India’s aviation sector, one of the fastest growing in the world, will need a push from the new government to achieve its potential.
Former diplomat Hardeep Singh Puri, who took charge as minister of state (independent charge) for aviation last week, will need to address key issues to reinvigorate the troubled sector, said several top industry officials and experts.
“Key issues that need to be addressed by the new aviation minister include lowering taxes on aviation turbine fuel (ATF), fast-tracking airport expansion plans in metro cities, and professionalizing the directorate general of civil aviation (DGCA)," said a senior executive at an Indian airline who didn’t want to be named.
DGCA is under the ministry of civil aviation and not independent, unlike aviation regulators in Europe (European Aviation Safety Agency) and the US (Federal Aviation Administration).
“The government needs to fast track airport capacity expansion at major metro cities as an urgent measure and it should do this ahead of building new airports for UDAN as the airports in top cities are choked with traffic (both in terms of aircraft and passengers)," the executive said.
India’s domestic aviation sector grew at a meagre 2.53% during January-April 2019, compared with the year-ago period, when it recorded a growth of 24.41%. This was largely because of capacity constraints following the grounding of Jet Airways and the subsequent fare hike, which led to a fall in passenger traffic.
In May, the quarterly and yearly results of the two listed airlines, IndiGo and SpiceJet, failed to live up to analysts’ expectations. While IndiGo’s full-year profit fell 93% during 2018-19, the steepest since the company started trading publicly in 2015, SpiceJet reported a ₹316.08 crore loss in 2018-19 against profit of ₹557.20 crore a year ago.
Surprisingly, ATF, which accounts for 35%-50% of airline costs, has fallen by about 7%. Overall crude price stood at $62.32 per barrel on Monday, about 19% lower than the year-ago price. However, Indian airlines pay more for ATF compared with many global peers because of high taxes, including a 5% custom duty, apart from excise and value-added tax (VAT) that are levied by states on the product.
Also, a large part of the expenses of airlines are in dollars, so the fall of the rupee by about 3.2% against the dollar last year is expected to further increase costs.
This does not bode well as Indian passengers are a price-sensitive lot and fare hikes are often accompanied by the lower load factor.
The central government can reinvigorate the sector by doing away with the custom duty on ATF, which will immediately benefit airlines, as reducing excise duty or VAT, will be difficult to attain in a short period, said Mark Martin, chief executive of aviation consultancy firm Martin Consulting Llc.
However, Capa India, another aviation consultancy, expects the government to undertake structural reforms in the sector with speed and clarity.
Top priorities for the government should be the privatization of Air India, speedier resolution of the Jet Airways issue, liberalization bilateral flying right, relaxing tax regime on domestic maintenance, repair and overhaul units, restructuring of DGCA and the Bureau of Civil Aviation Security, building a robust airport infrastructure plan and revitalizing the cargo sector, Capa India said in an advisory after Puri took over.