Intro: Since Indian Aviation industry is in an ICU, the regulation of aviation sector in India will need reforms and policy changes to shore up the ailing sector.
As per industry estimates, airline carriers in India are expected to register a loss of more than 12, 500 crores in the current financial year. This hard fact needs to be viewed in the backdrop of the financial performance of the aviation sector in the country over the last two decades. In an overall perspective, it can be said that airline carrier business in India has not been much profitable or financially rewarding. This is borne out by the dismal performance of the national carriers Air India and Indian Airlines which were merged into a single entity in recent years. The financial performance of private airline carriers has not been very good. Kingfisher Airlines going bust and Spicejet running deep in the reds are comparatively recent happenings and many private carriers like Damania, Jagson and Sahara of the nineties are forgotten names today. These airliners had to close their businesses because their mounting losses were becoming unsustainable. Recently, the reputed global consultancy firm KPMG is on record to have remarked that the Indian aviation industry is in an ICU and requires urgent shock therapy. In early 2014, the Indian aviation industry received a jolt in that it was accorded a safety downgrade by US Federal Aviation Administration.
The message that comes out of all the above facts is that regulation of aviation sector in India needs urgent review and reform. And unless the policy changes to shore up the ailing aviation sector are performed, expecting FDI to flow in fast and big in the construction of airports and airliners in India seems to be a bit farfetched. It can be argued that foreign companies can still be enthusiastic to set up production facilities in India for exports, but existing manufacturers may not like to touch significantly their present global markets.
The profitability of airport operations depends on air traffic and the latter is shaped by demand in the industry. Demand in aviation industry has two components—air travel intensity of business traffic and air travel intensity of tourism traffic which will depend on economic growth and peoples’ income levels. Thus virtually, the profitability of aviation business hinges upon the growth of the overall economy with special reference to national and international tourism. FDI in establishment of airports and factories for airliners will be incumbent upon domestic aviation becoming profitable and paying. Almost 70 to 80 percent of the turnover of manufacturing plants for airliners would be dependent upon and tied up to domestic demand. And we can expect exports to the extent of a maximum of 20 to 30 percent.
The government intends to build low cost airports at 50 locations in the country. But investing money in building these facilities is not going to be a worthwhile exercise unless the overall national economy witnesses a solid growth that will pull demand. Without this basic economic equation being fulfilled, foreign investors may also not show much interest in capital infusion for establishing airliner factories or airports. Keeping this important fact in view, the government must concentrate on making these businesses lucrative. The question is, how is it to be done?
Two important steps that the government needs to take to address the above issue are: First, reduce bank interest rates, i.e. the cost of borrowed capital for aviation industry and second, provide Aviation Turbine Fuel (ATF) at subsidised rates. The government can also consider providing fiscal concessions to aviation industry and make some regulations aimed at reducing operational costs in the airline business. Another area where the government needs to work upon is making domestic air travel cheaper and more affordable, which would markedly increase domestic air traffic. This point is highlighted by the fact that currently, just two percent of Indian population travels by air. As per statistics, Malaysia, with a population of 30 million flies 18 million passengers and US with a population of 250 million flies 750 million passengers, while India, with a population of 1250 million flies only 60 million passengers annually. Left to the free market forces and without extra support from the government, the aviation sector is unlikely to become lucrative and attractive for investment. These important areas call for urgent and close attention of the government, followed by addressal of the relevant issues.
(The writer is a senior columnist)