The Changing Face of Indian Aviation – Part 1

CargoForwarder Global with the assistance of Radhramanan Panicker, one of India’s most well known air cargo managers, takes a closer look at Indian Aviation development since the recent elections. Air cargo plays an important role in the Indian economy and seems to be profiting from recent positive developments in the country.

From tea-seller to Prime Minister – India’s Narendra Modi  /  source: PM’s Office
From tea-seller to Prime Minister – India’s Narendra Modi / source: PM’s Office

The recent national election in India created a tsunami in Indian politics. For the first time in the past four decades, a national government was installed with such a massive and decisive mandate, which analysts are categorical in stating is proof of an upcoming change. This change desired by the fast growing Indian urbanized middle class - a class which was generally marginalized by the so called poor (?) and agriculture based rural populace in political matters - led to an absolute majority of a national party for the first time in many decades. It also meant the decimation of the long popular national party - the Indian National Congress - and elimination of many small parties from the Parliament. The new Indian Prime Minister, Modi, campaigned on a promise to cut bureaucratic sloth and fight corruption. His party’s decisive win gives him the mandate to advance reforms that stalled under the scandal-ridden government of his predecessor, Manmohan Singh.

Slashing of subsidies is a must
Modi, who built his reputation as an economic modernizer by putting his home state of Gujarat on a high-growth path, has moved to streamline the cabinet towards a more centralized system of governing. Credited with winning the election single-handedly, it gives the Prime Minister, a very decisive, strong and authoritative control over his cabinet colleagues, something which the previous Prime Minister of two terms was not able to do which lead to every Minister pulling in different directions in the previous government. “I am sure the political change itself sends a strong signal to the global community and also domestic investors,” Jaitley, the newly appointed Finance & Defense Minister said. “I think over the next few months by expediting decision-making processes, I am sure we will be able to build that.”

Hyderabad’s Rajiv Gandhi International is one of India’s most modern airports  /  source: HYD
Hyderabad’s Rajiv Gandhi International is one of India’s most modern airports / source: HYD

Public finances are in dire straits as government spending has outpaced revenues. The new administration will immediately need to take a decision on slashing subsidy spending which is threatening a budget blow-out and a sovereign ratings downgrade. The major task before the new government is to completely shake up the Indian economy to push to higher trajectory of growth. Key initiatives identified are infrastructure development, reform in bureaucracy and governance, reign in the inflation and bring in investment both domestic and foreign. The Prime Minister in a unique experiment has put in a very small cabinet - half the size of the previous government.
Huge airport investments


The new government has raised great expectations in the civil aviation sector. The sector has seen dramatic change in the last decade, which itself was fraught with new concerns and issues. In a reformist zeal the previous government privatized the Mumbai and Delhi airports, while allowing two new airports at Hyderabad and Bengaluru to grow in the private sector. A couple of small airports were also privatized. This saw huge investment of more than U.S.$5bn on being sunk in the development of new and better airport terminals across the country and not just at the metro airports. The domestic airline sector grew and the fast expanding Indian globetrotters led to influx of huge international airline capacity into India.

 

Game-changer
The industry is currently the ninth largest aviation industry in the world at earning $16 bn, handling 121 million domestic and 41 million international passengers with more than 85 international airlines operating to India along with 5 Indian carriers connecting over 40 countries. According to the Airports Authority of India (AAI), in 2013 passenger traffic grew to 159 million and cargo traffic to 2.19 million tons, registering an impressive growth of 13 percent and 10 percent respectively from 2003.
The previous government had taken initiatives to attract foreign direct investment in the sector. The biggest game-changer in this direction has been the decision to allow 49 percent FDI by foreign airlines in Indian carriers. While this has raised critics’ hackles, the sector has seen a proposal to start two new airlines - one the low cost model by Air Asia in partnership with Tata and another Indian businessman, the second one has been the full service carrier jointly set up by Tata and Singapore Airlines. The first one is expected to severely shake up the low cost budget carriers like Indigo and Spicejet, the second one will take on Jet Airways and Air India. Air Asia India has already started operation and it is expected that TATA-SIA will begin their operations by September 2014. The policy also saw Etihad picking up a 25% stake in Jet Airways worth $350m. This policy to encourage FDI is in keeping with the 12th Five Year Plan period (2012-2017), which included an investment of $12.1bn in the airports sector, of which $9.3bn is expected to come from the private sector for construction of new airports, expansion and modernization of existing airports and development of low-cost airports.

Bengaluru’s Kempegowda International was the first airport in India to be constructed through a public-private partnership  /  source: BLR
Bengaluru’s Kempegowda International was the first airport in India to be constructed through a public-private partnership / source: BLR

Thankfully the new government is continuing the policy initiative of the previous government as far as Civil Aviation is concerned.

Challenges for the Aviation Sector
As Civil Aviation grows rapidly in the country, the lack of a Civil Aviation Policy aligned with a National Economic policy is a very glaring aspect. Despite many efforts over the past two decades, the said policy is yet to see the light of day. As a result, decisions are more on the spur of the moment or through lobbying rather than reason and in line with what is wanted going forward. It also leaves the investor and operators in the sector uncertain of what to expect in future so their decision making is still also short term and “present” oriented  rather than “future” oriented. This adds to the overall high cost in the industry.

Strong regulatory body needed
The second challenge and again very critical to the survival of the industry itself, is the establishment of a strong autonomous regulatory body to oversee implementation of the various regulation and rules governing the industry.
The current regulatory authority – Directorate General of Civil Aviation raises safety issues. The Regulator operates through officers who are seconded from the airlines and other bodies whom it is supposed to regulate. The previous government has brought in a new bill to replace the current system with an independent Regulator. However, the original bill has seen many changes which not only dilutes the powers but also makes one wonder whether the body will be more autonomous than the current one. Making a strong regulatory body with its own cadre should be the immediate priority within the new government.

Cargo Terminal at Bengaluru Airport operated by Menzies Aviation  /  source: BLR
Cargo Terminal at Bengaluru Airport operated by Menzies Aviation / source: BLR

High taxes, insufficient manpower
The third challenge is the high level of taxation in the industry. Central and state taxes on fuel (which in some states are as high as 40%) and maintenance, as well as service taxes on air tickets and high airport charges, all slow growth in the aviation sector.

The fourth challenge is the need for skilled human resources. According to a report, “the total manpower requirement of airlines is estimated to rise from 62,000 in FY-2011 to 117,000 by FY-2017. It is estimated that the sector, overall, will need about 350,000 new employees to facilitate growth in the next decade. Shortfalls in skilled labor could create safety issues and may see staff salaries rise, hurting India’s cost competitiveness.”

John Mc Donagh & Radharamanan Panicker

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