The Indian aviation sector is a complex sector. Its golden era, started with the civil aviation policy in 2003 and lasted until the financial crisis of 2008. The periodic rough weather since then speaks of volumes of fundamental problems that have persisted in the industry, despite the unprecedented growth in it.
- 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 merely at 14 million passengers, but 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.
- Despite the unprecedented growth, the sector has been largely profitless.
- The Centre for Asia Pacific Aviation predicts consolidated industry losses of between $430-460 million in FY19.
- Both private and public sector aviation companies are suffering huge losses, so, the Air India cannot be blamed alone.
Reasons for the aviation industry troubles
There are several reasons for trouble in the aviation industry, but the one that stands out is the international factors.
- First, 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.
- Second, and crucially, aviation turbine fuel (ATF) costs remain as big a pain in Indian carriers’ necks now as they were when the financial crisis hit. The Centre charges 14% excise duty on ATF. The states pile on their own sales tax that can go as high as 29%. Consequently, ATF charges, vulnerable to currency movements, comprise a large chunk of Indian airlines’ operating expenses—some 40% compared to 20% for foreign carriers.
- Thirdly, there are other issues that are mostly domestic in nature. The breakneck growth sets up competing tensions. On the one hand, the intense competition among domestic carriers, the need to capture a slice of the ever expanding market and passenger price sensitivity mean that airlines find it difficult to raise ticket prices
New Civil Aviation Policy, 2016
Rather than helping the sector, it has imposed additional costs in terms of ‘UDAN Scheme’ which may benefit the potential flyers in smaller towns but the ticket price caps imposed under the scheme hurt the airlines as the viability gap funding will last only for three years.
NCAP should liberalise foreign direct investment in the sector and provide for more bilateral treaties for international routes that Indian airlines companies can explore to take the full advantage of their potential. It is also desirable to allow more consolidation in the sector to lower down the cut throat competition in the sector.
Source – Livemint
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