Carriers need to work on more rational commercial principles

Carriers need to work on more rational commercial principles
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First Published: Wed, Jul 23 2008. 12 10 AM IST

Insider’s view: A file photo of Ashok Chawla, secretary, ministry of civil aviation.
Insider’s view: A file photo of Ashok Chawla, secretary, ministry of civil aviation.
Updated: Wed, Jul 23 2008. 12 10 AM IST
As the airline industry seeks government help to tide over a surge in fuel prices, the government has made it clear that private carriers first need to do their bit to turn around their ailing businesses. In an interview with Mint, civil aviation secretary Ashok Chawla spoke about the aviation industry’s growth prospects, funding for national carrier Air India, impact of slower economic growth on foreign direct investment and the future civil aviation policy. Edited excerpts:
After 30-40% growth rate in the aviation sector over the past few years and the sudden slowdown in growth over the past few months, what kind of scenario do you expect for the industry this year?
Growth in the domestic passenger market is now correcting itself. The slight additional capacity which the market had seen — airlines are busy trying to prune that by way of reduction of flights, reduction of the seats that they offer in the market and, to a certain extent, slowing down the process of acquisition of new aircraft. It is
Insider’s view: A file photo of Ashok Chawla, secretary, ministry of civil aviation.
very interesting that on the international segment the growth has always been — including in the last 3-4 years — more realistic, yet a very impressive and robust 14-15% per annum. That will stay. So, in other words, what we are seeing is a certain stabilization, or correction in the domestic passenger market. There is no cause for worry, this does not in any manner reflect the long-term prospects of the aviation industry in India, which, needless to say, are very good because of the vast size of the country, the increased purchasing power of the people and the fact that aspirations of people with more money in their pocket is much higher than it used to be. It’s difficult to put a specific number, but the overall growth in the current year in terms of the domestic passenger traffic will be in the region of about 14-15%. Also, this would be about 1.5-2 times the GDP (gross domestic product) growth. Internationally, the benchmark is that if you are doing 1.5 times the GDP growth rate of that region, that is a good healthy growth rate.
Airlines are losing money and seeking sops from the government. The Prime Minister has set up a committee to look into the possibilities. Are there any other measures under consideration to give them temporary relief?
The FIA (Federation of Indian Airlines) met the minister of civil aviation (early last month and) they later met the Prime Minister, finance minister and others; what was conveyed to them in very clear terms was that the industry itself needs to set its house in order and work on more rational commercial principles — be it the capacity in the market place, be it the manner of pricing etc. The other thing that was conveyed to the industry was that the government would try to see whatever relief it can offer to them but that cannot be in an isolated manner, and therefore it would be most appropriate if a senior-level committee went into this and came up with suggestions both for the short run and long term for the sustained growth of the aviation business. That committee has recently been set up under the chairmanship of the cabinet secretary, apart from the representatives of the four or five secretaries of the ministries concerned, and (Housing Development Finance Ltd l chairman) Deepak Parekh and Indian Institute of Management Ahmedabad professor G. Raghuram. That committee will start meeting and presumably, and hopefully, offer suggestions to the government in the next two-three months.
Is there any other immediate relief, such as reduction in landing and parking charges by the Airports Authority of India (AAI), being considered?
I think all that, you know, whether it’s the AAI charges or whether it is state government taxation on fuel and various such things — that airlines talk about — will form part of the overall matrix under the government’s committee.
How do you think the current slump will affect the foreign direct investment in the sector, like the ones you have envisaged for non-metro airports and others?
It basically depends on how long this period of correction continues. If it is not more then five-six months, which is what we expect, then it will certainly have no impact or very marginal impact on the investment proposals in the pipeline. The interest in infrastructure and other segments of the aviation business will continue without much break. So far as the investment in the airline business is concerned — the funding plans of the airlines — I don’t think we are likely to see any drop. We have just seen that SpiceJet has been able to raise the kind of money they needed. And I am sure while there could be a perception that market is slowing down...these are often the best times to put money in and take advantage of the upswing which will come later. So when focused investors put their money, it is an obvious sign that they don’t expect the airline industry business in India to remain like this for very long. The quantum of investments over a long period, for the next 10 years or so, we had estimated at about $130 billion(Rs5.55 trillion)...of which about one-third would be in infrastructure-related projects including equipment and two-thirds on aircraft acquisitions.
Will that be affected?
It’s too short a period…if you look at a larger time horizon of three years or longer than that there is nothing really which is going to slow down. It’s a minor storm in a tea cup.
Coming to Air India, how do you think the airline will be able to fill the working capital gap it sees this year?
Lots of obituaries have already been written on Air India but I think it is certainly not such a bad case as that. The problem again is the high operative expenditure, which is driven substantially by the aviation fuel and, to some extent, of the employee costs given the nature of the organization. Air India has the opportunity, which is to increase load factors, increase their yields. It’s possible, because they have such a tradition of passenger convenience and facilitation which they have enjoyed in the past. They need to really get down to their job. Air India also has an advantage in that fleet acquisition programme is not affected by temporary disruptions in their cash flow situation. Government of India provides sovereign guarantee for purchase of their aircraft, which benefit doesn’t extend to private airlines, who have to raise money, and they find the going tough. So Air India has that comfort — that their fleet acquisition plan will be on track with the government backing the whole process and, if they improve their commercial parameters, they will very soon be out of the difficult situation.
What about government funding?
We have reviewed their operations in (Mumbai) earlier this month in a fair amount of detail with the CMD (chairman and managing director Raghu Menon) and his senior team. They have been given some broad prescriptions...They’ll also rationalize their expenditure...for a month and a half-two which time they will have a clear idea of where they stand and what specific assistance they need from the government, either in terms of further equity infusion or a mix of loan and grant. They will come back to us after their board has (finalized it).
What are these specific measures...will there be some international flights such as those to Nairobi which are way below on load factors that will be withdrawn?
Well, some international flights will be pruned. Operations on certain days on domestic sectors when the loads are low (will be pared). It will be based on rational revenue-generating capacity of a flight. That has to be done, it needs to be done.
The civil aviation policy has been on hold for the past six months because of one issue — of relaxing the five-year minimum that domestic carriers have to fly before they are allowed to expand into international routes. Where does it stand now?
One contentious issue ...yes...that’s one-big ticket item which we still need to (clear) and get some indication — one way or the other — from the group of ministers and from the cabinet, so that we can then roll out the policy... This is quite crucial now when the sector is seeing some volatility, so we need to have a policy framework on one hand, and committee’s recommendations, on the other.
Do you expect any tweaking of the policy for it to be cleared? And will it be in place by the year-end?
I think one way or the other we should have something in the next two-three months.
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First Published: Wed, Jul 23 2008. 12 10 AM IST