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Special Report - Putting the Pieces Together

The potential of the growing Indian market can only be

realized through a coordinated aviation policy
India is a huge country, a land of great diversity. Geographically, culturally, and socially, the
sub-continent swings from one end of the scale to the other. Its aviation sector doesnt buck
the trend.
The potential is enormous. The market already has some 150 million travelers passing
through its airports, and if Indians begin to travel with the same frequency as Americans, then
the years ahead could see the market boom beyond the two billion mark. This will not happen
quickly and is dependent on an expected increase in per capita GDP. Even so, by 2020 traffic
at Indian airports is expected to reach 450 million, making it the third-largest aviation market
in the world. Some 90 million passengers per annum (mppa) are projected to pass through
Delhi alone.
At the same time, a multifaceted crisis has taken hold of the industry that threatens to nip any
progress in the bud. Air India and Kingfisher Airlines, for example, are in critical condition.
Airline losses approached $2 billion in the year ending March 2012on the back of a $3.5
billion loss over the previous three years. The Centre for Asia-Pacific Aviation (CAPA)
believes Indian airlines debt burden will soon reach $20 billion. Indian banks and financial
institutions are exposed to about half of this amount.
Indian domestic traffic fell 1.1% in July compared with a year ago. After expanding at 20%plus rates through 2010 and early 2011, the Indian market stopped growing at the end of
2011. July capacity rose 2.1%, ropping the load factor from 71.8% last year to 69.6%.

At least the crisis has pushed aviation to the forefront of national thinking. But current
aviation policy has a fragmentary approach that is not connecting the dots in the value chain.
Airports and fuel are getting more expensive even as airlines struggle.
A coordinated India Inc. approach that addresses the central challenges of infrastructure,
costs, and taxes is urgently required.

A different picture
In terms of airport infrastructure, India has got a great deal right in previous years. The
Public-Private Partnerships (PPP) model has delivered world-class facilities at Hyderabad,
Cochin and Bangalore. And the benefits of these developments are clear to see. Bangalores
international services have more than doubled over the past decade, for example, enabling
Indias Silicon Valley to earn contracts throughout the world.
In India, the PPP model for developing greenfield airports as well as upgrading existing
airports has provided the opportunity to develop integrated airport cities on the lines of Dubai
and Hong Kong, says Promananda Elangbam, Manager of Marketing at Bangalore
International Airport Ltd. A holistic approach to airport infrastructure and its management is
the need of the hour. Done in a transparent and effective manner, this can help boost
international trade and tourism considerably.
But at Mumbai a different picture emerges. A delayed new terminal that will push capacity to
40 mppa should finally open for business at the end of 2013. Traffic growth is such, however,
that the airport will become congested again by 2017. And there is no possibility of
significant further expansion at this facility.
Mumbai is Indias financial capital and an important part of the countrys economic
wellbeing. A jam-packed airport will undoubtedly curtail the many benefits of healthy air
connectivity.
Prime Minister Manmohan Singh has recognized the urgency of the situation and backed the
Navi Mumbai airport project that dates back to the mid-90s. Even fast-tracking the
development may not be enough, though. Projections suggest there will be nearly 275 million
passengers in the Indian system by 2017, the majority of whom filter through Mumbai and
Delhi.

A dire situation
The lack of space isnt the only concern at Mumbai. It has a similar concession model to
Delhiand the northern hub has been making the headlines for all the wrong reasons.
The Airports Economic Regulatory Authority of India (AERA) approved a 346% increase in
charges at Delhi Airport effective from May 2012. The increase will add more than $400
million annually in operating costs for airlines.
An increase of this magnitude will impact travel demand 5% to 7%, says Tony Tyler, IATA
Director General and CEO. Thats bad for airlines, for passengers, for Delhi International
Airport Private Limited (DIAL), for the Delhi hub, for Delhi as a city, and indeed for India

and its economy as a whole. We need to focus on how to make Delhi a more competitive
airport, a successful hub and a driver of economic growth.
DIAL pays 46% of top-line revenue to the Airports Authority of India (AAI) as a concession
fee. Much of this is used to subsidize other public sector airports, which is not only in
contravention of international standards but also distorts competition.
I urge the government to initiate deliberations on utilizing the 46% concession fee to offset
the increase in aeronautical charges and the cost for passengers, says Tyler. This could be
the basis for a way forward that protects the interests of DIAL, its airline customers, the farepaying public, and the economy. And it is important that we find a workable solution soon to
avoid Mumbai, with a similar concession structure, falling into the same dire situation.
Any discussions wont come a moment too soon. The hike in prices has come about through
aggressive concessions fees and the over-recovery of a $10 billion investment in airports over
the past decade. The next 10 years are expected to see airport projects totaling $20 billion
which may mean yet more record rises in airports charges unless concession fees and overrecovery are tackled. Already Chennai has proposed a 118% increase to fund its
modernization project, while at Kolkata, the Airports Authority of India has asked for a 242%
increase in for 2012/2013 and a 35% increase the following period.
There has been huge improvement in infrastructure with newer terminals like Terminal 3 in
New Dehli, the Rajiv Gandhi International Airport at Hyderabad, Bengaluru International
Airport and others across the country, says Naresh Goyal, Chairman, Jet Airways.
However, the imposed levies and charges have resulted in an increase in operational costs.

Tax increase
India is becoming increasingly expensive. Taxes are everywhere in Indias aviation sector, a
clear indication that the government views the sector as a revenue source rather than a
revenue generator. Including taxes on domestic fuel, Indias aviation sector contributes in the
region of $2.15 billion (INR120 billion) in taxes annually according to an Oxford Economics
India Benefits of Aviation study.
In contravention of International Civil Aviation Organization (ICAO) policy, Indias Ministry
of Finance has put a service tax on tickets as well as landing and navigation charges. Fuel
taxesan excise duty of 8.2% and domestic charges that can add up to 30% to the bill
mean fuel is 45% of Indian carriers operating costs. This compares unfavorably with the
global average of 33%.
For the industry to recover from its current travails and achieve long-term sustainable
growth, there is a need to address problems created by high input costs, says Goyal.
It is little wonder that the sub-continents airlines are struggling. The difficulties being faced
by Air India and Kingfisher Airlines in particular have been well documented. Aside from the
structural issues, industry observers have cited Air Indias artificially low fares as the main
factor behind the struggles of Indian carriers. It is reported that the average Indian ticket price
of $95 is about $11 shy of a break-even figure. A weak rupee isnt helping and has caused
further cost increases in dollar-denominated expenses.

The contraction by Air India and Kingfisher Airlines does have a slight upside. CAPA reports
yield increases for Indian airlines in the region of 10% in the fourth quarter of the 2011/2012
financial year, improving toward 15% in the first quarter of 2012/2013.
And capacity management will remain tight. Approximately 24 aircraft are due to be
delivered in the next 12 months, eight of which will be Bombardier Q400s. This will lead to
an increase in domestic capacity of 7% to 8%, only half of the increase seen in the previous
financial year.
Indias carriers are not part of the global alliance scene and there has been little enthusiasm to
revamp a number of bilateral agreements. Emiratesone of the few carriers looking to
increase its presence on the sub-continenthas exhausted its entitlements, for example.
The government may be loosening the shackles slightly. In March 2012, then Finance
Minister Pranab Mukherjee said the government would allow foreign airlines to take up to a
49% investment in Indian carriers. Closer ties with international airlines could make a crucial
difference, although there has been little enthusiasm to date.
For many, though, it is putting the cart before the horse, as investment wont be forthcoming
while the fundamental aviation framework is so weak. India is an attractive destination for
us to serve, but I am not sure if India will be an attractive destination for us to invest in,
Willie Walsh, Chief Executive of International Airlines Group has noted.
Other challenges loom on the horizon. The policy on ground handling needs to be resolved.
Airlines have argued against the government proposal to limit airports to a maximum of three
competing handlers and no final decision has yet been made. It is also expected that muchneeded investment in air traffic management could translate into higher fees.
It is estimated that Indian aviation will need about 350,000 new employees to facilitate
growth in the next decade. Shortfalls in skilled labor would see staff salaries rise above
inflation, adding further cost pressure. Robust training programs will be the key to a
sustainable future, especially considering that India will probably continue to provide a
significant workforce for Gulf carriers.

Numbers in the wings

If India can resolve the crisis, the economic and social benefits that derive from improved
competitiveness and air connectivity would be enormous. Already, the aviation industry
supports close to 0.5% of Indian GDP and some 1.7 million high-productivity jobs. The
annual value added by each employee in air transport services in India is approximately 10
times higher than the Indian average.
Tourism is an obvious area of improvement. The Indian Tourism Ministry is targeting 10
million tourists by 2017, nearly double the 5.7 million arrivals expected in 2012. Foreign
visitorsaround 89% of which arrive by aircontribute $9.8 billion (INR548 billion) every
year. Stronger air services would make a notable difference, not only to the tourism sector,
but also to the bottom line of the Indian economy.
Indian exports could also gain substantially from a more competitive and cost-efficient air
transport sector. The Commerce Ministry wants to double Indias exports to $500 billion by

2013-14 compared with the 2010-11 level. The Indian government must utilize the
determination it has shown in fighting the European Emissions Trading Scheme to put its
aviation sector back on track.
The world is focused on Indian aviationfrom manufacturers, tourism boards, airlines,
global businesses to individual travelers, shippers and businessmen, notes Tyler. If we can
find common purpose among all stakeholders in Indian aviation, a bright future is at hand.
The benefits of such an effort will be shared across the entire economy.
The optimism is echoed by Jet Airways Goyal. In an emerging economy like India where
the need for connectivity is critical to facilitate the growth of trade and travel, one can only be
optimistic about the future.

Action plan for India

A Knowledge Paper on India: The Emerging Aviation Hub by the Federation of Indian
Chambers of Commerce and Industry in collaboration with KPMG released in March 2012
suggested the following eight-point action plan for Indian aviation.

Ensure collaboration between the Ministry of Civil Aviation, other related ministries,
regulators, and the industry

Promote other sectors that can both support and benefit the aviation sector

Reduce fuel sales tax. The long-term benefits in terms of higher economic activity and
employment generation would more than compensate for the notional loss of tax
revenue in the short run

Create an Essential Air Services Fund (EASF) to support air connectivity to second
and third-tier airports. Greater private sector investment in airports should also be
encouraged

Implement recent policy decisions such as the 49% Foreign Direct Investment limit,
and establish safeguards to prevent excessive and predatory ticket pricing

Establish an Air Cargo Promotion Board (ACPB) to address the significant challenges
in the air cargo sector and make India an air cargo hub for the region

Promote the domestic Maintenance, Repair and Overhaul industry by removing the
anomalous tax structure and providing a deemed export status to help prevent
business moving abroad

Establish a world-class National Aviation University and promote private sector

investments in training academies to produce highly-skilled human resources