Flaws in civil aviation policy will be resolved over a period of time

The government´s civil aviation policy would generate the much-needed holistic development of the aviation sector in the next three to five years, says Ashish Tandon, MD, Egis in India.

How do you react to the new aviation policy announced by the Union government in 2016, in the wake of a resurgence in the aviation sector due to lower oil prices (now rebounding) after nearly two decades of chasing the red curve of stunted growth?
The new civil aviation policy is aimed at creating an ecosystem of affordable flying for the masses as well as easing industry-related concerns which were long due. To do so, the policy has addressed issues from the regulatory, financial and operational perspectives in a comprehensive manner in three main areas.

The new Regional Connectivity Scheme (RCS) aims to increase connectivity to short-haul routes by providing measures to increase the demand for air travel and supply of related infrastructure. The target airfare of Rs 2,500 per passenger for one-hour flights will allow a large number of travellers to afford air travel to smaller cities. To cater to this demand, the government aims to develop no-frills airports in Tier-II and Tier-III cities at an indicative cost of Rs 50 to Rs 100 crore without any IRR constraints.

Secondly, the FDI limit in airlines and airports has been increased to 100 per cent with certain caveats. Further, the ´5-year, 20 aircraft rule´, in which airlines had to operate a minimum of five years and have a minimum fleet of 20 aircraft has been amended to ´0-year, 20-aircraft´, which means that airlines can rapidly achieve their goal of flying to international sectors as soon as they deploy 20 aircraft to domestic routes. Hence the possibility of increased investments in the sector as well as less restrictive operational norms will bring increased competition to the market. These initiatives obviously benefit air travellers, who would be able to enjoy lower fares and increased service levels from airlines and airports.

Finally, the much ignored aircraft Maintenance, Repair and Overhaul (MRO) business is expected to benefit from certain tax exemptions. Currently more than 80 per cent of Indian airlines´ major maintenance activities are carried outside India. Henceforth, airlines would receive more cost-effective maintenance solutions in India versus abroad. Further as part of the ´Make in India´ initiatives, global aerospace OEMs are expected to invest in India. The policy recommends fiscal support to such initiatives and therefore will have a positive impact, not only in these industries, but also on the local economy where such industries are based.

Hence overall, the policy would generate the much needed holistic development of the aviation sector in the next three to five years.

The regional connectivity scheme (Rs.2,500 for an hour-long flight) for better pan-India flights was scheduled to take off in the second quarter of 2016. Air fares are comparable to first class AC train fares for the first time in Indian aviation history. Is this a viable business model, considering the negative financials of airlines in general? Has there been adequate movement on this front?

As of today, AAI, which is the nodal agency on behalf of the Ministry of Civil Aviation, has received proposals from several operators to operate more than 200 routes under the Regional Connectivity Scheme, which is quite encouraging. As this is a new scheme, operators will experiment with pricing on underserved sectors to invigorate such routes.

The scheme has certain gaps such as caps on the overall subsidy per flight which will require operators to fill the aircraft at significant load factors. In addition, operators will have to initiate operations with smaller aircraft models on such routes to minimise any negative impact if the sector does not generate enough traffic, even with the subsidised fares.

Hence, profitability on such routes will not be known at least until a year after operators start flying under RCS.

Is India competent enough to think and execute futuristic airports (future-proofed aviation management and operations) on par with global standards? What are the imperatives for the airport industry?
The Airports Authority of India and other private airport developers are quite advanced in terms of bringing modernisation to new airport developments. Innovation is not just being brought about in planning and design aspects, but also in operation and management of airports. For example, AAI has recently invited proposals for private participation in the operation & maintenance of Ahmedabad and Jaipur airports. The idea is to bring best practices from top airport operators and implement them here.

Further, airport developers are implementing various consulting models for development of airports which employ a combination of international designers and Indian engineering capabilities to bring about futuristic airport designs which are comparable to global standards. As a result of such innovative practices, the airports in Delhi and Mumbai are now ranked amongst the best worldwide.

The Union government is set to spend $10 billion to develop airport infrastructure over the next five years. This will mean the optimisation of nearly 400 unused airstrips across India that will be revived. How do you expect industry to react to this investment flow into the sector?
India is set to become the third largest aviation market by 2020, but the capacity of physical infrastructure needs to increase to cater to the expected growth. India has more than 400 airstrips out of which only one-fourth are operational. Further, 70 per cent of passenger traffic is mainly concentrated at the top seven airports. Hence, not only the capacity of existing high traffic airports needs to increase, but the non-operational airports also need to be developed.

Hence the Union government´s plan to spend on improving airport infrastructure will provide a huge stimulus to direct stakeholders such as airlines and business aviation companies which can access more routes. Further, investments in the aviation sector will have a large indirect impact on the regions where such air connectivity is enhanced. Tourism and industrialisation of regions will also increase as a result of better connectivity.

For example, a greenfield airport will come up in Sindhudurg region in a year. The airport will have a large positive impact on the entire tourism ecosystem of the region and may lead to development of hotels, convention centres and related infrastructure to support this industry.

Is the national carrier Air India adequately aggressive in the international and national markets? How can the national asset transform into a profitable proposition for the government?
Air India is aggressive in international expansion and has joined the Star Alliance, which will help it to expand its service to several international destinations using a global partnership platform. However, the company is saddled with several legacy problems such as huge debt and working culture, due to which it is unable to perform well.

Further, any turnaround requires significant freedom to professional managers who are able to take game-changing decisions without much interference from government agencies. Our government still has a large influence in the way Air India runs and the airline is monitored minutely by vigilance agencies, which limits the abilities of professional managers to take independent decisions. Airlines such as Delta have become profitable in a competitive market when they undertook major game-changing decisions on mergers & acquisitions, and revenue management. Air India needs to be given full autonomy to make decisions and be allowed to make a few mistakes on its path to make way for full professional management. Only after that it may take a few more years before it can have sustainable profitable operations.

How can the aviation sector buck the variables of oil prices in the international markets?
The aviation sector is directly impacted by oil prices and there are very limited options the airlines have to manage this risk. Several airlines hedge a portion of oil expenditure using the futures or options market, but this requires significant experience in trading futures, which globally only a few airlines can manage.

With the aviation sector poised for a spell of profitless growth, the emphasis by airlines to go in for aircraft purchases on a large scale, as is being envisaged, may have an adverse impact on viability. Your thoughts on the subject?
Firstly, airlines typically order large number of aircraft to negotiate better prices from OEMs. However, these aircraft are brought to India under sale and lease-back arrangements. Thus the airlines don´t carry heavy debt on their books and the only commitment is to pay lease rentals on such aircraft acquisitions. Secondly, the competitive dynamic in India is such that if one airline is inducting a large number of aircraft and increasing its market share by providing better connectivity and departure timings, then the competitors too have to follow a similar strategy, or they face a risk of declining market share. Secondly, if efficiently utilised, a large fleet can reduce unit economics of the airline and reduce overhead costs per aircraft, thus having a positive impact on the bottom line. Hence for airlines, one of the viable models is to maintain or increase market share by increasing fleet size and improve unit economics to sustain operations in the long term.

The New Civil Aviation Policy (NCAP) was almost 20 years in the making. But design flaws in respect of regional connectivity, ground handling and bilateral policy, mean that it will be difficult to implement and inadvertently act as an obstacle.

Fundamental issues have been ignored, namely strengthening and restructuring of the DGCA and BCAS, and developing a viable business plan for Air India and the Airports Authority of India. Your views on the subject?
The New Civil Aviation Policy (NCAP), although delayed, is a significant step forward in the development of the civil aviation sector in India. Within NCAP, the Regional Connectivity Service (RCS) will be implemented for the first time. Although there has been a significant dialogue between the Ministry and stakeholders, any such innovative scheme will have a few gaps which will take some time to resolve. We can see that already a few operators have bid for a number of routes under RCS. Hence the design flaws will be resolved over a period of time.

Further, a policy itself cannot provide solutions to all the challenges facing the regulator, airline operators and airport developers. Rather, it provides a broad framework under which focussed initiatives can be undertaken by each of these industries to improve their performance.

For example, under the aegis of EASA, an initiative was taken to restructure DGCA and strengthen it further. AAI has taken significant initiatives to modernise airports and develop the infrastructure in comparison to global standards. Further, under a new initiative, the operations & maintenance of select airports will be given to private global airport operators, thus again bringing global best practices to airport operations. These practices will then be adopted by AAI for operation of other airports as well.

Thus the NCAP, with its own set of gaps, has certainly provided a definite platform and headway to bring innovation in the civil aviation sector.