Opinion

Aviation reforms: good enough to fly high?

Arvind Sharma | Updated on June 02, 2020 Published on June 02, 2020

The govt has initiated far-reaching revival measures. But to deal with the present challenging situation, the aviation sector requires more booster shots

World over, desperate and sincere endeavours are being made to enable ailing economies to survive and tide over the ongoing Covid-19 crisis, and leaders are being as creative as they can to ensure normalcy can be achieved soon — even if that means in the next couple of years.

Any effective reform intended to come out of the present situation is subject to the challenges of whether: (a) we are ready to take-off fearlessly without the anxiety of being stumped; and (b) the reforms are qualitatively and quantitatively good enough to achieve their intended purposes. These are ultimate concerns, and will have a substantial impact in introducing successful reforms.

The effects of the Covid contagion are so severe that the world’s second oldest airline (Avianca) has already filed for bankruptcy protection. The US and Australia have already announced significant financial packages for their respective aviation industry. Other countries are also making all possible attempts to protect their airline companies. Needles to mention, travel and aviation sectors contribute significantly to the GDP of most countries, and it is critical to ensure the economic safety and prosperity of these sectors.

Revival efforts

The Government of India is also making drastic economic revival efforts, and it has announced a slew of reforms and initiatives under the Atmanirbhar Bharat scheme. Such reforms include measures to safeguard and promote the interests of various stakeholders in the bleeding aviation sector.

As part of its reforms, the government intends to efficiently manage and utilise the Indian air space to bring down costs and civilian air travel time. This is a welcome move and will reap rich dividends, and travellers and airline companies will be the biggest beneficiaries. There will be incidental benefits as well, including to the environment.

The challenge will be to ensure that the air travel does not become so expensive that it nullifies the benefits arising due to more airspace and air routes being available. Ultimately, the consumer should find it lucrative and practical to fly and the airlines should be able to retain savings to cater to their respective economic health. This will be a challenging task and difficult balance to achieve.

Development of more airports under the PPP model with a view to improve the aviation infrastructure without the government having to pump in additional funds has also been announced. There will be a round two, and a subsequent round three for airport development under the PPP model. The proposed structure for airport development will ensure upfront payments and a steady revenue stream over a pre-determined period for the government. Whilst this is a positive endeavour, airport infrastructure development is a challenging process often marred with completion delay, including because of time taken to procure governmental approvals.

The present situation has also resulted in immediate focus to develop India as an aircraft maintenance, repair and overhaul (MRO) hub. It is expected that aircraft engine manufacturers will set up shop in India, and airframe maintenance and component repair business should go up. On an overall basis, this should result in saving costs and creating liquidity for airline companies. Needless to mention, convergence between civil MROs and the defence sector should create economies of scale and long-term benefits.

Further reforms needed

The government seems mindful of the economic sentiment and financial strength of various stakeholders, and has rightly introduced beneficial measures by extending moratoriums, reducing interest rates, improving liquidity, and the like, and these measures will provide impetus to the economic recovery process, including for the aviation sector. However, in the present context, the aviation sector requires booster shots, and the subject reforms will take considerable time to generate notable benefits to the sector.

The immediate future of the aviation sector will be subject to severe challenges, including because of the historically heavy operating costs that cannot be borne in the present situation and stringent protocols to be put in place for air travel.

Industry leaders would really be hoping for further reforms that will deal their present situation on an immediate basis. Several airlines have closed shop in recent decades and Air India is surviving on bailout packages. Covid-19 poses an even more serious threat, and all efforts necessary to stop the collapse in the aviation sector should be undertaken.

The writer is Partner, M&A and General Corporate, Shardul Amarchand Mangaldas & Co

Published on June 02, 2020
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