 "Dear aviation minister A Raju, please look at this graphic before setting new priorities")
Ashok Gajapathi Raju Pusapati is taking over as civil aviation minister and is assuming the office at a time when the domestic aviation sector is straddled with losses.
Jet Airways reported its largest ever quarterly loss on Tuesday at Rs 2,153 crore for January-March. A few days back, SpiceJet, the listed airline from the Sun group, had registered a Rs 321.5 crore loss for the same quarter. For the entire 2013-14, its loss stood at a record Rs 1,003 crore loss. The other listed airline, Kingfisher, is yet to report its numbers. But about this company, the less said the better.
A look at the graphic below will show the deep troubles the domestic aviation is in. Of the three listed airlines, the only company to have made profit, albeit a minor one and just for two years, is SpiceJet.
A combination of a high cost environment, a sluggish economy, regulatory constraints and excess capacity have seen Indian airlines post accumulated losses of $10 billion and increase their collective debt of close to $20 billion over the last few years.
Some carriers are in a precarious state, with cash balances equivalent to less than one day’s revenue. Global aviation consultancy CAPA estimates that Indian airlines will need to raise $1.3 billion of capital in FY2015 just to stabilise their operations. Of course, this is unsustainable any way we look at it.
CAPA also points to most state-run airports losing money and general aviation being “chronically sick”.
So here is the biggest question facing new Minister Gajapathi Raju: Will he be able to persuade state governments and rationalise the insane taxes on aviation turbine fuel (ATF)? Fuel accounts for more than half the costs of airlines opearting in India. All, airline companies, barring IndiGo, have been piling up losses mostly because of this.
ATF attracts sales tax varying from 4 percent to 25 percent across various states. Unless this is brought down, airlines can either shut shop or continue to nosedive further into debt pit.
CAPA points out that notifying ATF as a ‘declared good’, will reduce sales tax to 4 percent from an average of 24 percent. This was not possible in the past because of the nature of coalition governments, now there should be no problem. This would mean an immediate reduction of 10-12 percent in airlines’ operating costs, representing a massive impact in such a low margin industry, it said.
Most people mistakenly believe that the new minister should take up the lost cause of Air India on a priority basis. No, Air India need not be the new minister’s priority, its privatisation should be.
Why spend more money on a bleeding airline when it could well be possible to sell it to a private owner and exit the business of aviation all together. Instead of wasting time and resources in trying to turn around an ailing national carrier, the new minister should look for professional help and sell it off at the earliest.
Now we come to perhaps his second biggest challenge for the new minister: finding ways to turn the vast number of airports, which are state-run, profitable. As of now, only four Indian airports - Delhi, Mumbai, Hyderabad, Bangalore - are being run by private operators under a PPP model and seem to be profitable. But those being run by the Airports Authority of India are bleeding.
Another big agenda which the new minister must prioritse is drafting of a comprehensive civil aviation policy. This will get a system in place for an economic, regulatory framework for airport tariffs at private airports and provide some basis and policy certainty for the criteria for the assessment of airline licence applications. Absence of any policy has left negotiation and allocation of bilateral capacity entitlements an ad-hoc affair. This also needs to become transparent.
Apart from these points, CAPA has suggested the following agenda points:
- Abolish the 5 year/20 aircraft rule which prohibits foreign operations by airlines before having a fleet of 20 aircraft and having completed five years of domestic operations. There is no justification for persisting with a regulation which discriminates against Indian carriers, effectively placing them at a competitive disadvantage to foreign airlines operating into India. It should be scrapped.
- Encourage further investment in the civil aviation sector.