri­va­tised air­ports are even higher. With such a high level of shar­ing, pri­vate air­ports charge air­lines and users at higher rates, which again add to costs. In­dian Air­port charges are con­sid­ered as one of the high­est in the world by the IATA.

The new gov­ern­ment should look at the avi­a­tion sec­tor holis­ti­cally, as a part of the econ­omy, which is go­ing to play a cru­cial role in eco­nomic de­vel­op­ment and is no more a sec­tor for the priv­i­leged class only.

It is in­creas­ingly be­com­ing a mid­dle-class mode of travel and con­trib­utes to busi­ness and em­ploy­ment. There­fore, as a sec­tor, there is a need to nur­ture it and not kill the hen that lays golden eggs, which seems to be the di­rec­tion to­day.

These is­sues can­not be de­cided only by the min­istry of civil avi­a­tion.

It needs an in­ter-min­is­te­rial group headed by the fi­nance min­is­ter to sort out the mess.

Au­thor is Chair­man of In­ter­na­tional Foundation for Avi­a­tion, Aero­space and Drones

Air­lines con­sti­tute the heart of the avi­a­tion sec­tor, with­out which air­ports and other al­lied sec­tors such as ground han­dling and tourism can­not thrive

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