Nose-diving Aviation Industry in India – Can it take-off again?

Last Updated at: October 23, 2019
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Nose-diving Aviation Industry in India – Can it take-off again?

India, in the last four years, has been one of the fastest growing countries in terms of addition of new passengers, the addition of crew, fleet and pilots. India was the seventh largest aviation market with 187 million passengers in FY 2017-18. Aviation is one sector that leveraged liberalization to the fullest, with the arrival of private players and the ability to serve across diverse sectors in India. A document released by the Ministry of Civil Aviation reports that the number of airports in India will increase to 200 by the year 2040 along with a predicted six-fold increase in passenger traffic.

But all is not well with India’s domestic aviation players, with one of the largest competitors Jet Airways being forced to ground its flights and the exit announcement of its key Board of Directors this week.

In this post, we cast light at the problems of the aviation sector in India and highlight reasons for the stagnancy being observed in this sector.

  1. High Cost of Operations for Indian Airlines: One of the most decisive factors for profit in any industry is the cost structure. The input costs of operation in the aviation industry are significantly high involving a very high working capital outlay in terms of fuel charges, technical staff, maintenance, ground fees etc. ATF or the Aviation Turbine Fuel is not covered under the GST regime in India. Since this is not done, airlines cannot claim the taxes on fuel costs as an input tax credit, making the ATF more expensive. Currently, aviation turbine fuel attracts an excise duty of 11%. Over this central levy, states charge different rates of value-added tax (VAT) that may go up to 30%. Other than ATF cost, various surcharges, user development fee (UDF) and steep navigational, landing and parking charges at airports make the cost structure of domestic airlines unviable.
  1. Weakening Rupee and Demand: A weak rupee necessarily means higher payments for parking charges, international staff and maintenance in other countries. This increased payout cost without any incremental advantages has the ability to severely affect an airline’s balance sheet as it declines reserves. India is also a particularly difficult market due to its population composition that favours cheaper modes of public transportation like railways.
  1. Financial Failures: Jet Airways in the recent past has been hit by increasing operational costs, fuel prices, depreciating rupee and weak demand on international sectors that contributed to huge losses and hence, failure to repay pending instalments. Jet Airways, has been forced to ground several of its aircraft due to its inability to pay rentals. Jet Airways is looking for working capital loans but banks that want the airline to show a turnaround commitment are sceptical of its future, considering the presence of rivals like GoAir and Indigo that are successful examples of low-cost airlines.

The once government-owned Air India is also in troubled waters, as it faces an existential crisis with a debt burden of Rs 55,000 crore, for which the government has provided interim support, a sovereign guarantee and loan funds from the National Small Savings Fund, helping it to keep flying.

Kingfisher also lurks in uncertainty and a loss of credibility in the eyes of the masses, ever since its owner, Vijay Mallya has been declared an economic fugitive with forfeiture of his assets in India.

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The Way Ahead

There have been various schemes floated to make aviation a viable alternative, such as the UDAN Scheme – Ude Desh Ka Aam Nagrik. It aims to make flying affordable by providing connectivity to un-served and under-served airports of the country through the revival of existing airstrips and airports so that residents of smaller regions may also be able to avail affordable flights. By capping fares at a price based on the number of kilometres, it supports regional connectivity. This boost in regional demand is likely to spiral into ensuring a larger customer base for Indian airlines. Moreover, classifying the ATF as an input tax could also help airlines cut down their taxation costs and play a role in making flying viable.

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    Avani Mishra is a graduate in law from the National Law Institute University, Bhopal. She qualified the Company Secretary course with an All India Rank 1 and is a recipient of the President’s Gold Medal for her academic distinctions. She also holds a B.Com degree with a specialization in Corporate Affairs and Administration.