Indian Aviation Sector is a mystic tale of surge and plummeting with tilt towards the latter over the last few years, since 2006 to be precise. Ironically when the air carrier Indigo saw its dawn in the year, since then three airlines Kingfisher, Air Deccan and Paramount Airways have shut the business. This quite reflects the devastating condition prevailing in the industry. With high debt and operational costs, it has been tough for any of the airlines to run successfully making a profit with the exception of Indigo making a profit of approximately 700crore in 2012-13. However Jet is bogged with the debt burden of $1.9bn and Air India with 40,000 cr. The scene was definitely not great until last year when steps were taken to combat the downfall of this sector.
India with its ever rising ‘aspirational’ middle class has lots in basket for this sector. With passenger traffic increasing from 73mn in 2006 to 144mn in 2011 and with prospective increase to 336mn domestic and 85mn international passengers by 2020, it was inevitable for the policy makers to ignore the sector anymore. So in order to keep the sector “flying”, govt. came with policies of allowing airlines to explore the possibility of directly importing the ATF, liberalized the acquisition of aircraft by the scheduled, non-scheduled airlines, flying institutes and for private use. It also granted traffic rights to Indian carriers to fly to several destinations across the globe. The govt. also announced exemption of duties on parts, equipment, accessories and spares required for MRO just to increase the competitive advantage and facilitate the growth of MRO business. Privatisation of four major airports under PPP/JV model was the second best possible sign the govt. could send across with the best being allowing 49% FDI in aviation sector.
This announcement ushered in an era of multiple deals fetching lots of money and hope for the sector. Three big deals have happened. One being Jet-Etihad deal under which $334mn stake has been sold to Abu Dhabi’s Etihad, $150mn in Jet’s frequent flyer program and $70mn to buy Jet’s three pairs of Heathrow slots. The even unique deals have been of TATAs one with SIA and other with Air Asia. The unique thing about these deals in particular is with these deals TATAs seem to make a comeback with a bang. The ones who started the TATA airlines in 1930 and were devoid of same because of nationalization in the year 1953 are going to enter the market this year as a FSC (Full Service Carrier) with SIA and as a Low cost airline with Air Asia. TATA-Air Asia deal comprises of 49% stake with Air Asia, 30% with Tata Sons and rest 21% with Telstra Tradeplace. In the TATA-SIA deal TATAs have 51% hold with SIA having rest of the share.
Consequentially TATA-SIA seems to be replacement for the void created by shutting down of Kingfisher and Air Asia with deep pockets seems to be giving other low cost no frill airlines run for money in the coming times. All these deals are going to create price wars leading to slash of the air fares drastically. It will increase the air traffic and thus more number of people flying to and within India. Medical tourism, eco-tourism will see a hike. There will be more of business and trade because of affordable way of connecting to people. This flourishing business would be a way to capitalize on the 2-3 day weekend into a quick holiday.This in turn will boost the hotel and restaurant business thus increasing the demand of infrastructure and development projects. Eventually these deals are expected to consolidate the Indian Aviation Sector and boost the economy to a great extent.
Challenges are no less. Operating costs are skyrocketing. The airlines are hurt by infrastructure constraints. There needs to be some regulation on suicidal price wars. The excessive taxes on ATF need to be handled. Maintenance Repair Overhaul (MRO) is a big headache for which airlines have to shell out huge money. Third party ground handling invites 30% royalty charges. So in order to stay profitable, it is important that the policies stay smooth, simple and clean and create a conducive environment.
With current per capita air trip being 0.04 for India, 0.3 for China and 2 for US, we can probably expect the current trend of changes to fill the huge existing gap in the market. To meet the increasing activity levels, it would become imperative for the government to invest in upgradation and modernization of the airports at Tier II, Tier III cities. In fact 12th Five Year Plan (2012-2017) envisages an investment plan of $12.1bn in airports. Probably this is the right time to push for modernization of Jammu Airport too. Just a thought or a question to the concerned authorities “When?”!
(The writer is a student at IIM Shillong)