Policy Interventions In Indian Aviation: Much Done And To Be Done

As the vaccination drive gains traction, Indian aviation is attempting to recover from a huge shock to demand.

Prior to the pandemic, the country was witnessing exponential growth in traffic volumes. From 44 million in 2008 to 136 million in 2019, the number of folks taking to the skies to travel within the country had come a long way.

And consensus forecasts indicated that the country would be the third largest aviation market by 2030. This, driven by a growing middle class, a trend towards urbanisation, a rising propensity to spend, and significant capacity entering the market — all key factors that still remain.

For this growth to materialise, it required an entire ecosystem. From Original Equipment Manufacturers (OEMs) to lessors and financiers, from Maintenance Repair and Overhaul (MRO) providers to multi-lateral agencies, and from airports to airlines – to name a few.

And the government, cognizant of this fact, had undertaken several policy initiatives which helped and will help the momentum in the sector.

At the same time, it is also true that for the sector to realise its full potential, additional policy prescriptions are required.

The core issue of ATF taxation makes for an uneven playing field

At the apex of the aviation value chain are airlines. And to ensure a healthy value chain, the first point of call is an environment where airlines can thrive.

Take for instance any country that has had a strong aviation footprint. Be it UK or UAE or Singapore, for aviation benefits to accrue, airlines not only have to survive but thrive.

And for airlines, the single largest pain point continues to be the cost of Aviation Turbine Fuel (ATF). It is an issue that remains unaddressed, often overshadowing all the other good work that has been done.

ATF constitutes up to 40 per cent of an Indian airline’s cost base and makes for the largest expense items. Globally, this figure averages roughly 20 per cent. The distortion of up to 20 percentage points means that Indian airlines do not face a level playing field.

Further it impacts the sustainability of businesses. And as of this writing, with the exception of one Indian airline, all other Indian owned airlines continue to bleed.

Taxing ATF like a luxury while treating it as a commodity just doesn’t suffice. One way or the other, bringing ATF under GST has to be a policy priority.

Without this the sector cannot prosper.

High airport development costs passed on to passengers are incompatible with inclusive development

Other than ATF, the costs associated with airports continue to rise. The economic regulation of airports was supposed to deliver outcomes that balanced all stakeholder interests.

But the numbers point to a different picture. For instance, at Delhi airport, the final project cost was 3.8 times the initial estimate and in the case of Mumbai, it was 1.7 times the initial estimate.

The cost of these overruns was covered by the flying public. And both airports were allowed to levy development fees to the tune of nearly Rs 3,400 crore.

The contribution via fees levied on passengers was 1.2X–1.4X the equity contribution in the case of Delhi and 3.0X–3.2X in the case of Mumbai.

Monitoring unwarranted expenditure and closely examining traffic projections is the need of the day. For existing airports, the costs including Capex spending must be closely monitored.

Additionally, even today, India is one of the only countries in the world that allows for the levy of both a User Development Fee (UDF) and an Airport Development Fee (ADF) and the latter certainly needs a relook.

The narrative often put forth is that tight regulations will detract investors, yet a strong regulator is not necessarily incompatible with diminished investor interest and the narrative also requires constant vigil.

And this cannot happen soon enough with the current commercial fleet of 716 aircraft likely to double within the next 7 - 10 years.

This fleet requires adequate airport capacity – for developing networks, for parking the aircraft and for flying the aircraft. As of the latest count, there are 137 operational airports across the country and more are required.

But it is worth repeating that development costs have gone awry and require strict monitoring.

Credit concerns continue to make for constrained lending

As of this writing, most banks are negative on the aviation sector. The reasons are many, including a change in the structure of demand, fluctuating EBITDAs, weak balance sheets, systemic impacts of the Jet Airways failure and the NPA cleanup.

This does not bode well. Because growth in the market requires adequate availability of funds. And the funds are just not flowing.

While the macro-economic risk holds steady, the political risk and company specific risks have changed significantly. And avenues to raise liquidity are few and far between due to a host of measures including lack of liquidity in the bond market, limited equity, lack of collateral, fragile balance sheets and the risk return appetite.

Thus, oddly enough, in spite of being a key growth market in Asia, private capital is reluctant to enter the aviation sector. Limited and time taking recourse measures further amplify this challenge.

Looking ahead through a financier’s lens, cash-flows for aviation in the near term continue to be patchy, at best, and thus the requirement for collateral will continue.

Going forward, equity infusions are likely to be the resort of first measure. Failing this, funding will continue to be hard to come by. And a funds crunch will affect both the quantum and quality of growth.

Much done and much to be done

As India continues to emerge towards playing a dominant role globally, its aviation sector cannot be overlooked. Especially, as this sector acts as a growth multiplier including economic output, jobs and trade – all enabled via better connectivity.

Aviation forecasts indicate that the Indian aviation market will witness compounded annual growth rates in double-digits over the next 10 years. To leverage this growth, policy interventions are necessary — interventions that address the multiple distortions impacting the sector.

To the government's credit, it has worked on delivering several changes that just a few years earlier were not even in the consideration set. These include a roadmap towards India entering the aircraft leasing market with transactions likely to happen in the coming financial year; the privatisation of Air India with winning bids to be announced; revisions to Foreign Direct Investment (FDI) norms – which are a matter of debate and require careful consideration; tax policy changes on Maintenance Repair and Overhaul (MRO); addressing concerns with regards to setup of flying training organizations; and a change in the bidding parameters for airports.

These undoubtedly have helped. Yet, in an ecosystem, all elements have to align and many elements remain unaddressed. For Indian aviation, there is much done and much to be done.