Civil Aviation: Grounded

Focus / Jul 15 2012

Focussed Approach Needed: The Aviation sector is reeling under tremendous stress caused due to various factors such as rising cost of Aviation turbine fuel, global economic slow down and pressure on the margins due to intense competition. The expenses are on the higher side compared to the revenues earned by the airlines both from the private and state owned airlines. The challenges before the industry are manifold. The industry and the Government need to find solution for the burgeoning debt crisis both for the private and state owned airlines in an attempt to ensure affordable and sustainable connectivity for passengers and freight. Air India is facing human resource issue and pilot's are on strike since May 7, 2012. This is ultimately affecting the passengers and revenue of the ailing airline

Ajit Singh, the Minister of Civil Aviation has informed the upper house, that based on returns filed by airlines with Directorate General of Civil Aviation (DGCA), all scheduled airlines operating in the country except IndiGo are incurring losses. The total operational losses for all the airlines for the period 2008-09, 2009-10 and 2010- 11 are Rs 19,000 crore approx. and Rs 10,000 crore loss is anticipated in 2011-12. Inter-Ministerial Working Group had been constituted under the Chairmanship of Secretary, Ministry of Civil Aviation to identify the factors causing stress in civil aviation sector and suggest solution to them. The Minister said that Secretary, Ministry of Finance; Secretary, Ministry of Petroleum and Natural Gas; Secretary, Financial Services; Director General of Foreign Trade and Joint Secretary, Ministry of Civil Aviation are members of this working group. The recommendations made by the Working Group in its meeting held on 22nd Dec 2011, inter-alia, includes rationalization of the VAT on ATF, permission to foreign airlines to invest in the domestic airlines undertakings, allow airlines to import ATF directly for their own consumption, revision of fare structure by airlines so that costs of operations are covered. The silver lining for the industry appears in terms of the country improving it's rank from 101st in 2007 to 12th in 2010 in terms of airport maintenance, traffic handling and passenger facilities.

FACTS & FIGURES

The air traffic has witnessed a growth of 16.5 per cent in India during 2004- 05 to 2010-11 with domestic traffic clocking a cumulative annual growth rate of 18.5 per cent and international traffic at 14 per cent in the said period. Total flights/week on domestic network has been increased from 8724 in year 2006 to 12107 in year 2011. The number of airports operating Scheduled Air Services has increased from 50 in year 2000 to 82 in 2011. Total domestic passengers carried by all Scheduled and Non-Scheduled operators have increased from 362.37 lakh in 2006-07 to 606.63 lakh in 2011 (up to December 2011). The reason attributed by the Ministry of Civil Aviation for this turnaround is due to the reduction in airfares over the last seven years and introduction of new routes, which made air travel affordable for the common man.

Indira Gandhi International Airport in Delhi has emerged as the busiest airport in India with an increase of nearly 6 million passengers compared to the last fiscal. An economic impact study of Delhi airport says that in terms of total passenger movements, Delhi airport handled more traffic than airports in Mumbai, Chennai and Kolkata. Delhi airport has a major market share of air traffic volume to Middle East, European, Asian and American regions. Delhi airport handled 29.94 million passengers in 2010-11 and the number reached 35.94 million in 2011-12. Mumbai is the second busiest airport in the country.Delhi airport handles almost one lakh passengers every day and aircraft movements have also increased.

According to air traffic data released by the Directorate General of Civil Aviation (DGCA), the passengers carried by domestic airlines during Jan-May 2012 were 258.07 lakh as against 244.98 lakh during the corresponding period of previous year thereby registering a growth of + 5.34%.

AILING AIRLINES

Air India has taken several initiatives towards cost cutting and revenue enhancement. As a result the national carrier could save an approximate amount of Rs 800 crore during 2010- 11. The private sector airlines, KingFisher Airlines are getting embroiled in to deeper crisis and it's becoming difficult for the carrier to remain afloat as the debt burden and operational loss are mounting too heavily. No bailout from the lenders seems to be in sight. Fresh funding from banks is not likely.

ATF PRICES

ATF prices in India are 30 to 40 per cent more than the prices in international market due to high base price and higher taxes. The sales tax on ATF in different States in India is on much higher side, and varies between four to 30 per cent in different States. The ATF cost in terms of operational cost of the airlines is almost 40%, which makes the operational cost of the airlines very high. The Government has allowed airlines to import ATF directly. Airlines such Spicejet, Kingfisher Airlines have got approval to import ATF. Air India has also sought import permit. This move can result in saving cost on fuel and improve profitability.

The expert agency commissioned by Ministry of Civil Aviation to study the ATF market attribute following reasons for high ATF prices: 1) High taxation regime particularly ad valorem VAT levied by States (ranges from 20% to 30% for most states). 2) Lack of effective competition in the ATF market in India. This market is controlled by the Oil PSUs.

The expert group has recommended the following to address the issue of high ATF prices. 1) Bring ATF under “Declared goods” category that attract uniform lower rate of VAT. 2) Switch to specific rate of duty instead of ad valorem taxation of ATF. 3) M/o Petroleum and Natural Gas to bring ATF under PNGRB regulatory scope by notifying the product so that PNGRB could take action to protect user / consumer interest.

SERVICE TAX ON AIR TRAVEL

As per MoCA, the Service tax during the financial year 2012-13 on transport of passenger by air has been increased 4 times and is levied upon 40% of gross ticket value which was earlier levied at 10% of gross ticket value or Rs.100 per journey whichever is lower for domestic passengers travelling by any class and 10% of gross ticket value or Rs.500 per journey whichever is lower for international passengers. This move can hamper the growth of the sector to a great extent and dissuade people to travel by air.

AIRPORT INFRASTRUCTURE

The Government of India is encouraging development of airport infrastructure by way of encouraging expansion and upgradation of existing airports including small and medium airports to attract foreign tourists and through establishment of new airports including Greenfield airports. So far, Government of India has granted ‘inprinciple' approval for setting up of 15 Greenfield airports newly at Mopa in Goa; Navi Mumbai, Shirdi and Sindhudurg in Maharashtra; Shimoga, Gulbarga, Hassan and Bijapur in Karnataka; Kannur in Kerala; Durgapur in West Bengal; Pakyong in Sikkim; Datia/Gwalior (Cargo) in Madhya Pradesh; Kushinagar in Uttar Pradesh; Karaikal in Puducherry and Paladi/ Ramsinghpura near Jaipur in Rajasthan. The Government of India has received proposals for setting up of Greenfield Airports at Itanagar in Arunachal Pradesh; Greater Noida/ Jewar in U.P.; Dholera region and Dwarka in Gujarat; Machhiwara in Punjab; Ongle, Prakasham district in A.P., Aranmula-Pathamathitta district in Kerala; Solapur and Bolera in Maharashtra; Rohtak in Haryana; Alwar in Rajasthan; Bellary in Karnataka; Jamshedpur in Jharkhand and Rumari village in Assam.

CARBON TAX

The European Union had earlier directed Indian carriers to submit emission details of their aircraft by 31.3.2012. The EU had proposed to impose carbon tax on air travel with effect from January 1, but no airline will face a bill until 2013 after this year's carbon emissions have been tallied. This is another bone of contention between the EU and the Indian Aviation sector. The government has barred its airlines from complying with the European Union carbon tax scheme, joining China in resistance to plans that have caused a backlash among the EU's trade partners. Few weeks back, the Indian airlines have refused to provide the EU with emission data. In case these airlines are banned from flying to EU. The retaliatory action may be taken by the Indian Government by banning the EU airlines in it's airspace.

IMPROVING INTERNATIONAL AIR CONNECTIVITY

The Ministry of Civil Aviation has decided to open 11 new International Sectors under Bilateral Air Services Agreements (ASAs) to the national carrier Air India as well as to other Indian Scheduled Carriers. These Sectors are: Mumbai-Dar-es-Salaam Delhi-Guangzhou; Delhi-Yangon ; Delhi-Tashkent; Delhi-Ho-Chi-Minh City; Delhi-Hanoi ; Delhi-Almaty Delhi- Macao ; Delhi-Addis Ababa ; Delhi- Melbourne; Delhi-Sydney. With this, the Services of Air India (AI) and Air India Express (AIE) will increase from 430 services per week during winter 2011 to 471 services per week in summer 2012. These services will include increase of services from 94 to 109 on the Dubai sector, from 39 to 47 in Abu Dhabi sector, from 33 to 49 services in Sharjah sector, from 12 to 21 services in Doha sector and from 42 to 48 services in Saudi Arabia sector. The services of Air India and Air India Express will further increase from 471 services per week in summer 2012 to 577 in winter 2012.

INDUSTRY VIEW

India is likely to emerge as the third largest aviation market by 2020. Dr. Rafael Echevarne, Director, Economics and Programme Development, Airports Council International (ACI) said this on the second day of India Aviation 2012 at Hyderabad recently. Emphasizing on restoring Indian Aviation competitiveness during his keynote address at ‘India Aviation 2012' in Hyderabad, Tony Tyler, IATA's Director General and CEO suggested that airlines purchases should be aligned with international principles. In addition he recommended infrastructure expansion, rationalization of airport charges, investment policies which enable 49% direct investment by foreign carriers. Amber Dubey, Director Aviation, KPMG has appreciated Government initiatives like formulating an Air Cargo Promotion Policy, proposal to set up a full-fledged aviation university, investments in MRO hubs as positive steps in the right direction. He added during his speech at ‘India Aviation 2012' that there is urgent need to develop no-frill airports in tier 2 and 3 cities in keeping with the potential increase in air passengers in India.

GOVERNMENT INITIATIVES

To promote the growth of Aviation Sector, the Government of India has taken several initiatives such as: (i) Easier FDI Policy for airports has been put in place vide which 100% FDI, through automatic route, has been permitted in Greenfield airports. (ii) FDI requirements for air transport side of civil aviation have been revised and separate limits have been prescribed in respect of different sectors such as schedule cargo airlines, non-scheduled operators, MRO etc. (iii) Relaxed procedure for establishment of private airports for private use has been announced. (iv) Private domestic airlines have been permitted to fly on overseas routes subject to specified guidelines.Further, bilateral arrangements with other countries have been gradually liberalized to enable better international connectivity. (vi) The infrastructure at the airports, Air Traffic Control and Navigation is being constantly upgraded to meet the future demand of the airlines.(vii) To create a world class airport infra-structure upgradation / moderni-zation of a number of metro and non-metro airports have been undertaken by Airports Authority of India (AAI) as well as through Joint Venture Companies. (viii) AAI has undertaken upgradation & moder-nization of 35 non-metro airports in the country in a time bound manner. In addition, 13 more airports have also been taken up for upgradation. (ix) AAI has also undertaken the modernization and expansion of the international airports at Chennai and Kolkata.(x) DGCA from time to time reviews and amends its regulations as per international standards and aviation requirements of the country. (xi) DGCA itself has been strengthened to meet international safety obligations.(xii) City side development of specific airports has been undertaken under Public Private Participation model.(xiii) A new policy for greenfield airports which envisages. (xiv) An Independent regulatory Authority, namely, AERA has been established 12.5.2009 with the prime objective to create a level playing field and healthy competition amongst all major airports (Government- owned, PPP based, private), regulation of tariffs of aeronautical services, protection of reasonable interest of users.

POLICY

The operations in domestic sector have been deregulated and flights are being operated by concerned airlines on the basis of commercial viability subject to adherence of Route Dispersal Guidelines. The Government has laid down Route Dispersal Guidelines with a view to achieving better regulation of air transport services taking into account the need for air transport services of different regions of the country including North-East region. It is, however, up to the airlines to provide air services to specific places depending upon the traffic demand and commercial viability while complying with Route Dispersal Guidelines.

CIVIL AVIATION AUTHORITY

The Government plans to set up Civil Aviation Authority (CAA) in place of DGCA which will have adequate financial and administrative flexibility to meet functional requirements for an effective safety oversight system. In addition, it is also proposed to assign additional functions relating to certain economic regulations, consumer protection and environment regulation. The CAA is proposed to be set up through a separate Act. However, the present legal framework such as Aircraft Act 1934 etc will continue to govern the aviation sector. The proposal is at formative stage.

VISION 2020

The Vision-2020 documents prepared by the Ministry of Civil Aviation are an assessment of the overall outlook of the sector in 2020. As per the vision-2020, the growth of aviation sector has potential to absorb upto USD 120 billion of investment. Fleet size of commercial airlines sector will be approximately 1000 aircraft, domestic passengers numbers could reach 150-180 million, Helicopter fleet is expected to be another 500, air cargo movement is expected to reach the level of 9 million MT and the sector may have the potential to absorb 3 million jobs directly by 2020.

FUTURE OUTLOOK

$30 bn investment planned for airport projects: Union Civil Aviation Secretary SNA Zaidi while addressing the 3rd International Aviation Economics Conference has said that the central government planned to invest $30 billion in next 10 years on airport projects. Presently, there are around 127 airports in the country, but in the second phase of sectoral growth, the existing airports would be developed. Some new airports may come and if needed, a second airport would also come up in those cities where there is a need, he said, adding the government is planning to invest Rs 67,000 crore on these new projects. The government invested $10 billion in the 10th and 11th five-year plans. The airports developed under the publicprivate- partnership model are presently handling 60 per cent of the passenger traffic in the country. In the first phase, connectivity to metro cities was established while in the second phase, the focus would be on connecting metros to tier-II and tier-III cities, he said. Stressing the need for more airports in the country, Zaidi said the number of passengers was likely to go up to 260 million and cargo by five million tonne by 2020.

1,000 aircraft needed by 2030:

According to a market forecast by aviation major Airbus, India will require 1,043 new passenger and freighter aircraft valued at $145 billion between now and 2030. Of this, 1,020 will be passenger aircraft and 23 cargo. Indian market for new aircraft is the world's fourth largest in both number of units and value, according to Joost Ven Der Heidjen, Airbus head of marketing for India. Indian annual passenger traffic growth rates of 7.2 per cent are well above the regional Asia Pacific average rate of 5.9 per cent and the world average 4.8 per cent.Of the requirement for 1,020 new passenger aircraft, some 860 will be for growth and 160 to replace the oldest aircraft in the existing fleet of 327. By 2030, this means that India's passenger fleets will more than triple to some 1,180 aircraft, Heidjen said at a press conference in Hyderabad.

3rd Largest aviation market: From its present ninth position, India may become the third largest aviation market in the world as traffic volumes grow exponentially, Gurjot Singh Malhi, Commissioner of Security (Civil Aviation), Bureau of Civil Aviation Security (BCAS) has said. Malhi said that the growth of civil aviation is likely to push India from ninth to third position in the world in terms of volume of traffic, necessitating a very strong security system. He was speaking at an event marking the silver jubilee of the bureau where a commemorative special cover was also issued by the Department of Posts.