#dnaEdit: Stunted field

The entry of Vistara, branded as a “luxury” airline, from the Tata-Singapore Airlines combine, has raised worries about whether new ventures in the troubled Indian aviation sector will worsen the plight of existing players. Burdened with high taxes and crippling operational costs, airline companies are estimated to have incurred losses of $1.7 billion in 2013-14 with cumulative losses pegged at $10 billion. In June, Tata, had entered the low-cost segment in a joint-venture with Air Asia. Last month, the civil aviation ministry granted no-objection certificates to three more national and three regional carriers. What is causing some alarm in industry circles is that these eight airlines are entering an arena where three of five major airlines — Air India, Jet Airways and SpiceJet — are incurring huge losses, while several others like Kingfisher and Paramount have shut. In all this, the saving grace is IndiGo, which has posted consistent profits, while GoAir turned in a small profit last fiscal.

At the core of this renewed interest in the aviation sector, by Tata and Singapore Airlines which first mulled an entry nearly 20 years ago, and by the six new aspirants, is the immense potential for growth. In 2012, India had just 422 commercial aircrafts and 0.04 air-trips per capita compared to China’s 1,981 airplanes and 0.3 air-trip per capita.

From the ninth largest civil aviation industry presently, experts predict that India could become the third largest by 2021. But for this to happen, the Indian government must review a host of policies that have hurt the industry badly. In recent years, Aviation Turbine Fuel(ATF) prices have nearly tripled, accounting for 50-60 per cent of airline operational costs in India, up from 40 per cent earlier. The corresponding global average is around 25 per cent. Rather than respond by reducing taxes on ATF and maintenance and repair operations, the Indian government has been caught in a muddled tax structure with the economic downturn curbing the manoeuvring space for fiscal reforms. Besides the customs and excise duties imposed by the Centre, state governments levy hefty sales taxes on ATF varying between 20-35 per cent. Further, a discriminatory arrangement that imposes higher taxes on national flights while sparing international carriers is also in vogue.

With private airport developers aiming to maximise their returns on investments, airport charges have seen a steep 150-400 per cent jump in metros since 2012 further straining the airlines’ margins.  Air Asia, after threatening to boycott Mumbai and Delhi protesting the airport charges, may rethink owing to the high passenger traffic on this sector.

Exorbitant operating costs should normally restrict the leeway for airlines to cut fares. Ironically, the dire need for huge cash inflows in the face of mounting operational costs have forced these airlines to resort to deep discounts and offer limited-days sales of a huge volume of air-tickets. While clearing the six new airlines and promising 100 “no-frills” airports, civil aviation minister Ashok Gajapathi Raju has claimed that these will foster better connectivity. However, Raju has maintained a studied silence on the policy issues that undermine the commercial viability of airlines. The aviation industry’s future has multi-sectoral implications for India. The industry is heavily in debt to banking institutions and acts as a facilitator to other industries like tourism. With seven million foreign tourist arrivals annually, India’s tourism industry has been dwarfed by smaller Asian countries like Malaysia and Thailand which welcomed over 25 million tourists in 2013. The aviation sector will test the Modi government’s promise of synergy and coordinated multi-pronged action.