By Robert S. Metzger
India has experienced extraordinary growth in civil aviation over the past decade and is forecast to be on of the world’s largest aviation markets in just a few years. To achieve (and afford) the promise of civil aviation, India faces challenges posed by national and state policies, law, regulation and practice. Crucial questionsare presented to policy makers, regulators, business leaders and to lawyers who advise them.
Civil aviation in India may be taken as a study in contrasts. Despite extraordinary growth in traffic, most of India’s airlines are in a precarious condition. Despite forecasts that India will add more than a thousand transport aircraft to civil fleets in the two next decades, India has too few airports and today lacks the aviation safety infrastructure required to handle the growth.
AKPMG report in 2012 citeda 15.6% increase in the Compound Annual Growth Rate (CAGR) in domestic passenger throughput over the five year period concluding in FY 2011, and KPMG forecast domestic throughput of 293 million passengers by FY 2020, up from 106 million (actual) in FY 2011, and 51 million (actual) in FY 2006. Late in 2012, the International Air Transport Association (IATA) predicted that India’s domestic air traffic would experience double-digit growth between 2012 and 2016. For air cargo, India was forecast by IATA to be among the five fastest growing international freight markets.
For a variety of reasons, however, growth has slowed. IATA reported that domestic air traffic had dropped 9.1% in February 2013 versus February 2012.The growth rate of India’s Gross Domestic Product (GDP) has eased and disposable incomes have been pressured by inflation and the declining value of the rupee. Airline costs have been rising in part because of the reduced currency valuation, very high charges for aviation fuel levied by Government Public Sector Undertakings (PSUs) and high sales taxes imposed by state governments. (One recent news article asserts that the overall cost of airline operations increased by 20% in just three months in 2013 because of jet fuel prices and rupee devaluation.) The Indian domestic air travel market is clearly sensitive to pricing. Some of the growth in air travel has been fueled by a “middle class” willing and financially able to fly. There also may be price elasticity given the availability of travel by rail, as India enjoys one of the world’s largest rail networks.
Irrespective of the recent dip, Boeing’s 2013 commercial aviation forecast, covering the period between 2013 and 2032, estimates that Asia Pacific airlines will need 12,820 new airplanes, valued at $1.9 trillion, over the next 20 years. Late in 2012, Boeing forecast that India would have the highest passenger traffic growth in the world – higher than China’s – and predicted the Indian market itself would require 1,450 new aircraft worth $175 billion by 2031.
But the Boeing forecast also cautions that India is one of several regions where “aviation growth outpaces planned infrastructure development.”
Today, most of the civil air carriers in India are in a financially distressed condition. India’s leading airlines posted a combined loss of $1.65 billion between 2012 and 2013, according to one report. The government-owned carrier, Air India, has a total debt of $6.4 billion (at the exchange rates as of this writing) and is expected to post a net loss of nearly $625 million in the current financial year. Just a few years ago, exploding demand brought several new, low-cost carriers to the India market, leading to the purchase or lease of several dozen modern single-aisle transport aircraft. The financial results, taken as a whole, are discouraging. Only one Indian carrier, IndiGo, is expected to be profitable in 2013. Several of the budget carriers (Kingfisher, Paramount and MDLR) have ceased operation.
At the same time, however, interest remains keen among prospective entrants to join the Indian market, especially in the wake of Government decisions allowing increased investment by foreign airlines in Indian carriers. (See below.) The Tata Group has announced its return to civil aviation. Through a link-up with AirAsia, a new budget carrier, AirAsia India, is expected to start flying domestic routes in January 2014.The Tata Group also has announced an intention to partner with Singapore Airlines (SIA) to create a new, full-service airline, Tata SIA Airlines Ltd., with Tata Sons as the majority partner with a 51 per cent stake. These developments show confidence on the part of the airline industry that there is as-yet unmet demand for air traffic to be served to and from and within India.
Air carriers face other challenges in the web of national and state regulation and taxation. Indian airlines operate with some of the highest fuel costs in the world. India imports a huge percentage of Aviation Turbine Fuel (ATF) from foreign sources and prices are set by Government-owned PSUs that exclude competition from private sources. State surcharges on fuel vary widely, from 4% to 30%,and are not under effective control by the national Government. Further pressure is a consequence of the fall in the value of the rupee relative to the dollar; according to some estimates, as much as 70% of the costs of airline operations in India are dollar-based.
The negative movement of the rupee may prove transitory. The central Government knows of the financial difficulties of Indian airlines and may show forbearance from new charges and efforts to mitigate existing levies. Also, there are some signs of restraint on the part of state governments. Five states reportedly have agreed to reduce their taxes to as low as 4% and Bengal recently announced a 3-year sales tax waiver on ATF and a sales tax reduction as an incentive to bring more flights to the Kolkata airport.
Apart from the distressed financial condition of most of India’s air carriers, and the availability of cheap rail transport, another constraint on the growth of civil air passenger traffic and cargo operations is the relatively small size of the aircraft fleet available for domestic routes or international destinations. One source reports that the total fleet size for commercial airlines in India was 371 as of February 2013. In recent years, India has seen a dramatic increase in the number of transport aircraft owned and operated by domestic air carriers, and more are on order. Nonetheless, actual capacity compares unfavorably with other countries in South Asia whose domestic airlines own many more aircraft to serve smaller populations. Indonesia, with a population of 240 million, about 20% that of India’s, has a substantially larger fleet in being and many more aircraft on order.
The not yet resolved status of Kingfisher aircraft affects the ability of Indian carriers to lease aircraft or obtain financing for purchase. India in 2008 ratified the so-called “Cape Town” agreement (formally, the “Convention on International Interests in Mobile Equipment” adopted in Cape Town, South Africa, in 2001). The Cape Town agreement is intended to assure financiers that they will have prompt ability to repossess collateral, such as airplanes, in the event of financial default. Kingfisher Airlines, which leased Airbus A320 aircraft from several lessors, suspended operations in 2012. Several lessors have encountered stiff legal and bureaucratic obstacles in recovering the airplanes, in part because of demands by local airport and tax authorities for payments Kingfisher failed to make. As a consequence of Kingfisher’s default and the obstacles encountered by aircraft lessors, the financiers now are demanding a premium from the hard-pressed Indian carriers to cover added risks. However, all but two of the controverted airplanes have been recovered as of this writing. The Government of India reportedly has agreed to consider legislative and rule changes to expedite the ability of lenders to take possession of aircraft. Until the Government completes these actions, however, the problems exemplified by Kingfisher will constrain the financing of aircraft fleet growth.
At the level of the national Government, India sometimes has exhibited an ambivalent and contradictory attitude towards civil aviation. Periodically, the Government has acted to increase charges upon carriers and passengers as a revenue-generating device. But Civil Aviation Minster Ajit Singh said, in May 2013, that the Government is looking to reduce charges to land and park planes at 80 smaller airports in India. The Government also indicated it is re-examining a long-standing rule that Indian airlines are prohibited from flying internationally unless they have five years of domestic operations and a minimum of 20 aircraft.
For some time, the national Government has pledged to take necessary steps to replace the Director General of Civil Aviation (DGCA), criticized as lacking in authority and resources, with a new and more powerful central aviation administration, the Civil Aviation Authority (CAA). CAA would have independent funding and improve upon recruitment and retention of trained aviation personnel. Though the Union Cabinet has approved the proposal to replace DGCA with CAA, and the commercial aviation community has expressed widespread support for this change, it will take several years to occur. DGCA has taken several positive steps recently, however. Most important is the decision to extend by one year the term of Arun Mishra, the head of DGCA. DGCA also has announced it intends to hire 100 airworthiness officers to improve its staffing of safety oversight.
Problems with DGCA figure into new concerns that raised by international authorities about India’s attention to air safety. Late in the summer of 2013, a delegation from the International Civil Aviation Organization (ICAO) conducted fact-finding in India, and its scrutiny was followed by an audit by the U.S. Federal Aviation Administration. It is expected that these reviews will place pressure upon India to shore up its aviation oversight,answer shortages of trained aviation specialists and improve supervision of aircraft repairs. There are indications that the Government is responding promptly. If its efforts are not sufficient, then India’s status among countries in the aviation schema could be downgraded and there would be restrictions on the ability of Indian carriers to add flights to international destinations. This would be especially harmful to Air India, which has announced intentions to use its growing fleet of Boeing 787 passenger aircraft on new international routes.
India’s approach to foreign investment in its domestic air carriers also has exhibited ambivalence, uncertainty and inconsistency. In 2012, the Indian Government announced that it would relax limits on foreign airline direct investment (FDI) in Indian carriers, allowing a new maximum of 49%. Realization of the benefits of the change has been beset by competing bureaucracies and frustrating delays. Early in April 2013, UAE-based Etihad Airlines announced its intention to buy a 24% stake in Jet Airways. The subsequent processing of that investment has been tortuous, with allegations of impropriety as well as various interventions by multiple government agencies and bureaus, among them the Prime Minister’s Office, the Central Vigilance Commission (CVC), the Securities and Exchange Board of India (SEBI), the Foreign Investment Promotion Board (FIPB), the Department of Industrial Policy & Promotion (DIPP), the Competition Commission of India(CCI) and the Cabinet Committee on Economic Affairs (CCEA).All have been involved in the route to approval and many have intervened to require changes to the commercial deal.However, it appears that this deal will be concluded in the near future and the lessons learned should be instructive. Despite the trevails of the Etihad-Jet Airways deal, the recently announced plans for AirAsia India and Tata SIA Airlines suggest that the Government’s FDI changes are working to bring foreign airline capital to India’s carriers.
There are many analysts who advocate further relaxation of FDI limits on civil aviation. There are several sectors encompassed within civil aviation – among them domestic airlines, ground handling, setting up new airports and non-scheduled operations – that have different FDI limits. India, like many sovereign nations, naturally has a strong desire to assure that its nationals have an active role, if not controlling authority, in these vital commerce sectors. Due recognition of these national interests is India’s right, of course. However, India’s present experience is one where the pace of foreign investments has fallen and where the current account deficit has risen, together contributing to the decline in the rupee’s value. Liberalizing FDI in all sectors of civil aviation should encourage greater inflow of capital and could help India to increase carrier fleets, improve carrier operations and profitability, and enhance infrastructure.Stronger air carriers should bring more competition for domestic and international travel.
Infrastructure remains a continuing challenge and potentially is the critical restraint upon the growth of India’s civil aviation. Only 21 airports in India served more than 1 million passengers in 2012, according to figures published by the Airports Authority of India (AAI) and some of these do not match Western standards. Six airports dominate the traffic statistics – Delhi, Mumbai, Chennai, Bengalaru, Kolkata and Hyderabad. Considering a “middle class” population variously estimated at between 300 million and 600 million, India is woefully short of airports.The potential demand for domestic air travel in India will not be realized without massive improvements in airport infrastructure and there are reasons to question whether that can be accomplished on the scale required or in time to answer demand.
Despite the impressive recorded growth in domestic traffic, measured over the past ten years, air travel “penetration”in India (total domestic passengers divided by total population) has been reported at about 5%, far behind developed countries and one-fifth the domestic traffic of China (which is only 10% larger). A 2009 DeloitteReport on India aerospace cites infrastructure limitations as “the weakest link in the chain” and indicates that only 45% of the major city pairs in India have direct connectivity by air. The situation is even worse for the many “Tier II” and “Tier III” cities – which have adjacent populations numbering into the hundreds of millions. The problem of un-served or under-served smaller cities has drawn attention at the highest level of the central Government. Prime Minister Manmohan Singh, in late September, pledged that India would have 100 airports in small towns by 2020. The strategy to achieve this goal will be to privatize more of the larger airports so that the Government can focus on smaller facilities.
There has been considerable public discussion, in recent months, over new airport initiatives, as would be led by the Airports Authority of India (AAI). Various strategies have been promoted, including privatizing more airports and promoting more private-public partnerships for airport modernization and new airport development. Earlier this summer, the “Mayaram Committee” recommended 100% FDI in existing airport projects. Also under consideration are reduced landing, route navigation and security charges for air services to Tier II and III cities.
A critical problem is in the limited availability of land, except where unused land can be found and dedicated for “greenfield” projects. The process to acquire land is rendered daunting under the present legal regime, though the newly enacted Land Acquisition Bill may help to abate the problem. Another problem is that the national and state governments have imposed sizable fees and concession demands upon private airport operators, raising a question as to whether a business case for investment can succeed. It remains to be determined whether the private sector will answer calls for new airport privatization initiatives without wholesale reform in the way in which the national and state governments regulate and tax airport operations and economics. There is no doubt, however, that the private sector remains very much interested in opportunities to invest in the modernization of India’s airports. Eleven companies, including several industry leaders, recently responded to a call for expressions of interest in projects to modernize airports at Chennai, Lucknow, Kolkata, Ahmedabad, Guwahati and Jaipur.
Apart from the challenge to provide the necessary airports, air traffic management and security infrastructure, today the fleets of India’s civil carriers are optimized for high density passenger transport between primary city pairs. Although regional aircraft, especially turboprops, offer advantages in operating efficiently with short runways and from relatively less improved facilities, India’s air carriers today have relatively few regional aircraft (whether jets or turboprop). With uncertain demand and doubtful basic infrastructure, Indian air carriers have been reluctant to purchase aircraft optimized for regional service. However, Government officials have spoken of intentions to conduct a trial to subsidize airlines to increase regional service.Air India has announced an intent to lease turboprop aircraft to enhance connectivity to non-metro cities.
India has not clearly articulated policies to promote business and general aviation, and various DGCA actions imposefrustrating operational and regulatory barriers. India’s use of rotary-winged aircraft is surprisingly small, considering the utility of helicopters and their ability to serve areas lacking airports suitable for conventional, fixed-wing aircraft. Pawan Hans Helicopters Limited, a PSU, is reported to have less than 50 helicopters in its fleet.In 2012, the fleet size of helicopters operated by private concerns actually fell from 293 to just 266, according to a report published in September 2013. The root causes are said to include high import duties and the regulatory environment, where complex rules frustrate helicopter operation and add costs. The central Government has said it recognizes the need for more heliports, in part to aid in disaster response, and has expressed an intent to improve training of helicopter pilots. Until these changes are accomplished, the rate of induction into private service of new private sector helicopters likely will remain very low.
In recent months, the Prime Minister’s office announced an intention that India develop, indigenously, a 70-90 seat medium range turboprop aircraft, ostensibly to answer presently underserved demand, and to assist the Indian military in tactical airlift. The project also is intended to build up a domestic airframe and support industry. This is a commendable goal – but its commercial viability and technical realism are open to question. The notional turboprop transport would face tough competition from ATR and Bombardier, that already have products in this space and are working on larger capacity, even more efficient aircraft. Moreover, the Indian medium range civil aircraft could face aggressive competition from regional jets newlyavailable from Russia and models soon to come from Japan, Canada, Brazil and China.
Realism should temper national aspirations. India’s track record in the domestic development of civil or military aircraft is not distinguished. There is no establishedprivate sector resource with the necessary competencies (or technology) to lead a new aircraft development program, much less to produce a civil aircraft in quantity that meets world-class safety and reliability standards. Unless the Indian Government agrees to underwrite the development program, there is not likely to be sufficient assured demand to justify the risk and expense of private development.
Indian leadership would benefit from assessmentof the experience of other “BRIC” nations in the development of national civil aerospace programs. Embraer in Brazil, of course, stands out as a shining example of how much can be accomplished. That experience took decades to achieve, however, and may not be replicable. China’s experience is instructive and should serve to caution India. Creation of a domestic air transport industry has been a matter of high national policy, priority and investment. But China, despite the expenditure of billions of dollars and years of effort, has experienced continuing frustration and delays in three new civil aircraft that its state-supported enterprises have sought to bring to market: the XIAN MA60 turboprop, the Comac ARJ21 regional jet and the new Comac C919 single-aisle transport.
There should be no question that India has the capacity to develop and sustain a civil aviation industry. The nation’s world-class accomplishments in many technology-driven areas speak to its inherent abilities and the potential of its highly educated workforce. India has announced it will open an aviation university in September 2014. But India should not underestimate the difficulty of “going it alone” to achieve the desired result. India should actively promote aeronautics in the private sector andencourage foreign investment. So long as India limits FDI, and presents an opaque maze of regulations and approvals, it denies itself the opportunity to form successful ventures with accomplished Western companies to plan, design, develop and sustain a capable Indian civil aviation industry.
To foster a successful civil aviation industry will take decades. A coherent and consistent national policy is needed. India should welcome rather than frustrate foreign partnerships; its domestic industry will succeed only if it has access to technology and technical assistance from accomplished foreign partners. Those foreign partners will not put at risk their enterprise-critical technology without a high degree of assurance of return on their investment and without confidence they can do business in India without threat to their intellectual property or compromise to their business integrity. Continuing vigilance to eradicate routine governmental corruption is essential to attract ethical global partners.
If development of new aircraft is a long-term objective, India can focus with higher confidence of near-term success on creation of an aviation supply chain, e.g., specialized service and manufacturing. India should harness its prodigious information technology and software development capabilities to contribute to the design, development, manufacturing and sustainment objectives of the major players in the global aviation industry. Certainly, India should facilitate and promote national resources for maintenance, repair and overhaul(MRO) of civil aircraft. All of these areas today are subject to rules, regulations, policies, taxes and levies that frustrate accomplishment. For example, very high tariffs now inhibit original equipment manufacturers from importing into India the parts that are needed for MRO operation.These barriers should be removed and replaced with a responsible, businesslike, predictable administration of civil aviation matters. Senior government officials recognize the huge opportunity for MRO operations in India to service Indian aircraft, but coordination of the necessary actions among involved ministries will be difficult, particularly when the Finance Ministry may be asked to reduce taxes and tariffs to promote the long term opportunity.
Moreover, and most important, India needs to give national attention to civil aviation and should establish a holistic national policy to promote both the industry and infrastructure needed. There exists a correlation between the effectiveness of civil aviation – both passenger transport and cargo – and growth of the national economy. Stronger civil air carriersand a better aviation infrastructure will contribute to GDP growth. Successful nurturing of a civil aviation industry will add manufacturing jobs for India’s enormous population of skilled, younger workers. Over the longer term, a credible aerospace supply chain will enable India’s airlines to buy aviation supplies and services from domestic sources, and this will help to reduce the pressure on currency accounts by reducing outflows to foreign sources. Aircraft that are operated in Indiashould receive MRO within India.Indeed, the devaluation of the rupee increases the appeal of Indian-sourced supplies and services where costs are in rupees and receipts are in U.S. dollars.
For several years, much attention has been paid to refinement to the Defence Procurement Policies and the accompanying “offset” obligation that foreign sellers must buy from or invest in Indian sources in an amount equal to 30% of the equipment sale value. India has been disappointed with the results from the offset program, as growth of indigenous capability has been slower than hoped. Better results would be obtained if India opens up its offset program to permit discharge by more transactionsin the civil aviation sectors, including “dual use” projects where a product or service could be used either for military or commercial purposes. Credit against offset obligations should be granted for work done by India-based aerospace companies with more than 26% foreign ownership. A fundamental restraint upon the willingness of India’s domestic companies to invest in military aerospace is that the size of the market is limited and the certainty of purchases is inherently in doubt. In contrast, the market for civil aviation is larger by orders of magnitude and its duration is essentially indefinite. The national Government would be well-counseled to devote more of its attention and energies to promotion of a civil aviation industry and infrastructure in India. Benefits to India’s national defense will follow.
The U.S. and India are natural partners in the promotion of civil aviation in India. Since 2007, the U.S.-India Aviation Cooperation Program (ACP) has operated as a private-public partnership to promote the growth of the civil aerospace sector in India. In July 2011, the countries signed a Bilateral Aviation Safety Agreement (BASA) in July 2011, to facilitate reciprocal safety and certification activities, and explicitly to promote an indigenous aircraft and aeronautical products industry with U.S. cooperation and technical aid. Through the ACP, the U.S. Government and leading American companies are cooperating and assisting Indian counterparts for the advancement of civil aviation across a broad spectrum. Several key opportunities are on the horizon for coordination of public and private sector initiatives between the countries. A U.S.-India Aviation Summit, sponsored by the U.S. Trade and Development Agency and the Government of India, is to be held on October 29-31, 2013 in Washington, D.C. Planning now is underway for the 4th International Exhibition & Conference on Civil Aviation to be held on March 12-16, 2014, in Hyderabad.