Just eight years after the Wright Brothers’ Kitty Hawk ‘hop’ flights in December 1903, the first aircraft flew over Indian airspace, followed quickly by mail services and passenger air services. Air India flew its first international flight to London in 1948, with nine airlines operating by the 1950s. The 1953 Air Corporation Act subsumed these into Air India and Indian Airlines.
Despite harbouring this duopoly, the first bailouts started early, given the oil shocks of the 1970s, along with labour unrest and strike action. Indian aviation has remained overpriced and undercapitalised for decades.
Many More High-Flyers
The aviation sector continues to play a significant role in India’s economy, influencing over 30 million jobs, and creating 1.7 million jobs, direct and indirect, while contributing nearly 1.5% to India’s GDP (Oxford Economics, 2009). About 90% of the over 6.5 million tourists arriving in India do so via air travel. India’s airlines now carry nine times more passengers today than before deregulation.
Despite this, India has lost out on becoming an aviation hub. Missing the travel boom of the 1990s, India ceded its natural geographic advantage as the mid-stop between East Asia and Europe, while confining air travel to a small proportion of the population. According to the Air Connectivity Index (Jean-Francois Arvis and Ben Shepherd, World Bank, 2011), representing the importance of a country as a node, India ranks at 88 scoring3.8, compared to China at 46 and the US at top spot. India’s total air cargo volume is lower than that of individual airports like Hong Kong’s.
Given numerous code-sharing agreements, foreign players now enjoy about 65% market share in international traffic, garnering about half the total airline revenues (inbound, outbound and within India), building up Dubai and Singapore as hubs to India, instead of Mumbai and Chennai. Domestic carriers, meanwhile, are left with no-frills traffic and hampered by high operating losses.
Reforms have moved ahead in fits and starts. The Air Taxi Scheme (1986) saw private airlines such as Air Sahara, Jet Airways, ModiLuft and East-West Airlines operating chartered and non-scheduled services, boosting domestic tourism.
By 1994, the Air Corporation Act was repealed, with additional measures taken in 1997 to relax entry requirements and operational control of fleet size and aircraft type decisions. Air Deccan’s entry in 2003 transformed the domestic market, shaking up an oligopolistic market with cheap fares and no-frills travel.
But India’s aviation industry remains hampered by fuel taxation, regulatory barriers and capacity constraints. According to Icra, aviation turbine fuel (ATF) costs contribute 30-55% of overall operating costs. Domestic prices of ATF are linked to oil price fluctuations and exchange rate movements, while government tax levies, at the state and central level, lead to 60-70% higher ATF prices in India than globally. ATF attracts an 8% excise duty, about 24% sales tax by states and around 15-18% margin markup by oil marketing companies
Despite low oil prices, the ATF fuel market remains uncompetitive as prices are based on international import parity, being unrelated to the actual cost of refining ATF in India (Working Group on Civil Aviation, 2013). Aviation taxes need to be brought down in the near term, by about 10-15%, while maintenance, repair and overhaul (MRO) activities need to be excluded from the service tax regime for the next 10 years.
ATF should be included in any future unified GST regime, while a more transparent ATF pricing regime is required, with OMCs required to declare costs and pricing methods.
India’s idiosyncratic air traffic policies inhibit aviation growth. The 5/20 rule, ideally preventing startup airlines from flying internationally until they complete five years of operations and acquire 20 aircraft, has ringfenced India’s lucrative international routes for incumbent full-service carriers. In addition, many airlines are increasingly engaging in rapacious pricing strategy, with excessive prices noticeable during peak festival periods like Diwali.
As suggested by former secretary VSomasundaran, replacing the 5/20 rule with domestic flying credits formula could revitalise this sector. Airlines flying on domestic routes could earn credits that contribute to foreign route flight permissions, with unprofitable routes offering greater credits. Regulators should also work closely with airlines to regulate pricing, protecting consumers from predatory episodes, while ensuring that prices remain market-driven.
Aviation is a unique transport mechanism, comprising only nodes, with journeys limited to point-to-point distances, subject to capacity constraints. According to the National Transport Development Policy Committee (Planning Commission, 2013), the majority of India’s existing airports are running at levels near full utilisation, with a shortage of landing gates and waiting areas.
The well-meaning Route Dispersal Guidelines, pushing a public service obligation to serve unprofitable and remote regions like the northeast, have hampered commercial planning in remaining routes.
The creation of new aviation hubs, particularly in central and eastern India in places like Nagpur, Indore and Kurnool, could help make remote regions profitable. Promoting connectivity between regional airports with natural demand, as in Gujarat and Karnataka, will also require tax-based incentives.
Greater access to air transport can facilitate transportation efficiency improvements, fostering greater competitiveness, higher outward and inward investment, and enabling an economy to exploit economics of scale (IATA, 2009). Making in India, with its just-in-time supply chains, will require greater air transport.