General Studies Paper 3 (Indian Economy): Aviation Sector

Indian Aviation Sector

IAS Junior Mains Answer Writing June-Sep 2019 Schedule (Click Here)

 

Syllabus: General Studies Paper 3 (Indian Economy)

 

Discuss the issues plaguing aviation sector in India.  Can new aviation policy address these issues? Discuss the steps needed to overcome these crises.

 

Introduction:

Aviation industry is one among the most important industries of any country because of its economic and social viability. The aviation industry not only contributes to the Gross Domestic Product (GDP) of the country and improves employment statistics, but also aids in domestic and international trade, and facilitates many other businesses. Indian aviation industry  in recent years has witnessed severe highs and lows. Despite the fact that the Indian civil aviation industry in currently considered the third largest domestic civil aviation market in the world, the industry is suffering from several problems. Of the 638 aircraft in Indian skies, all the 18 Boeing 737 Max’s are grounded. From being one of the most preferred airlines, Jet Airways is now fighting for its survival.

 

Body:               

Aviation industry crisis in India:

  • At least a dozen airlines have closed down in the last two decades. Big names such as Damania, Sahara, Paramount, Air Deccan preceded Kingfisher and Jet Airways.
  • In each of them, a large amount of public money was involved to keep them afloat before they folded up. Besides, Air India, the national carrier, is surviving on the taxpayer’s money. The government has so far given Rs 60,000 crore to keep it flying after sell-off bids failed.
  • It is not the first time that Jet Airways is in financial trouble. During the 2008 Financial crisis, the Indian aviation sector also hit badly. Due to the drop in the number of passengers, airlines were forced to either drop the prices or to raise them to meet the cost of rising fuel prices
  • From 2018, it became apparent that Jet Airways is  in a serious financial mess.

 

Reasons for Crisis:

  • Aviation turbine fuel burden
    • Aviation turbine fuel (ATF) is one of the important sections of the industry.
    • The Centre charges 14% excise duty on ATF. The states pile on their own sales tax that can go as high as 29%.
    • ATF charges, vulnerable to currency movements, comprise a large chunk of Indian airlines’ operating expenses—some 40% compared to 20% for foreign carriers.
    • As the price for oil has shot up, it had led to difficulties for airlines as they have not been able to absorb in the short term due to their business model.
  • Low-cost model
    • The low-cost model, followed by most airlines (domestic) in India, is one of the biggest factors behind rising operational costs in the aviation sector. Jet Airways is one of those players which has been deeply hurt by the model followed by budget airlines such as IndiGo and SpiceJet.
    • It involves offering heavy discounts on flight tickets to attract more passengers. In a nutshell, it is a business strategy which is based on volume-based sales.
    • The model has turned the Indian aviation sector into a vulture’s nest, with each airline looking to snatch customers away from competitors, even at the cost of offering tickets at dirt cheap prices. Jet Airways also had to match the lower ticket prices to attract more customers.
  • Imbalance of manpower
    • While some of the Airlines such as Air India has surplus manpower and this is one of the major causes for its financial crisis. Some of the airlines such as Indigo as facing the shortage of manpower.
  • Rupee depreciation
    • The rupee’s depreciation is hitting carriers hard as it did a few years ago.
    • About 25-30% of their costs, excluding fuel, are dollar denominated—from aircraft lease rents and maintenance costs to ground handling and parking charges abroad.
  • Excessive parking and landing charges
    • High Airport (aeronautical) Charges levied by Airport Authority of India.
    • These charges payable at the International airports are higher than those payable at the airports designated as Domestic airports.
    • As a result, the domestic airlines in India are incurring additional costs at the international designated airports without deriving any extra facilities.
  • Fare wars
    • There is a cut throat competition faced by the top airline due to ticket pricing.
    • Established Airlines are threatened by low cost carriers, which are eating up their market share.
    • In order to consolidate their market share, top premium airlines were forced to reduce their ticket fares to around 15- 20 per cent.
    • Such a slash down in price will lead to a price war in the long run amongst the airlines with the only goal of increasing their market share.
    • A growing market for low-cost carriers (SpiceJet, IndiGo and GoAir) that affected the profitability of a full-service carrier like Jet
  • Loads of debt
    • To keep the operations afloat, the carriers take loans.
    • But poor operational efficiency, steady losses in the wake of higher fuel costs and a weaker rupee leads to non-payment of debts.
    • No airlines company has been able to devise a credible currency policy to protect them against sharp currency movements.
  • Corporate mis-governance
    • Many experts believe that company decision often lacks transparency. Company top management accused of making bad investments and failing to address the company’s deteriorating financial predicament while borrowing heavily.
  • Government policies limitations
    • The new civil aviation policy (NCAP) 2016’s regional connectivity scheme doesn’t help.
    • Its goal is laudable and it may well benefit potential flyers in smaller towns.
    • But the ticket price caps it imposes under the scheme, the fact that the viability gap funding will last only for three years and various operational issues, such as the lack of slots for connecting flights at major airports, mean that carriers are, by and large, left holding the can.

 

Relevance of the new aviation policy:

  • The new civil aviation policy (NCAP) 2016’s regional connectivity scheme doesn’t help.
  • The regional aviation policy is well-intentioned, but expecting private capital to flow to loss-making projects remains elusive.
  • Its goal is laudable and it may well benefit potential flyers in smaller towns.
  • The policy is also silent on the future roadmap for the state run Air India and the way forward for that airline.
  • There is no word about removing the sales tax on ATF and other taxation measures levied on Indian carriers.
  • The regional aviation policy unveiled by the previous government with incentives like 4% sales tax on ATF and no landing/ parking charges could not achieve the expected progress. Experts feel that the policy is too difficult to implement.
  • Adding to the woes, the expected rise in helicopter operations, private flying and regional airlines is likely to add to the pressure.
  • But the ticket price caps it imposes under the scheme, the fact that the viability gap funding will last only for three years and various operational issues, such as the lack of slots for connecting flights at major airports, mean that carriers are, by and large, left holding the can.

 

Besides crisis aviation industry has also seen some positive changes too. However, there are many positives too

  • According to the Directorate General of Civil Aviation, India’s air passenger traffic has grown by at least 16% annually over the past decade.
  • In 2000-01, it stood at a paltry 14 million passengers. In 2017, Indian airlines flew nearly 140 million passengers, most of them domestic.
  • It is now the third largest aviation market in the world with growth rates that leave the US and China in the dust. There is no slowdown in sight.
  • Airbus forecasts that domestic traffic will grow five and a half times over the next two decades.

 

Steps to be taken:

  • Inclusion of aviation turbine fuel within GST: This will help airlines to reduce their tax outgo as the new indirect tax system is without the cascading effect of taxation.
  • Strong corporate governance law: Government should take necessary steps to bring transparency in corporate decision making in order to avoid these situation.
  • NCAP’s liberalization of foreign direct investment in the sector needs to be ironed out to attract investors.
  • Bilateral treaties for international routes that Indian carriers are unable to take full advantage need to be looked into at the earliest.
  • Insolvency and Bankruptcy code can be used to quickly resolve the issues in case of defaults and bankruptcy by airline companies.
  • Aviation sector should have been better prepared to handle such an unforeseen situation, learning from the past situations – as fuel prices and rupee volatility were among the top reasons for one of the biggest aviation disasters of recent times.
  • There is a need to set up simulators to develop the skills of unemployed pilots.
  • clear long-term policy roadmap which is aligned to the industry’s requirements is yet to emerge. One method could be opening up international routes faster for our airlines that are successful.
  • The industry stakeholders should engage and collaborate with policy makers to implement efficient and rational decisions that would boost India’s civil aviation industry.
  • With the right policies and relentless focus on quality, cost and passenger interest, India would be well placed to achieve its vision of becoming the third-largest aviation market by 2025.

 

Conclusion:

The aviation industry is at a crossroads. It is facing a calamity as well as the prospects of high growth in the future. The fate of the industry will now depend partly on government policies on oil prices as well as the industry’s ability to bring about more effective management so that airlines can avoid the fate of Jet Airways. 

 

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