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 ? 

UDAN : Concerns Raised by the Indian Aviation Industry

The final guidelines under the Regional Connectivity Scheme (RCS) as envisaged in the NCAP, which have been named as UDAN (Udey Desh ka Aam Nagrik) are set to be announced today by the Civil Aviation Minister Ashok Gajapathi Raju. The government believes that its ambitious UDAN will jump-start regional aviation in the country. This seems to be in sync with the IATA’s recent forecast: “In 10 years, the Indian aviation market will be the third largest in the world, overtaking the UK.”

“We are very hopeful of a positive response from the industry but our thinking is that with the scheme, we will in fact be jump-starting regional aviation,” Minister of State for Civil Aviation Jayant Sinha has said. 

He expressed his hope that the scheme would be “quite attractive” for consumers, carriers, small and regional airlines, lessors and other players in the ecosystem.

He said that the purpose of formulation of such a scheme is that regional carriers get the support they need both in terms of reducing their cost as well as in terms of viability gap funding so that they can serve tier-II and tier III cities.

The government had on July 1, 2016 unveiled the draft scheme which fixed all-inclusive fares at Rs 2,500 for one-hour flights in its attempt to make flying affordable for the common man. The complex scheme seeks to connect currently unlinked towns as well as extending viability gap funding (VGF) through a regional connectivity fund. There are 394 unserved and 16 under-served airports.

On one hand the government exudes optimism, while on the other hand, aviation experts have said they are not sure about how much of this projected growth will materialise considering several constraints currently plaguing the Indian aviation industry. They reckon legislative constraint is one major hurdle as far as Regional Air Connectivity is concerned. The established airlines grouping – the Federation of Indian Airlines (FIA) – who controls over 80% of India’s aviation, has asserted that the government does not have any authority or mandate to impose levy in nature of tax on scheduled flights. It has threatened to initiate legal action against the imposition of levy.

On its part, the government has defended the imposition of levy on scheduled flights from trunk routes to fund the scheme. The Minister of State for Civil Aviation Jayant Sinha has said that the government had a “very extensive” stakeholder’s consultation process prior to the formalisation of the RCS.

“We have already clarified from the ministry. Based on our own discussions with the Law Ministry, we think we can look forward to this kind of arrangement (imposition of levy) within the current legislation,” he said.

Apart from the upcoming legal battle, the country’s aviation industry has aired its various concerns about the regional connectivity scheme. A day ago, the Minister of state for Civil Aviation Jayant Sinha had hosted a round table in Delhi where the chief executives of airline companies, aircraft lessors and executives in the maintenance, repair and overhauling of aircraft businesses had been invited. Therein the executives voiced their fears. One serious concern is infra structure related – the non-availability of slots at major airports such as those at metros.

The majority of flights still operate from Delhi, Mumbai, Chennai, Bengaluru and Kolkata, airports. These metro airports today are running to capacity. Thus, they have very few slots available for each airline. Some of them like Mumbai have stopped allotting fresh slots altogether. The executives stressed that it was important that some slots be made available at the major airports. Slot constraints at the metro airports prevent the linking of smaller airports with the bigger ones. The hub and spoke model, thus, will not work. For effective execution  of the RCS, this is the basic requirement.

The aim of the NCAP has been – “Take flying to the masses.” The scheme entails capping of the fares at an affordable Rs 2,500 for flights of one-hour duration. (Although, one can travel by air for an hour in a scheduled LCC at less than Rs 1800 even today. Search a cheap air fare at this site now !) The government is aware that Rs 2500 does not fully cover the airplane’s operating costs. So, the government has proposed to indemnify the difference through subsidies which will be provided for a period of three years. The scheme is dependent upon VGF. So, the chief objective should be to rationalise the costs of aircraft operation. Unfortunately, that doesn’t seem to be happening because most of the overheads like landing costs, excise on fuel, user development fee, etc. are increasing. The proposed subsidy is very little for a small 10-20 seat air craft. The cost of seat per kilometer, their acquisition cost, is almost twice that of a regular 80-seater plane. Further, a potential investor will not like to run the business on “crutches of subsidies”.

Manpower Shortage Becoming a Bottleneck to Air India’s MRO Growth Plans

In January 2015, Air India hived off its engineering department into a separate unit to tap maintenance, repair and overhaul business from other airlines. It still mainly caters to its own aircraft maintenance but aims to double its third party business to Rs 1300 million in FY 2017.

But today Air India is facing a severe shortage of aircraft engineering personnel. Its plans to grow its MRO business faces a big risk.

As per H R Jagannath, CEO of Air India Engineering Services Limited, Air India’s MRO unit has around 600 aircraft maintenance engineers and faces a shortage of around 100-150 personnel. Recently it hired around 100 of its retired engineers on contract but it was inadequate. Air India will require 250 engineers and the manpower shortage could become a bottleneck to Air India’s growth.

Part of the additional manpower through fresh hiring will be utilised to maintain new aircraft being inducted in Air India’s fleet. A part is also to be utilised to cater to vacancies caused by retirements of over 15-20 employees each month.

Hiring engineers essentially means poaching from another airline and is so proving to be a difficult proposition. It normally takes four years for a fresh aircraft technician to secure a type rating and maintenance engineer’s license. An operator like Air India must also groom aspirants for the job. Air India is now offering on-job training to technicians from other companies, enabling them to apply to the Directorate General of Civil Aviation (DGCA) for licence.

“We are seeking support of DGCA and Boeing for the training programme. The government too should support the MRO sector by offering five year tax holiday, ” according to H R Jagannath.

Earlier this year, Air India’s MRO began carrying out ‘C’ check (heavy maintenance check) on Jet Airways Boeing 777 aircraft. It has also signed a MoU with SpiceJet to maintain its Boeing 737 and efforts are underway to secure European Aviation Safety Agency certification for MRO facilities in Nagpur and Thiruvananthapuram.

The MRO unit will also start test and minor repairs of General Electric engines which power Boeing 777 planes at its Nagpur unit later this year and complete overhaul of engines will be carried out from next year. The engine overhaul facility, the first of its kind in India, will significantly boost the MRO business as it can undertake engine repairs of all General Electric engine customers.