INDIAN Civil Aviation Ministry’s Vision-2020 documents are to be believed, the growth of aviation sector has potential to absorb up to US$ 120 billion of investment. The fleet size of commercial airlines sector is expected be approximately 1000 aircraft, whereas domestic passenger numbers could reach 150-180 million by 2020. The country’s helicopter fleet is expected to be another 500 in the same period. India’s air cargo movement is expected to reach the level of 9 million MT and the sector may have the potential to absorb 3 million jobs directly by 2020.

turbulenceintheairThese are some of the positive assessments which can make anyone very optimistic about the Indian aviation industry. Ironically, the current scenario rather looks very gloomy. Almost all the airlines are running in huge losses, raising question about their ability to survive in the long run. While the Government-owned carrier Air India is in an abysmal state with mounting losses and is at the mercy of bail-out package from Government, the private domestic carriers (Jet Airways, Kingfisher Airlines, SpiceJet, Jet Lite and GoAir) with the exception of the low-cost carrier (LCC) IndiGo, as per figures ending September 2011, have all reported heavy losses and are flying on very low fuel. Reports indicate that the daily losses range from Rs.1 crore for IndiGo to Rs.7 crore for Kingfisher.

The Centre for Asia Pacific Aviation (CAPA) has forecast a record US$ 2.5 billion (Rs.12,500 crore) to US$ 3 billion (Rs.15,000 crore) loss for Indian airlines for the year ending March 2012, with Air India accounting for more than half of it. It also estimates that Indian carriers need an immediate injection of US$ 2.5 billion to keep their operations from collapsing.



Given the abnormally high cost of jet fuel; the weakened rupee; lack of maintenance, repair and overhaul (MRO) facilities within the country; substantial state tax on aviation turbine fuel; higher interest costs and operating losses; and a growing inability to service interest and debt obligations, matters could not be worse. Airlines are also unable to raise fares thanks to the fiercely competitive nature of the Indian market. The Federation of Indian Airlines claims that ticket pricing is 30 per cent below cost.

Every airline has called on the Government to address urgently the issue of jet fuel pricing. Industry experts point out that on an average fuel accounts for 30 per cent of an airline’s operating costs. For Indian carriers—thanks to the state’s sales tax and customs duty, which hover around 20 to 30 per cent – fuel costs account for 45 per cent of the operations.

For Kingfisher Airlines and Jet Airways, fuel cost as a percentage of revenue stood at 53% and 48%, respectively, in the September quarter, while it was 63% for SpiceJet Ltd, a low-fare carrier.

The recent increase in crude oil prices and depreciation of rupee against the dollar have made the cost on fuel around half of airlines’ total cost, from two-fifths of the total cost a year earlier. The industry expert suggests that the Government should categorize jet fuel as capital goods, which will fix taxes on it at 4 per cent.

For the domestic airlines, poor infrastructure has come as a double whammy: increased downtime or circling in the air since landing slots are not available, and parking woes. With no slots to park in the metro airports, airlines are forced to take their aircraft to smaller airfields in tier 2 and tier 3 towns. This means filling seats by selling tickets below the cost to avoid flying an empty aircraft.

With as many as ten carriers operating, has the market become too crowded for comfort? There are several players who have started feeling the heat. Though there were some high-profile mergers and acquisitions in 2007-08, the situation has not improved much. Jet Airways took over Sahara Airlines (renamed JetLite); Air India and Indian Airlines merged to form NACIL; Kingfisher Airlines took over the original low cost warrior Air Deccan (renamed Kingfisher Red) which had high leverage and found the going unsustainable.

With the growing market share of LCCs coupled with economic slowdown in 2008 and 2009, the pure full service airlines are finding themselves into tough situation. Full service carriers embraced the low fare model in good measure to ride out the downturn. While Air India had its low cost arm, Air India Express, Jet and Kingfisher shifted a majority of their seats to the low fare category. As things stand, the aviation market in India comprises three LCCs — SpiceJet, IndiGo and GoAir — and three full service carriers — NACIL, Jet Airways and Kingfisher Airlines —which also offer low fare seats. However, Kingfisher decided to do away with its low fare offering (Kingfisher Red) and focus only on the high yield segment of the market.

Full service carriers were also badly impacted by the high debt they had taken to expand fleet capacities and at the time of acquisition of other airlines. Such high debt has dragged down the full service carriers. The situation was similar in 2011 when buoyant demand conditions and reasonable crude oil prices for most part of the year led to a good operating performance by many airlines.

The year 2012 sadly is turning out to be a nightmare for the sector. Oil prices have shot up sharply beyond US$ 100 a barrel levels. However, though demand is growing at a healthy clip, airlines are not able to hike prices to the extent needed, thanks to fierce competition.

If things continue as they are, this fiscal may be a washout for most airlines, including LCCs, even at the operating level. However, given their low levels of leverage (at least till now), LCCs seem better positioned to tackle the current turbulence.



The Government has taken some measures to facilitate and enable growth of the aviation sector. Some of the steps undertaken by Government are as following:

(i) Easier FDI Policy for airports has been put in place vide which 100% FDI, through automatic route, has been permitted in Greenfield airports. (ii) FDI requirements for air transport side of civil aviation have been revised and separate limits have been prescribed in respect of different sectors such as schedule cargo airlines, non-scheduled operators, MRO etc. (iii) Relaxed procedure for establishment of private airports for private use has been announced. (iv) Private domestic airlines have been permitted to fly on overseas routes subject to specified guidelines. Further, bilateral arrangements with other countries have been gradually liberalized to enable better international connectivity. (v)A new Flying Training Institute has been established at Gondia, Maharashtra. Further, Indira Gandhi Rashtriya Uran Akademi has been restructured. These measures would help in putting in place better training infrastructure for skilled manpower in the aviation sector. (vi) The infrastructure at the airports, Air Traffic Control and Navigation is being constantly upgraded to meet the future demand of the airlines. (vii)To create a world class airport infrastructure upgradation/modernization of a number of metro and non-metro airports have been undertaken by Airports Authority of India (AAI) as well as through Joint Venture Companies. (viii) AAI has undertaken upgradation & modernization of 35 non-metro airports in the country in a time bound manner. In addition, 13 more airports have also been taken up for upgradation. (ix) AAI has also undertaken the modernization and expansion of the international airports at Chennai and Kolkata. (x) DGCA from time to time reviews and amends its regulations as per international standards and aviation requirements of the country. (xi) DGCA itself has been strengthened to meet international safety obligations.(xii) City side development of specific airports has been undertaken under Public Private Participation model.(xiii) A new policy for Greenfield airports which envisages. (xiv) An Independent regulatory Authority, namely, AERA has been established in 2009 with the prime objective to create a level playing field and healthy competition amongst all major airports (Government-owned, PPP- based, private), regulation of tariffs of aeronautical services, protection of reasonable interest of users.



The Civil Aviation Ministry is expected to give its nod for foreign airlines to pick up 26 per cent stake in Indian carriers. Though, the Ministry was agreeable to offer only 24 per cent stake to foreign carriers, a stake of 26 per cent will give the foreign investor the right to block special resolutions on the board and thus will have a greater say in the carrier’s business decisions.

The issue is expected to be brought before the Cabinet for formal approval and implementation very soon.

The Government initiated the move to allow 26 per cent FDI by foreign airlines into domestic carriers against the backdrop of Kingfisher slipping into a severe debt crisis and several other Indian carriers laden with high debt on their books.



The Government is working on a new Civil Aviation policy and economic regulatory mechanism for pricing of air tickets.

The Government has started fresh work on the new Civil Aviation policy to meet the challenges of the new decade. It will look into issues of sustainability, viability and human resource of the sector.

The Ministry is also working on an economic regulatory mechanism for pricing of air tickets as the airlines have been attributing their losses to the pricing of air ticket below their cost price. However, the Government will not regulate the airfares or fix the tariff.

Also, the Ministry is planning to propose a set of recommendations to ease taxes on aviation turbine fuel to the Prime Minister’s Office (PMO) after it wrote to the Ministry to examine tax regime governing the jet fuel.

ATF prices and taxes on it would be reviewed in the economic regulatory framework, under which the Ministry could propose direct import of jet fuel and ease the policy regime in this matter. It will also suggest restructuring of custom and excise duty on jet fuel.

The Government is considering establishing a Civil Aviation Authority (CAA) in India in place of Directorate General of Civil Aviation (DGCA). Apart from the regulatory safety oversight functions of the current DGCA, additional functions relating to Economic Regulation, Consumer Protection and Environment Regulations have also been included in the proposed CAA.

The objective of the proposed CAA is to overcome the constraints presently faced by DGCA in terms of recruitment and retention of technical manpower and inability to quickly address on-going operational issues due to lack of adequate administrative and financial authority and growing need of the aviation sector.

The proposed authority would have adequate financial and administrative flexibility to met functional requirements of an effective safety oversight system.



The aviation sector is a crucial cog in the country’s infrastructure wheel. To ease its troubles, the Government could consider reducing the high taxes on aviation turbine fuel. Also, allowing investment by foreign airlines in the aviation sector (as it is being considered by the Government now) would be welcome.

It is also critical for the sector players to revert to rational fares, as soon as possible. In this regard, continued shielding of NACIL by the Government needs to be stopped. Also, there is little case for bailout of private airlines.

While the Government should do its bit in terms of the policy framework, the sector should then be left to function on the principle of ‘survival of the fittest’. Another round of consolidation may be just what the India’s aviation sector needs.



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