3 min read.Updated: 18 May 2020, 03:09 PM ISTNishant Pitti
The airline industry is a capital-intensive business, requiring large sums of money to operate effectively
Most equipment is financed through loans and months of unearned revenue
In the fourth tranche of the government's Rs20 lakh crore stimulus package to restore the health of the economy, Finance Minister Nirmala Sitharaman made announcements for the aviation sector. There were 3 major announcements focusing on airspace management, airports and making India an MRO hub (maintenance, repair and overhaul of aircraft).
The first announcement towards more efficient utilization of airspace will benefit the whole sector by reducing fuel use and air time taken by flights and will help in marginally reducing the flying cost. This will additionally have a positive impact on the environment.
The second announcement, focusing on creating world class airports through Public-Private Partnership (PPP) basis, is a welcome move as it will have a significant economic impact and will help in job creation. The major concern for this announcement shall circle around with the location of these airports as for an airport to be successfully privatised, it needs to have the kind of volumes necessary to ensure that the entity that wins the bid actually makes money.
The third announcement mentioned making India a global hub for MRO. It will reduce the maintenance cost for airlines as currently most of Indian planes go abroad for MRO. This move will help bring foreign investments into India and shall help in creating jobs. MRO has been a long pending demand of the industry and further details on tax simplification shall help attract players in the segment and improve their profitability.
While the measures announced are positive and are evident of the government recognizing the problems in the sector, more is expected from the authorities.
The airline industry is a capital-intensive business, requiring large sums of money to operate effectively. Most equipment is financed through loans and months of unearned revenue. A considerable support is needed to compensate for their losses during this period which can be provided to airlines through tax relief or relaxation in multiple charges paid by airlines to reduce their costs. With the industry remaining intact i.e. all the carriers flying, the government will be the one that shall benefit in the long run.
Some measures that could be taken by the government to provide targeted relief to airlines could be:
> Airlines being treated as priority sector lending
> Increased credit allowance to airlines by Airports Authority of India, oil companies etc
> Waiver of AAI and private airport operators’ space rentals, royalty, landing, parking, route navigation and terminal charges for a period of next six months
> Reduction in GST slab for Aviation Turbine Fuel (ATF) with full input tax credit on all goods and services
Majority of the countries across the globe have announced direct measures to support the sector through capital infusion including bailout plans during the crisis. Indian government should take clues from other countries and announce further direct support measures to support Indian airlines.
It is worth noting that airlines operate on thin margins and weak demand amidst social distancing measures within flights will lead to a decrease in the load factor of aircraft resulting in natural increase in average break even fare. With people having less income to dispose, their willingness to pay will be low and hence the airlines will have a hard time increasing airfares. A direct relief targeted towards cost reduction of airlines will help airlines keep constant prices and generate demand which will ensure speedy recovery of the sector.
With a few more support measures targeting the airline and allied industry of this mammoth aviation sector will further improvise the sentiments and ensure their survival. Once the sector is set on the track of recovery, it will automatically attract further investments that shall aid its growth and create opportunities that will benefit everyone. Without such measures, airlines facing cash-crunch might not be able to survive the recovery period and close their operations, thus leading to thousands of job losses. The government in the interest of the sector's recovery should look at further measures to infuse cash directly in the industry.
The author is a co-founder of EaseMyTrip, an online travel booking portal. The views are his own and do not reflect those of Mint.
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