Business | Aviation

Turbulence facing sector boils down to the ground rules

One ray of hope in this otherwise descending sector is the recent move by the Indian government to allow foreign direct investment

  • By Shweta Jain, Senior Reporter
  • Published: 21:30 February 15, 2013
  • Gulf News

Dubai: Bad regulation, outrageous taxes, high airport charges, volatile fuel costs, high operating costs, inefficient infrastructure and rupee depreciation. These are the ingredients that make up a recipe for disaster for India’s aviation sector.

The one ray of hope in this otherwise descending sector is the recent move by the Indian government to allow foreign direct investment (FDI) of up to 49 per cent in the country’s airlines.

Sure, it opens up tremendous opportunities for Gulf as well as other global carriers that have so far been waiting to gain a strong foothold in the Indian market. But is it really helping Indian carriers emerge from their spiral? It still remains to be seen if global carriers will take that leap and invest in the debt-laden and loss-making Indian carriers such as Air India and Kingfisher Airlines (the carrier which recently lost its licence owing to massive debts).

As Geneva-based aviation analyst, Andrew Charlton of Aviation Advocacy, points out: “Indian airlines are failing for a single reason — they have been subject to terrible regulation and to regulatory interference for too long. There has been incredibly restrictive investment rules, work practices and work limitations enforced by unions with government support. There has also been significant under-investment in infrastructure and incredibly protectionist, restrictive negotiation of rights and access.”

And then there are astronomically high ticket prices. In the first half (from April-September) of financial year 2013, air traffic in India fell 1.8 per cent over the last year, “the first such instance in the past five years”, according to Amber Dubey, partner and head of aviation at global consultancy KPMG.

“Economic slowdown, weak business sentiment and high ticket prices contributed to this drop in traffic,” he said, adding that the exit of Kingfisher allowed airlines to price tickets above cost for the first time in several years.

Clearly, the Indian airline industry is failing for a number of reasons, but one can begin with state-owned Air India and its regulators, as US-based analyst Ernest S. Arvai of the Arvai Group points out.

“This inefficient carrier is heavily subsidised by the government, which also mandates that it charge fares lower than its costs to compete more effectively with more efficient low-cost carriers. That process is simply staving off the inevitable bankruptcy to come, were the state to stop propping it up,” he says.

“In the EU, for example, Air India would have been closed, like Malev in Hungary, for illegal state subsidies propping up a money-losing operation,” Arvai added.

Depreciation of the rupee, crude oil price volatility, high operating costs and high taxes continue to plague the Indian aviation sector, according to KPMG’s Dubey, who says that the outlook for the airline industry in the short term remains that of cautious optimism.

“There have been encouraging signals from the [civil aviation] ministry and one hopes that pending reforms, especially on the taxation front, and regional airports would be fast-tracked in 2013,” he said.

So what can be done to make sure the Indian aviation sector steers out of the turbulence?

For the government to rationalise the taxes for long-term growth of this critically important sector is just one of the options, according to Dubey.

“Else 2013 appears to be no better than 2012,” he warns.

“An improved alignment between capacity and demand has seen yields strengthen and several airlines have reduced their losses in first few quarters of FY [financial year] 2013.

However, it is still too early to predict a turnaround in the Indian aviation industry,” he added.

What remains to be seen is whether India’s aviation sector will be able to manage a smooth take-off this year.

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