Viewpoint

To sustain growth in aviation, the cost structure will need correction

Indian aviation has a bright future, provided market forces are allowed to come to play, says Nalin Jain

A lot has changed in Indian aviation in the last few years - six new airlines launched, most of them as LCCs; 500 new aircraft orders announced; airport modernisation takes off; ATF excise duty halved and travel tax abolished; landing charges reduced for all aircraft and abolished for less than 80 seat aircraft; new bilaterals signed to allow private operators to fly internationally and to allow more and more foreign operators to add India on their route maps.

Despite all the recent positive changes, we are only at the beginning of a big growth opportunity. Going forward, the rate of growth would be determined by infrastructure growth (airports, ATC, etc) driving operating costs down and growth of regional connectivity as well as trunk routes to ensure uniform growth.

The government has demonstrated its commitment by launching the airport modernisation programme. Now it needs to ensure speedy implementation (both at major hubs and 35 smaller airports) to match with the traffic growth. Till now, the ratio of airside and landside revenues (70 per cent - 30 per cent) have been the reverse of global standards. Special focus should be given to improve landside revenues to reduce the burden on operators.

Just like telecom we need to leapfrog and learn from the rest of the world. One good example of this is - why not straight away build low-cost airport terminals like Singapore and Malaysia have done to cater to the LCCs? The other area, which needs attention, is shortage of pilots, engineers and ATCs. To reduce operating costs, training facilities need to be developed through different models of public-private partnership.

According to ATAG, during the period 1960-90, some 80 per cent of the air traffic growth was explained by growth in GDP, with 20 per cent due to price reduction. In the 1990s this has changed to 60 per cent and 40 per cent, respectively, implying that price reduction has become more important. Price reductions have to be driven by cost reductions. In India, since the emergence of LCCs, while prices have dropped, costs have continued to rise! Compared to the global cost structure of an airline - Indian operators suffer from high costs due to fuel, maintenance, and airport charges.

In the long run, a high cost structure, increased competition and low prices will make airlines unviable. While GDP growth and low prices will continue to drive the traffic, to sustain this growth, the cost structure needs correction. The government needs to rationalise fuel taxes and airport charges, ratify the Cape Town treaty to reduce cost of financing equipment. Further the private sector and government should come forward to create MRO set-ups in India.

Indian aviation growth needs to go beyond the 10 major cities, which account for 80 per cent of the traffic today. Development of regional routes would not only result in a uniform growth but also create feed to trunk routes thereby further enabling growth on trunk routes. One of the key reasons for underdevelopment of regional routes has been the route categorisation policy, which has failed to promote air services on these routes. Unlike the West, the current government policy, which is similar to trunk routes (minimum fleet size, minimum equity capital, etc) does not promote existence of second and third tier operators for providing specialised services on low-density routes.

One other correction required is that the fuel tax policy (4 per cent tax) for less than 80-seat turbo-fan jets should be brought at par with less than 80-seat turboprops. There are already some signs of positive change with some airlines focusing on these routes with regional aircraft and the government demonstrating commitment to develop smaller airports, modify existing policy and put in place enabling mechanisms for regional operators.

In summary, Indian aviation has a bright future ahead provided operating costs are made viable, market forces are allowed to operate, adequate infrastructure is provided, adequate safety standards are set and enforced, and an enabling regulatory framework is created to expand the market through low-cost service and increased coverage.

The writer is sales director South Asia, Commercial Engines, GE Aviation. The views expressed are personal.