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Is the Indian aviation sector seeing a credible revival after a turbulent 2012, when the country’s airlines posted a combined loss of $1.6 billion, and saw a popular brand Kingfisher Airlines go bust?
Market analysts who’ve usually been bearish about the sector have started heeding to the positive developments that have taken place in the last few months. Nikhil Vora, MD & Head of Research at IDFC Securities in a recent interview to CNBC TV18 said “This is a market which is just about opening up. It will become competitive in the next few years, but possibly will also become profitable which was not the case earlier.”
There is, all of a sudden, a lot to be bullish about. Analysts like Vora expect $2-3 billion to flow into India, through the FDI route over a period of time. The Jet-Etihad deal has got the cabinet nod, the Tata-AirAsia JV is expected to commence operations by early next year and the Tata-SIA combine is busy getting approvals in place before they take to the skies. Others like Qatar Airways are reported to be keen to expand their Indian footprint, leading experts to believe there will be significant M&A action in the Indian skies over the next 12-18 months. Experts believe these partnerships will open up vast networks to Indian passengers, as carriers join global alliances.
Almost as important as the opening up of FDI, is talk about allowing domestic airlines to operate international services without restrictions in fleet size and operational experience (scrapping what’s known as the 5/20 rule).
“There is no logic in not allowing Indian airlines to fly international without having five years of operational experience and 20 aircraft when foreign airlines can fly in with even a single aircraft in their fleet. The regulation needs to be amended and we are planning to move a Cabinet note soon.” Civil Aviation Minister Ajit Singh said recently. Singh received support from Finance Minister P Chidambaram and the sense is, this amendment will soon be pushed through.
This could be a big deal. Aviation advisory firm Centre for Asia Pacific Aviation (CAPA) described the 5/20 rule as “the most damaging and discriminatory” adding that it enabled foreign airlines to capture a larger share of the international market at the expense of home carriers. CAPA believes India could reach the 100 million passenger mark by 2021 instead of 96 million by 2023 if India abolishes the 5/20 rule as it would “result in a significant acceleration of growth.”
LCCs (low cost carriers) would benefit the most from this amendment, and India would be able to leverage its potential as a low cost hub, an opportunity that was thwarted by the 5/20 rule, believes CAPA.
Counter intuitively, the advisory firm also thinks opening up of India-UAE bilateral agreement, while causing a huge uproar for being allegedly favouring the Jet Airways – Etihad combine, could have had a positive spinoff. “This may in turn have prompted the decision to fast-track approvals for AirAsia, and likely for Tata-SIA and others, as well as the growing momentum to remove the 5/20 rule in an effort to re-balance the market. If the consequence is the dismantling of some of the key structural challenges in Indian aviation the outcome will be highly positive for the sector” according to CAPA’s recent report titled India’s evolving global alliance mosaic.
Gradually, the skies seem to be clearing up for the aviation sector which as one expert put it, is a glass 80% full. We are pretty much on track barring a “few but formidable problems” according to Amber Dubey, Partner & Head of Aviation at KPMG. Dubey believes precipitous taxation and high costs remain key challenges to making aviation profitable, and it would be ‘fallacious’ to assume that there will be a meaningful turnaround without a rationalization of taxes and costs.
“If we could just get the top 5 states of Delhi, Maharashtra, Tamil Nadu, Karnataka and West Bengal to free aviation from the huge taxes on ATF and MRO, we are home. The funny thing is, this so-called ‘tax relief’ would come back to the states in the form of enhanced, trade, commerce, tourism and employment. It’s an investment and not relief” Dubey told Business Standard.
India continues to remain one of the costliest places to run an airline. Indian ATF is nearly 60% costlier than in the Middle East and South East Asia and depreciation in the rupee has made ATF, MRO and air craft leasing charges even more expensive.
KPMG has a 5 point agenda for the government to achieve closure on the reforms process that’s already been set in motion. Some of their demands include:
- Notification of ATF as a declared good with uniform 4% sales tax all over India
- Declaration of a 10 year tax free status for MRO (Maintain Repair Operations)
- Abolition of the 5/20 rule, movement on which is already underway
- 40% funding support for tier 3-4 airports
- And a complete overhaul of policy in air cargo, airport security, aviation related licenses, general aviation and aviation education.
Last but not the least, is a demand from almost all quarters; that the government undertake bold action to revive Air India, which while showing an improvement across financial and operational metrics, is unlikely to return to profitability given the fast changing dynamics in Indian aviation. The debt laden, bloodletting national carrier is expected to bleed heavier once competition intensifies. Ajit Singh spoke about privatization and had to revoke his stance, but experts say the Maharaja has a lot of cleaning up to do before the government can even think of de-nationalizing.
It is a long way then before India’s airlines reach ‘destination profit’, but after years of being grounded, at least the takeoff has happened.
