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.&nbsp;

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 per cent of the total operating cost, in India due to oligopolistic nature of ATF supply, the domestic price is much higher than in other countries.

In addition, a central excise imposition of 14 per cent&nbsp;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 per cent&nbsp;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&amp;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 per cent 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. 
&nbsp;

(This article was originally published on The DNA. Read the <a href="https://www.dnaindia.com/analysis/column-time-for-hard-decisions-2759742">original article</a>)

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL.)&nbsp;

&nbsp;

 
&nbsp;

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.

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 per cent of the total operating cost, in India due to oligopolistic nature of ATF supply, the domestic price is much higher than in other countries. In addition, a central excise imposition of 14 per cent 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 per cent 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 per cent 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. (This article was originally published on The DNA. Read the original article) (Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL.)

Aviation sector is in a financial mess that needs to be sorted

A major conundrum facing India’s aviation industry is the high growth rate of passenger traffic, both domestic and international.&nbsp;

CAPA, a highly regarded private consultancy, has predicted domestic traffic to grow at 14-16 per cent annually, while internationally, traffic is pegged to rise by 10-12 per cent from FY2020.&nbsp;

IATA has also predicted that India will be the third largest air passenger market by 2025.

While the top dozen airports make profits, the rest 100 odd are loss-making. Of these, half-a-dozen private airports also share their revenue with the Airports Authority of India (AAI). The rest are owned and managed by the AAI, which cross-subsidises the balance.&nbsp;

While the present double-digit growth in passenger traffic is likely to continue, massive investments in the airport and air traffic management are needed to overcome a deficient infrastructure.&nbsp;

Despite double-digit growth, profitability is declining. The original national carriers, Air India and Indian Airlines, were merged in July 2007 in a hair-brained scheme devised by the then minister.&nbsp;

The new entity has not managed to survive without the government’s life support. Since it’s fully owned by the government, no attempt has been made by the previous or the present government to revive it, as was done in the case of Satyam in 2009 or the Japan Airlines.&nbsp;

It’s painful to see that recently the government formed an SPV and transferred Rs 29,000 crore out of its Rs 55,000 crore debt, hiving off the profitable Air India Air Transport Services.&nbsp;

Meanwhile, Air India is fast losing its market share and may soon become irrelevant. Justifying it as a cost-cutting measure, Air India has reduced its Global Distribution System (GDS) agents to one, Travelport, which is represented in India by owners of Indigo Airlines - a direct conflict of interest.&nbsp;

The result is that the catchment area of passengers for Air India has shrunk, resulting in the once-premier airline announcing the suspension of three flights from Delhi - to Madrid, Birmingham and to Birmingham via Amritsar, respectively.

As for Kingfisher, Vijay Mallya is fighting against extradition in London courts.&nbsp; 
 
Jet Airways, started and owned by the enigmatic Naresh Goyal as a first-class full-service airline since 1992, too is fighting for survival.&nbsp;

In 1997, the business model of airlines in India changed dramatically with the arrival of a low-cost carrier, Air Deccan. This and other airlines gave up on the glamour quotient, providing just point to point services, sans any frills and lower ticket prices.&nbsp;

With the Indian economy growing at 7 per cent plus, there was an air traffic boom. A lot of people who used trains switched to LCCs.&nbsp;

While growth in air traffic has been in double digits for the last ten years, the growth in railway traffic for two-tier coaches and above has been minimal.&nbsp;

Full-service airlines, Air India, Kingfisher and Jet Airways, began their low-cost subsidiaries. However, by not closing their full services, they suffered.

With the high growth of passenger traffic, airlines started ordering new aircraft. Indigo in 2005 astounded everyone by ordering 100 single-aisle Airbus A320-200 aircraft and followed this up in 2011 by ordering another 180 aircraft of the same type, placing yet another order for 250 Airbus A320-Neo in 2015.&nbsp;

Meanwhile in 2016, the government allowed 100 per cent foreign equity in airlines but kept a cap of up to 49 per cent equity for foreign airlines wanting to invest in Indian carriers, mindful of the international requirement that an airline must be majority-owned and effectively controlled by the nationals of their country.&nbsp;

As new aircraft started arriving to join the fleet, the need to fill them up meant that prices had to be kept low, given India’s price-sensitive market.&nbsp;

A new system of computerised ticket price management was introduced to fill up seats. However, as the seat capacity in India grew, the need to keep prices low to attract travellers became desperate.

To add to this, there were two more variables that mattered. The first were oil prices, which keep fluctuating. But in India, domestic oil prices are kept artificially high by oil companies and the government benefits when prices go up as their share of tax revenue also increases. Therefore, there is little reason for them to lower Air Turbine Fuel (ATF) rates.&nbsp;

The second factor are foreign exchange rates. As the rupee slides down, airlines have to pay more for ATF in Rupee terms, which reflect on their balance sheet.

The net outcome is that the airline industry in India lost S1.7 billion in FY2018 and may lose another $550-700 million in FY 2019.&nbsp;

As more aircraft join the fleet, these losses are likely to continue. As airlines go into losses, the banking sector comes into play. While private banks tend to shy away from such risky loans, it is the public sector banks, in particular, the State Bank of India, that gets hit. &nbsp;

Public sector banks are not only nudged to give loans, but when these loans become nonperforming, are nudged to convert them into equity at a high rate, thereby absorbing partially the losses of the airlines.

The government must now reduce the tax burden on airlines, both directly and through unnecessary taxes/charges of supply of ATF, which is both monopolistic and very high.&nbsp;

With such a high growth rate of traffic, it is unlikely that revenues will fall. To avoid becoming an oligopolist structure, indiscriminate ordering of aircraft should be examined by some competent authority like the Competition Commission.

DGCA is obligated under Aircraft Rules to look into ‘excessive and predatory’ pricing.&nbsp;

(This article was originally published on The DNA. Read the <a href="https://www.dnaindia.com/analysis/column-a-curious-case-of-plenty-2740001">original article</a>)

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL.) 
&nbsp;

A major conundrum facing India’s aviation industry is the high growth rate of passenger traffic, both domestic and international. CAPA, a highly regarded private consultancy, has predicted domestic traffic to grow at 14-16 per cent annually, while internationally, traffic is pegged to rise by 10-12 per cent from FY2020.

A major conundrum facing India’s aviation industry is the high growth rate of passenger traffic, both domestic and international. CAPA, a highly regarded private consultancy, has predicted domestic traffic to grow at 14-16 per cent annually, while internationally, traffic is pegged to rise by 10-12 per cent from FY2020. IATA has also predicted that India will be the third largest air passenger market by 2025. While the top dozen airports make profits, the rest 100 odd are loss-making. Of these, half-a-dozen private airports also share their revenue with the Airports Authority of India (AAI). The rest are owned and managed by the AAI, which cross-subsidises the balance. While the present double-digit growth in passenger traffic is likely to continue, massive investments in the airport and air traffic management are needed to overcome a deficient infrastructure. Despite double-digit growth, profitability is declining. The original national carriers, Air India and Indian Airlines, were merged in July 2007 in a hair-brained scheme devised by the then minister. The new entity has not managed to survive without the government’s life support. Since it’s fully owned by the government, no attempt has been made by the previous or the present government to revive it, as was done in the case of Satyam in 2009 or the Japan Airlines. It’s painful to see that recently the government formed an SPV and transferred Rs 29,000 crore out of its Rs 55,000 crore debt, hiving off the profitable Air India Air Transport Services. Meanwhile, Air India is fast losing its market share and may soon become irrelevant. Justifying it as a cost-cutting measure, Air India has reduced its Global Distribution System (GDS) agents to one, Travelport, which is represented in India by owners of Indigo Airlines - a direct conflict of interest. The result is that the catchment area of passengers for Air India has shrunk, resulting in the once-premier airline announcing the suspension of three flights from Delhi - to Madrid, Birmingham and to Birmingham via Amritsar, respectively. As for Kingfisher, Vijay Mallya is fighting against extradition in London courts. Jet Airways, started and owned by the enigmatic Naresh Goyal as a first-class full-service airline since 1992, too is fighting for survival. In 1997, the business model of airlines in India changed dramatically with the arrival of a low-cost carrier, Air Deccan. This and other airlines gave up on the glamour quotient, providing just point to point services, sans any frills and lower ticket prices. With the Indian economy growing at 7 per cent plus, there was an air traffic boom. A lot of people who used trains switched to LCCs. While growth in air traffic has been in double digits for the last ten years, the growth in railway traffic for two-tier coaches and above has been minimal. Full-service airlines, Air India, Kingfisher and Jet Airways, began their low-cost subsidiaries. However, by not closing their full services, they suffered. With the high growth of passenger traffic, airlines started ordering new aircraft. Indigo in 2005 astounded everyone by ordering 100 single-aisle Airbus A320-200 aircraft and followed this up in 2011 by ordering another 180 aircraft of the same type, placing yet another order for 250 Airbus A320-Neo in 2015. Meanwhile in 2016, the government allowed 100 per cent foreign equity in airlines but kept a cap of up to 49 per cent equity for foreign airlines wanting to invest in Indian carriers, mindful of the international requirement that an airline must be majority-owned and effectively controlled by the nationals of their country. As new aircraft started arriving to join the fleet, the need to fill them up meant that prices had to be kept low, given India’s price-sensitive market. A new system of computerised ticket price management was introduced to fill up seats. However, as the seat capacity in India grew, the need to keep prices low to attract travellers became desperate. To add to this, there were two more variables that mattered. The first were oil prices, which keep fluctuating. But in India, domestic oil prices are kept artificially high by oil companies and the government benefits when prices go up as their share of tax revenue also increases. Therefore, there is little reason for them to lower Air Turbine Fuel (ATF) rates. The second factor are foreign exchange rates. As the rupee slides down, airlines have to pay more for ATF in Rupee terms, which reflect on their balance sheet. The net outcome is that the airline industry in India lost S1.7 billion in FY2018 and may lose another $550-700 million in FY 2019. As more aircraft join the fleet, these losses are likely to continue. As airlines go into losses, the banking sector comes into play. While private banks tend to shy away from such risky loans, it is the public sector banks, in particular, the State Bank of India, that gets hit. Public sector banks are not only nudged to give loans, but when these loans become nonperforming, are nudged to convert them into equity at a high rate, thereby absorbing partially the losses of the airlines. The government must now reduce the tax burden on airlines, both directly and through unnecessary taxes/charges of supply of ATF, which is both monopolistic and very high. With such a high growth rate of traffic, it is unlikely that revenues will fall. To avoid becoming an oligopolist structure, indiscriminate ordering of aircraft should be examined by some competent authority like the Competition Commission. DGCA is obligated under Aircraft Rules to look into ‘excessive and predatory’ pricing. (This article was originally published on The DNA. Read the original article) (Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL.)

Government must reduce the tax burden on airlines

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Zee News Rajasthan

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Sanat Kaul

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