Airlines from the Gulf Likely to Invest in RCS

“A smart guy can now earn Rs 100 crore a year from regional aviation” – Minister of State for Civil Aviation Jayant Sinha.

Major foreign airlines, including major air carriers from West Asia, have shown interest to invest in India’s regional aviation market. The investment could be in the form of a stake in an existing airline or opening a new regional airline in the country. Recent changes in FDI (foreign direct investment) rules, seem to be an encouraging factor. They have held negotiations with the government to fly on routes connecting the country’s metros to its tier-II and tier-III cities. A significant traffic to the Gulf comes from the smaller cities. India being a significant market for the Gulf majors, those airlines would want to have a feeder airline, which brings West Asia-bound traffic from tier-II and tier-III cities of India to the metro airports.  Having a joint venture with a current regional carrier like Air Costa or TrueJet can be captured as a thoroughfare product.

Air transport in a country like India puts in a huge value to its GDP. India’s air transport sector contributes $72 billion in GDP and supports nearly 8 million jobs. With such a scenario, India is expected to displace the UK to be the third largest aviation market by 2026 as per the recently made forecast by the International Air Transport Association (IATA). By 2035 IATA expects the Indian aviation market to serve over 442 million air passengers. Aviation in India is inspiring the Nation’s growth and development with more and more accessible air connectivity even though India’s air transport industry has been through harsh times. While many Indian airlines have now started to show profits, the aviation sector, as a whole, is still in a loss zone along with several perennial hiccups. These include colossal debt burdens, arduous regulations, high-priced and inadequate airport infrastructure and high taxes. Airlines face an arduous tax burden in India, including the imposition of service tax to services rendered outside of India, including those for over flight charges, global distribution systems, and international tickets. As per IATA, this is a breach of international principles established by governments through ICAO.

IATA has called for a renewed look at the reduction in taxation and for India to join international efforts on sustainability for air transport. This will be a key factor of a vitally important industry to India to be an even bigger catalyst for its socio-economic growth. For India to attain its true aviation potential, the sector needs to grow in a sustainable manner. In order to bring about that envisaged growth, the potential to have a capacity for 322 million new fliers will be needed in a period of less than 20 years. That will be a real challenge. The vigor of the growing aviation sector will be put at risk if significant changes are not introduced by the policy makers. Addressing these issues and resolving them will bring enormous relief to the aviation sector while simultaneously bringing in various social and economic benefits to the country. While many of those issues have been accounted for in the last couple of years, more will no doubt surface again.

On whose money does a plane fly? Is it of those who are in it or is it of those who are outside it ?

IATA has congratulated India for its first-ever Civil Aviation Policy containing building blocks, such as developments on open-skies, code-sharing, foreign direct investments (FDI) which are very heartening. In fact, allowing FDI of 100% in an Indian airline places India among the most progressive states in this regard. But, IATA has also raised concerns for the levy to cross subsidize regional flights.

India’s celebrated position as one of the world’s fastest-growing aviation market, however, masks some treacherous flaws. There are only few people who are seriously keen to invest in India. Even going by the government’s growth figures, private investment is shrinking at a rapid pace — by 1.9 per cent between January and March, and by 3.1 percent between April and June. Since 2000, there has been an FDI inflow of $288.6 billion in India – in sectors such as trading, pharmaceuticals, broadcasting, air transport, retail and defense. Of this, only $931 million has been in aviation. The government struggles to make up for this lack of assurance with its own money. It may seek parliamentary approval for $7.5 billion of additional spending over the next five months, which it hopes will increase growth by 0.4 percentage points. The government considers that boosting government expenditure would bring in more private investment, would raise investors’ spirits, fuel optimism and lead to major private-sector activity. But, unfortunately that has simply not happened so far. With half its term gone, the government seems unwilling to accept that its approach is flawed. And it has been a huge disappointment.

Investors have been burned in the past by such arbitrary government decisions; disputes over taxation or environmental regulations have stopped work on many projects. Infrastructure investment in particular continues to be held up — about half of India’s large projects are delayed — tying up capital and leading to big losses for investors. As a result, several airports over the years have remained defunct.

Airport Privatization. The awarding of airport concessions is intended to contribute to the development of India’s airport infrastructure. While the passenger experience improves, the impact for the airlines remains far less desirable.

Even IATA does not support the privatization of airports considering the experience of airport privatization – in India and elsewhere. A private sector mindset can add value to airport projects with efficiency, cost effectiveness, entrepreneurial spirit, and so on. There should be a stronger regulatory framework to ensure that there is a balance struck between commercial and national interests. IATA has called for a rethink at the results of Indian public-private partnership in airport privatization.

Airlines operating in India have faced huge costs escalations. This is partially due to the 46% concession fee that the private airport operators have to pay to the government. At the same time, the Airport Economic Regulatory Authority (AERA) has been unable to preserve its independence sufficiently and has not been able to implement its own tariff orders, such as the one to reduce Delhi’s charges by 96%.

Many potential investors openly say now that the desirable real change remains elusive, which is why companies have met government promises with their own promises, not money.

Taiwan-based Foxconn was to set up a plant in Maharashtra. More than a year has passed, but there is no sign of that investment.

Even companies that have committed money are having second thoughts. A new Ford plant was to come up in Gujarat. But Ford’s CEO Mark Fields said recently that the company was “reviewing alternatives” for India; he was more pessimistic about operations there than in any other emerging market. 

India’s recent aviation history has shown that entrepreneurs did try to start regional airlines. Most of them failed despite availing subsidy benefits from the government. Air Pegasus closed down finally. Ventura Airconnect continues to operate in a loss territory. VRL Logistics didn’t dare to start its Aviation business.

The government seems unmindful to such alarming signals. It has done too little to minimise the damage to the aviation sector’s competitiveness. Potential investors want to view concrete changes before they start putting money back into the aviation sector. The government has made a lot of noise about easing the task of doing business in India, a key element of PM Modi’s flagship Make in India program. The government has come up with an UDAN scheme which is replete with conditions and more conditions. There are sops, concessions and subsidies which, given past experiences, are arguably highly vulnerable to manipulation – a normal human trait found extensively in India. Foreign airlines intending to get into it will surely find out.

IATA does acknowledge that India is the fastest growing aviation market in terms of passenger traffic. Between January and September 2016, passenger traffic within India grew 23.17%. Presently, the businesses of all airlines can be termed as brisk which excites a potential foreign airline to invest. But, it is mainly due to low ATF prices currently prevailing. Even without any subsidy, airlines have operated more than their regional connectivity quota. It clearly reveals that market forces are strong enough to drive regional connectivity.

“Concessions cannot boost air traffic”.              “Sops cannot stimulate air traffic”.

Several aviation analysts endorse such views. State subsidies are best used elsewhere. Perhaps, Team Jayant Sinha should look at other areas which genuinely require help from the government. 

Though the intent is noble, the step is in the wrong direction. It is a typical case of government intervention in the market. Moreover, UDAN assumes that an airline is eligible for a subsidy for three years. Fuel cost is the most significant factor in an airline’s business model. If the fuel price increases during the three-year break-even period, if it is found that the resulting increased air fares are discouraging people to fly, if Rs 2500 start appearing to be too costly to a discerning flier, if it is found that RCS is becoming nonviable due to insufficient passenger numbers, then the various concessions being extended by the government in the form of subsidies will be rendered redundant and ultimately the government’s stated purpose – “Make flying affordable for the masses”- will be defeated .

The very idea of subsidy underlines the fact that there is no value addition in aviation business as such. In other words, the said business can not run on its own and so the government should step in and extend monetary support. Many observers will not endorse such a policy. In many ways, it is an affront of the plane maker, the operator and even for the beneficiary. A subsidy comes from tax-payer’s money. A plane should fly with the money of its own passengers. This subsidy model to apparently promote regional connectivity is not a wisely conceived policy.  If, for any reason, the money is not sufficient to operate a plane, then why should a person who is not flying in it be asked to pay tax (levy) for it ? 

Vistara’s First International Flights to Include South Asia and Gulf

Vistara forays into the International market.

Vistara to begin overseas operations with SAARC, Gulf after June 2018.

Options open to add either Boeing, Airbus or both aircraft to expanded fleet.

Vistara mulls regional routes as  part of its long-term growth plan.

In June 2016, the government of India partially scrapped the contentious 5/20 rule, which mandated an airline to have five years of domestic operational experience and 20 planes to become eligible for international operations, by removing the five years of domestic operational experience clause.25-vistara

The new rules came in amid strong opposition and hectic lobbying by older rival airlines like Jet Airways, Spicejet and Indigo. Under the new rules, domestic airlines can fly overseas provided they deploy 20 aircraft or 20 per cent of their capacity in the domestic market, whichever is higher.

It is to be noted that the newest airlines, the Tata Sons and Singapore Airlines promoted Vistara, and the budget carrier AirAsia India – a budget carrier also owned by Tata and Malaysia’s AirAsia Bhd – were behind the campaign to end the 5/20 rule. Now both are speeding up their fleet expansion plans so that they can fly overseas sooner and compete with local rivals Jet Airways and state-owned Air India. Both are devising their strategies after the government eased restrictions on overseas flights.

Vistara, which started operations on January 9, 2015, connects 17 cities now and Port Blair will be the 18th Indian destination from October. The number of daily flights has grown to 70 and may reach 100 by the end of the 2016. Its every aircraft does a 13-hour duty a day. It is the only airline in the country that offers a three-class configuration: the economy, the premium economy and the business class.

Currently, Vistara has only 11 aircraft at present and will get the delivery of two more A320s by October.

Vistara is not going to get the 20th airplane in its fleet before June 2018. It has said that it would not be rushing into international operations.

sanjiv-kapoorVistara Chief Strategy and Commercial Officer Sanjiv Kapoor interacted with the media recently. He pointed out his Company’s plans : Be it domestic or international, it is not going to be a walk in the park as an Indian airline, since each market is competitive. The airline has a measured approach towards its new venture. We are not rushing into international operations. It’s not a race for us. But we will definitely do it. We will get the delivery of our 20th plane by the first half of 2018. So, with the government retaining the 20-plane clause for international operations, we have the possibility of accelerating that, we are studying that, we haven’t made a decision. Again it is not just a question of get 21 and fly abroad, we need to get the rights, we need to get the slots, we need to get the partnerships in place, a whole lot of things to be set up. So, we are not going to accelerate just for the sake of accelerating. But if it makes sense to bring it in, bring in the 20 aircrafts little bit sooner we will do that but we haven’t yet made that call. Of course, we are reviewing and refining our international strategy.

Kapoor further said that their international operations will begin with the SAARC markets and the Gulf as their present set of planes (A320s) could serve short-haul markets the best.

“The first set of routes that we will launch internationally, will be the routes that can be flown by our existing aircraft (A320s which are narrow body planes by Airbus) which will be routes within three, three-and-a-half hours from our Delhi hub,” Kapoor said.

“So, that means South Asian nations will be our first focus international destinations along with the Gulf,” he said, adding markets like Bangladesh, Nepal, Bhutan, the Maldives, Sri Lanka and even Afghanistan have great potential. Although, 70 per cent of International air traffic from India goes westwards, Vistara opts to go reverse.

Kapoor also said the airline has been witnessing steady increase in its loads factor, which is one of the highest now at 90 per cent economy class and 80 per cent for overall three seating configuration, the airline was expanding its fleet and network at a steady pace and denied it was facing a cash crunch.

Kapoor also said that the airline, however, does not want to miss out on the growth in regional markets, with the civil aviation ministry coming up with its Regional Connectivity Scheme (RCS) while framing policy to link unconnected towns. A presence in regional markets could provide a feed for the airline’s mainline domestic and foreign routes.

“Most full-service airlines the world over have a commuter arm. The nature of (aviation) markets is such that airlines need to feed their hubs and a lot of it comes from small cities, which need small aircraft. There are two ways to do that. Either we get small aircraft or partner a regional airline. I am not talking of it (happening) instantly, but at some point, we will want a regional domestic feed,” Kapoor said.

Kapoor denied the airline was contemplating a regional play to speed up plans to fly abroad.

Kapoor said that the relaxation of the five-year and 20-aircraft rule for flying abroad and RCS were positive measures by the government but capacity constraints at major airports needed to be addressed.

“I do not think we can take profitable 20 per cent (annual) growth for granted until we fix infrastructure problems at major airports and until capacity addition is more measured. Certainly, there is a huge potential in India, but in the next two-three years the kind of aircraft we see coming is way above the market demand growth,” he said.

Earlier this month, Vistara Chief Executive Phee Teik Yeoh had said that the airline was readying a long-term plan for starting international operations and that he would meet the board with a plan within the next two months.

Vistara you see today is just tip of the iceberg: CEO Phee Teik Yeoh
Vistara you see today is just tip of the iceberg: CEO Phee Teik Yeoh

“There is no stopping us from preponing our aircraft deliveries, but we would like to go overseas only when we are ready. It’s not about to be the first, or the earliest, and not so much about how fast we go. I don’t see how all this can be done in the next 9-12 months. Easily, it’s a minimum one-year affair,” Yeoh had said earlier this month.

Yeoh had also said advancing the plane delivery is something that he would not rule out. “Advancing just to go overseas is not good enough. We should not lose sight of the fact that we have domestic operations to run,” he had said.

He had further said that the airline would induct wide-bodied, long-haul planes and consider starting direct flights to Britain and the US. 

Read : Airbus Clinches $12.5 bn Order from Air Asia

How soon Vistara launches its overseas operations will largely depend on two factors. One, it must have 20 aircraft. Availability of aircraft — through lease or purchase or a buy and lease back — will affect the timing of Vistara’s International flights service launch. Both the big airplane makers of the world – Boeing and Airbus – are busy fulfilling the earlier orders from IndiGo, GoAir, Spicejet, Air Asia and others. Vistara is way behind in the queue. Vistara should opt for small planes to get to the magical number of 20.

Read Out of the Ordinary Saga of Spicejet.

The second factor will be the positioning of service offering itself as Vistara will be competing with some of the best in class carriers. Currently, India has air services agreements with 109 countries, of which only 29 are being used by Indian airlines. As per Vistara, there are plenty of new destinations that can be explored while planning routes. The profile of the Indian consumer is changing fast and so also are their preferences for travel destinations. According to analysts, 45.7 million Indians traveled overseas in FY15. The share of Indian carriers got only 37 per cent share of this traffic.