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Air cargo capacity hamstrings India’s economic growth

Air cargo capacity hamstrings India’s economic growth
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First Published: Wed, Feb 14 2007. 12 02 PM IST
Updated: Wed, Feb 14 2007. 12 02 PM IST
New Delhi: On a cool February night in 2003, K.S. Ramakrishna, the chief executive of Bangalore-based flower exporter Karuturi Networks, got a dreaded call on his mobile phone.
At the peak of his export season, with Valentine’s Day just around the corner, two of his three chartered planes hadn’t shown up at Bangalore’s airport, and close to half a million dollars worth of roses destined for Europe were stranded inside refrigerated trucks. The government-run cold-storage facility at the airport was already full, and the refrigerated trucks were designed for four-hour trips.
As the night wore on and Ramakrishna and his employees worked the phones, the flowers started to wilt.  Eventually, the flowers had to be dumped, at huge discounts, in the local market. “It was really devastating,” he recalls. “I think it was the turning point for me.”
After years of struggling against complicated and cumbersome customs requirements, paying freight charges that consistently exceeded global prices, and losing almost 10% of its inventory because of delays that it could neither control nor predict, Karuturi decided that for the company to grow, India was the wrong place.
The company eventually invested in a 50 hectare farm in Addis Ababa, Ethiopia, and expects revenues from that farm to exceed its decades old Indian production within the first year, taking advantage of freight charges to Europe that are a fifth of what it pays in India , some 50 cents or Rs22 a kilo of flowers versus $2.50 or Rs110 a kilo from Bangalore.
As a result, the company’s growth has more than doubled, up to Rs44 crore compared with Rs14 crore the year before. Profits are up 126% to almost Rs6 crore, according to P. Mukunda, Karuturi CFO .
“There’s no way I could continue growing in India,” said Ramakrishna. “It would be a big business blunder to even try.”
India’s overcrowded air cargo system has been creaking since 2000, when foreign trade totalled about $88 billion. In the years since, annual growth has been anywhere between 20% and 40%, and in 2006, almost $183 billion worth of goods were passing through the same ports and airports that have seen very little increase in capacity.
Now, the time in between—when a piece of nonperishable cargo shows up at an airport and when it is ready to be moved—has reached an average of 17 days, according to Radharam Panicker, country manager for Mumbai-based Cargo Service Centre India, the KLM subsidiary that handles cargo for the Dutch airline, which also runs the perishable goods facilities at the Delhi airport.
The problem has not escaped government attention. In a recent interview, Ajay Prasad, outgoing secretary at the civil aviation ministry, said growth in air cargo capacity was on high priority for the ministry.
“Have no doubt about it, economic growth is very closely tied to cargo growth,” he said. “We intend to focus on this sector significantly in the future.”
But, the increased cargo capacity at the airports in Delhi and Mumbai, being expanded currently, won’t be available until 2010 and 2012, respectively. Till then, Indian companies that trade in perishables like fruits and electronics like computer equipment and cellphone components, are stuck with delays of 15-20 days.
“These delays translate into extra dollars, because it’s tougher to satisfy a customer when we can’t control the supplies,” said Ramdev Sharma, country director for Chinese telecom gear-maker Huawei, which imports mobile phone and radio equipment, among other electronics equipment.
Sharma estimated that almost a fifth of his average turnaround time for an order is taken up waiting for customs officials to approve the release of his shipments.
For companies that don’t do business internationally, the delays are less severe. But Blue Dart Aviation and its parent company DHL, the top player in the Rs6,000 crore air cargo services sector, say that bottlenecks at airports and high state taxes on aviation fuel force prices upward. “It really is a missed opportunity,” said Tulsi Mirchandani, senior vice-president of marketing at Blue Dart. “If you look at airports in this region, like Singapore or Dubai, they have increased cargo capacities tremendously.”
In 1990, for instance, both Mumbai and Dubai’s airports had about the same cargo capacity. Today, Dubai’s total cargo capacity ranks 18th in the world, moving about 1.5 million tonnes of cargo annually, while Mumbai’s airport struggles to handle less than half a million tonnes of cargo.
In the last three years, the customs regulations in India have seen some simplification—introduction of computerized systems and the addition of new customs officers. But red tape still remains cumbersome.
At Karuturi, for instance, at least two dozen rose shipments a day leave its farm outside Bangalore to the airport, where six sets of forms are needed for each shipment before they are allowed onto the tarmac. Each shipping bill needs a customs superintendent approval, and each shipment gets inspected physically before it can take off. 
For businesses exporting perishable goods, these delays are often death blows to the profitability of their shipments.
“The customs officials here have improved somewhat, but they are not even close to world-class,” said Nitin Agarwal, the managing director of Mumbai-based EuroFruit, which exports mangoes, pomegranates and grapes to wholesale suppliers in Europe, both via sea and air. “There is a lot of room for improvement, especially in understanding the priorities of perishable goods.”
For the air cargo industry, other costs, like labour and aviation fuel, are also increasing—costs which they pass on to customers already paying high air freight charges.
“We can’t hire enough people to take care of the freight, and we have no training centres for people in the cargo industry,” said Panicker.
The country manager for Cargo Service Center saw its own operations stretched thin in the last year as volume at Mumbai’s air cargo facilities went up by almost 45%.
Analysts and industry officials say the biggest hindrance to growth of air cargo industry in India are the various—up to 45%—various central and state levies that airlines have to pay for aviation fuel. Taxes on aviation fuel have been a controversial and expensive sideshow to India’s aviation boom. While Central surcharges are fixed, individual states apply tariffs ranging from 8% to 35%.
In a high-volume, low-margin business, buying extra planes or investing in airport facilities is difficult in such a heavily-taxed environment, said Damien Horth, a Hong Kong based analyst for UBS. The resulting higher freight charges in India hurt the profits for Huawei, for instance, as it competes in one of the most price-sensitive mobile telephony markets in the world.
“Cellphone costs in India are the lowest in the world, and they could be lower if I didn’t have to pay extra for freight,” said Huawei’s Sharma.The taxes on aviation fuel are what convinced Karuturi networks to stop chartering Russian aircraft for their own freight operations, and are a major concern for DHL and other cargo operations. 
The outlook in the coming years is bleak. The economy—and foreign trade—is expected to grow much as it has in the past few years, while the new airports cargo capacity won’t be available in the next few years (2010 for Delhi, and 2012 for Mumbai and 2008 for Bangalore). The frustrating delays for importers and exporters, until then, will continue.
“We are in a unique position, both economically and geographically, to become a major cargo hub,” Mirchandani said. “But we just haven’t been able to leverage our advantages.”
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First Published: Wed, Feb 14 2007. 12 02 PM IST
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