Indian aviation must fly

The dominant headlines from Indian aviation this past fortnight have revolved around the ailing Jet Airways, the grounded 737 Max 8 aircraft of SpiceJet and the overall squeeze in the sector that may also be pinching passengers’ pockets. Amidst all that gloom, there is the (non-headline) news from the latest world airport traffic rankings from Airports Council International that, in 2018, Delhi’s IGI airport saw the maximum growth in passenger traffic among any of the top 20 busiest of the world. In the process, Delhi has also become the 12th busiest airport in the world ahead of major hubs, Frankfurt and Guangzhou. A paradox of booming demand and struggling airlines.

India cannot allow aviation to fail (but that doesn’t mean airlines should be bailed out by the government). If there are any poster boys of the success of India’s less-than-full-hearted move to a market economy, they are aviation and telecom. A true measure of the success of free markets isn’t just the rise of profitable businesses and dollar billionaires. Equally, it must involve considerable, quantifiable benefit to the consumer. Just 20 years ago, it would have been unthinkable to imagine that 800 million Indians would have access to a phone and that 200 million Indians would be travelling in airplanes every year. In addition to bringing efficiency and affordability to the lives of consumers, both sectors have also contributed hugely to job creation. 

But the fact is, aviation is a tough business, anywhere in the world. In the US alone, the world’s largest aviation market (India is now the third largest) there have been some 100 airline bankruptcies. There have been high profile busts in Europe too with many countries folding up flag carriers or selling them to foreign airlines. Inherently, aviation is a very competitive and high cost business. In India, government policy has pushed the cost curve further up.

Not in sync: In India, the development of airport infrastructure has not kept pace with growing demand. Big cities like Delhi, Mumbai and Bengaluru ought to have multiple airports

One-third of an airline’s cost is fuel cost. Aviation Turbine Fuel (ATF) is taxed at very high rates in India. At times when global fuel prices are high, charging those rates would make most airlines unviable. Even in times of moderate global oil prices, taxes on ATF must be lowered. Aviation is no longer a luxury. It is just another mode of conveyance. Ideally, it should be brought in under the GST but the centre and states that have got addicted to over-taxing all kinds of fuels are not likely to relent easily.

The other challenge for aviation in India is that the development of airport infrastructure has not kept pace with growing demand. Big cities like Delhi, Mumbai and Bengaluru ought to have multiple airports. Elsewhere in the world, low-cost carriers usually fly to secondary or tertiary airports around major cities where user charges are lower than in major airports. In India, all airlines have to use over-crowded airports with high user fees. Private participation in airports (other than Delhi, Mumbai, Bengaluru, Kochi and Hyderabad) had been going slow until the recent bidding out of O&M (operation and maintenance) operations in six state-run airports to private players. The government should, on a fast track, divest all airports which have substantial traffic to private players and encourage them to build second airports in big cities. The government can focus on building greenfield airports in smaller cities where private investment is not forthcoming but where there may be latent demand.

Perhaps the biggest obstacle to the growth of a healthy aviation sector is the terminally sick Air India on which the government has spent close to Rs 60,000 crore over the last decade without achieving any turnaround. The bottom line is that the airline is using its assets inefficiently, whether it is aircraft or landing rights or bilateral international rights, or a bloated workforce. All these assets would be better used if Air India was either shut down or sold to the private sector. Needless to say, such a sale will not happen if the government imposes stringent conditions as it did in 2018 when no buyers came forward. A dose of pragmatism is necessary.

Crucially, the government needs to remove the 49 per cent cap on foreign airlines investing in an Indian airline. There are only two ways to prevent chaos around a failed airline (and this applies to Jet Airways too). First, put the airline into the bankruptcy process or ensure a change in promoter and management. Second, liberalise policy so that the pool of buyers for a failing Indian airline is the largest possible. That requires foreign airlines to participate fully.

Of course, poor management may still lead to business failures. With the right enabling environment, market forces will take care of that.

The author is chief economist, Vedanta