India’s commercial air travel market, touted not so long ago as the world’s fastest growing, has fallen upon hard times and things aren’t going to get better soon.
Jet Airways has closed down with absolutely nobody coming forward with a proper bid to take it over. Before that the government failed to privatise the hugely loss making Air India. It continues to fly only on the political will of its owner.
All the three segments that make up India’s civil aviation sector are in trouble. With the demise of Jet Airways (strictly speaking it is currently comatose), the full service can is being carried by loss making Air India and Vistara, the Tatas and Singapore Airlines joint venture, which is yet to make any money.
At the other end of the market is the potential in small towns and cities which the government attempted to bring on to the aviation map of India through its UDAN scheme. It capped fares at ₹2,500 for a certain number of seats on one-hour flights with subsidy to meet the deficit of the carriers coming forward to operate. But two years into the scheme, eight small airlines stopped functioning, the can being carried largely by budget carriers like IndiGo, Alliance Air (Air India subsidiary) and SpiceJet. Again, how long can these go on?
Squeezed from both ends, the bread and butter no-frills budget service providers along with the developed network are also gasping for breath.
When an entire industry is in trouble policy makers have to sit down and answer two questions: How important is the industry in the public interest and how can the policy regime be changed for it to become viable and continue on its own feet?
First, air travel is not a luxury as it is essential for maintaining the economy’s productivity levels and growth. Simultaneously, routinely subsidising mainstream air travel is not a sustainable proposition.
This brings us to the issue of identifying the killer costs in a commercial carrier’s budget. Financial cost of acquiring aircraft is given and airlines have little control over it. Airport charges are also more or less given.
The next most important item, personnel costs, are also given in the sense that airlines have to compete in the marketplace for the skilled staff they must engage, especially trained pilots. This brings us to the one cost over which the government has some control — aviation turbine fuel which has a high tax component. There has been a steady demand to bring aviation fuel under GST but that will help only if the government (central and the states) acquiesce to a rate of 28 per cent, the highest slab.
But mid last year, when rising global oil prices severely denting airline finances became an issue, taxes accounted for as much as 40 per cent of what airlines paid. Fuel consumed by UDAN services attracted a far lower rate of under 5 per cent.
But while lowering taxes can be a reasonable proposition, there are clear limits to which this can work. First, India being a substantial net importer of oil, is a price taker. Besides, aviation fuel being a fossil fuel, government easing the tax burden on its consumption goes against the grain at a time when there is global concern over climate change contributed in good part by the burning of fossil fuels.
Public subsidy or tax relief should instead go to the users of renewable energy and the Railways has elaborate plans to move forward in that direction.
But the stark reality is that for even budget, no-frill airlines to earn a decent margin air fares have to go up. This will of course curb demand at the margin. Flyers enjoying cheap fares now under special offers will have to stick to rail travel.
A solution will of course emerge over time. As incomes grow rapidly along with economic growth, air travel at higher fares will become more affordable. But in the immediate future there seems no option but to live with higher fares. Politically, the government’s vision of making it possible for the common man to fly will have to wait for some more time to become a reality.
But there is a silver lining of sorts. Large companies with deep pockets, seeking to capture market share in an emerging economy in a sector with a future, like say Reliance Jio and Amazon, may be willing to foot losses for an extended length of time and keep offering cheap fares.
The writer is a senior journalist