Govt policies put aviation sector on a wing and a prayer

Ashwini Phadnis New Delhi | Updated on April 19, 2019

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While Jet has buckled under now, the going seems not so easy for SpiceJet

Have government policies helped or hindered the growth of the civil aviation sector in the 25 years since the Air Corporation Act was amended in 1993 allowing the re-entry of the private sector into the domestic civil aviation space?

More airlines sprung up

V Subramanian, former Secretary and Member Secretary of the Naresh Chandra Committee — which came up with a report on the roadmap for the Civil Aviation sector in 2003 — is of the view that the government has helped domestic aviation as more airlines have come up and more cities have got linked by air.

The former bureaucrat has a point. When the Act was amended a number of airlines took to the skies and connectivity across the country has improved dramatically since then.

Among those who took advantage of the Act were Modi-Luft, a joint venture between Lufthansa and SK Modi; Damania Airways promoted by Parvez Damania and EastWest Airlines. And, there were Air Sahara and Jet Airways.

That was a time when the airlines were called air taxi operators and were not allowed to print their flight schedules. But the entrepreneurs were willing to take their chances in the fast-changing Indian market as they saw the potential for growth.

However, the going was not that good and most of themhad to shut shop soon after starting operations. Some promoters acted in haste by opting for older aircraft which were more expensive to operate; they also grew their operations in an unsustainable manner.

SpiceJet, Jet Airways

In a testimony of their business models and perhaps what can be termed a better understanding of the aviation market then, only two — SpiceJet and Jet Airways (which temporarily ceased operations on April 10) — of the original wave of private airlines managed to survive.

While Jet has buckled under now, the going seems not so easy for SpiceJet — a re-incarnation of Modi-Luft started by Ajay Singh (the current owner of SpiceJet) started in 2005.

Unfavourable policies

Policy and changes continue to play a major role in shaping up the sector. According to Dhiraj Mathur, former Partner and Leader, National Aerospace and Defence Practice, PwC, there are three issues on the policy front hampering the domestic aviation sector — exorbitant taxation on aviation turbine fuel (ATF) which is probably the highest in the world, the duty structure which makes the domestic MRO sector unviable, and issues related to infrastructure although now the government is seeking to build more new airports.

Also read: Indian carriers have ‘limited freedoms’ to operate as true commercial businesses: IATA

“Historically, the government has been inward looking and protectionist. Easing has started now but a lot more remains to be done,” he argues.

Jet: a case study

The only exception which managed to grow despite these policy hurdles was Jet Airways started by Naresh Goyal in 1993. Unlike its competitors, Jet Airways started with the then latest Boeing 737-400 aircraft which had a larger cabin. Goyal also had a sound business strategy in place before taking to the skies. For example, Jet Airways entered into an agreement with Gulf Air, which was a shareholder in the Indian carrier.

Also read: Jet Airways: AIBEA urges PM to order thorough enquiry, punish wrongdoers

This was a time when international flights landed in very few Indian cities. So, many of the passengers flying to Mumbai from the Gulf on Kuwait Airways or Gulf Air would automatically board a Jet Airways flight to their final destinations within the country.

This arrangement ensured a steady and assured income stream for the start-up. Jet Airways was built on such revenue over the two-and-a-half decades that it flew in the Indian skies.

Hub-and-spoke model

But what it probably missed was the advent of the low-cost airlines in India, courtesy Captain Gopinath’s Air Deccan. Started in 2003, this low-cost, no-frill airline changed the way Indians looked at flying forever. While Air Deccan was unable to face market competition and was eventually acquired by Kingfisher Airlines, the market forces unleashed by it soon saw SpiceJet, IndiGo and AirAsia following this model. The low-cost carriers (LCCs) now control most of the Indian aviation space.

While the next logical step for the airlines that existed was flying international, unfortunately government policies did not help Indian carriers. While making it clear that he is not against India exchanging bilaterals with other countries, Subramanian maintains that the manner in which this was done saw the hubs shift out of India to the West Asia and Far East leading to a loss in business.

India exchanged air services bilaterals which saw a huge increase in the number of daily flights that airlines such as Emirates, Etihad and Malaysian could operate to and from India. These airlines flew passengers from India not only to Dubai (in the case of Emirates) but also onwards to other parts of the world. India has managed to win back some of those passengers as integrated airports have come up in Delhi and Mumbai which allow airlines to transfer them on to flights to different parts of the world on the lines of what Dubai, Singapore and other airports are doing.

The 5/20 rule

On his part, Mathur believes that the government’s 5/20 rule which stipulated that an Indian carrier must have flown for five years and have a fleet of 20 aircraft was one of the main reasons why Kingfisher collapsed. Since it did not meet the required eligibility for going international, Kingfisher acquired Air Deccan which added debt to its balance sheet. The airline finally succumbed to its pile of debt and shut down in 2012.

Ironically, the 5/20 rule has been changed with domestic airlines no longer needing five years of flying in Indian skies to qualify for flying abroad but having 20 aircraft remains a mandatory requirement for international operations.

Published on April 19, 2019

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