INDIAN INFRASTRUCTURE SERIES – I: Airports and Aviation

With the country’s population of nearly 1.3 billion, only 0.08 billion fly by air annually. 

There are times when an air ticket costs less than a premium train’s 1st class ticket. Apart from the ticket price, the time taken by flights to make one reach a destination is significantly lower than the time taken by trains. Still, majority of the population prefer trains. This might be because of the pre-conceived notion about flights being extremely expensive and almost unaffordable by the middle-income group and lower. This means, there is a huge potential for the domestic aviation sector to grow and prosper.

 National Civil Aviation Policy (NCAP 2016) passed by Union Cabinet

In June 2016, Union Cabinet approved the National Civil Aviation Policy (NCAP 2016). Since independence, that was the first time an Integrated Civil Aviation policy has been brought out by the government. The policy focuses on taking “flying to the masses” and making it “affordable, convenient, cheap.”

To make this possible, the new policy:

  • Aims at bringing down tax-based cost for airlines. All the states will be required to bring down VAT on ATF to 1%, and a viability gap funding will be provided by the government to help it cut ticket cost.
  • The cabinet has approved a cap on short-span flights. It has capped the flight ticket rates for journeys with 30-minute air time at Rs. 1,500 and the ones with one-hour air time at Rs. 2,500.
  • The earlier proposed 2% cess on all regional flights has been done away with. The cess was proposed to collect funds to improve regional infrastructure.
  • The policy will put a cap on the cancellation fees.
  • The excess baggage feehas been reduced to Rs.100/kg for the first 20 kgs of excess baggage and then Rs.250/kg.

The NCAP 2016 also provides for a Regional Air Connectivity Scheme (RCS)- UDAN, that aims to link all the under-served and un-served areas of the country.

Current level of implementation of the NCAP

  • As far as the Regional Connectivity Scheme is considered, only the Delhi government has abided by it. It has recently slashed the value-added tax (VAT) on aviation turbine fuel (ATF) to 1% from the current 25% for flights to the north-east regions and other remote parts of the country.
  • The airline industry has been giving attractive results since the past 14 quarters. The airlines companies have been making good profits, due to cost cut downs. One of the reasons for this cost cut is the fall in the crude oil prices. But there’s a question that arises here- Is the crude oil price alone sufficient for the airline industry for its sustainability?

Update on UDAN

  • A total of 128 routes have been awarded to 5 operators- SpiceJet (11 routes), Air Deccan (34 routes), Air Odisha (50 routes), Alliance Air (15 routes) and Turbo Megha (18 routes)- who won the bid for RCS.
  • A total of 45 un-served/ under-served airports have been added to the list after the approval by the Government.
  • Within 4-6 months, all the new regional flights will become operational.
  • 50% of the seats on UDAN flights will cost Rs 2500 for a one hour flight.
  • Subsidy will be borne by passengers from whom a nominal amount will be charged.
  • Under UDAN, the operators would be extended viability gap funding. The amount is estimated to be around Rs. 205 crore per annum.
  • The viability gap funding would be in place for three years for the airlines concerned from the date of starting operations in UDAN route.

Let’s have a look at a few interesting statistics which depict the growth potential of the airline industry:

GDP per Capita:

Another thing that could contribute tremendously to the growth of the aviation sector is the increasing per capita GDP and disposable income, which could indirectly be achieved by reduced air ticket prices. The current per capita GDP is Rs. 1,28,843.

Indian aviation market is significantly underpenetrated

India’s air travel market is the sixth largest globally in terms of total domestic seats and ninth largest in the world by total domestic and international seats. However, based on annual domestic seats per capita of India is around 0.08 which is significantly low compared to other developing markets such as Brazil, Turkey, Indonesia and China, where penetration rates are between 0.35 and 0.65 annual seats per capita.

The major reason behind this significant under penetration due to relative high costs and commercial airline services being limited to metros. In 2014, India’s per capita seat penetration was 1/7th of the developing countries and 1/30th of the developed countries.

The substantial gap between the aircraft penetration rates in India and larger aviation markets suggests significant opportunities for growth. Therefore, we believe that the investments in airport infrastructure and airlines going to newer towns will help the sector grow multifold.

Source: CAPA

Investment in Regional Airports

Airports provide access to and link regional, national and international markets. This makes investment in existing or new airport infrastructure essential for economic development.

In FY16, the total passenger traffic was 16.89 crore of which 76%contribution was from the major airports of India. As far as the first 9 months of FY17 is considered, the contribution of the above-mentioned airports is 75% of the total passenger traffic which is 15.18 crore.

This implies that the rest of the airports have very less passenger traffic. These airports have low connectivity. To increase the traffic here, the most important thing to offer is the value migration from rail to air travel.

Following is a chart showing the passenger traffic at the top 10 major airports of India-

Passenger traffic at the top ten busiest airports in India

Name City State IATA Code Passengers (FY16) Passengers (9M FY17)
Indira Gandhi International Airport Delhi Delhi DEL 3.43 3.12
Chhatrapati Shivaji International Airport Mumbai Maharashtra BOM 3.00 2.45
Kempegowda International Airport Bengaluru Karnataka BLR 1.56 1.45
Chennai International Airport Chennai Tamil Nadu MAA 1.03 0.97
Netaji Subhash Chandra Bose International Airport Kolkata West Bengal CCU 1.02 0.98
Rajiv Gandhi International Airport Hyderabad Telangana HYD 0.92 0.86
Cochin International Airport Kochi Kerala COK 0.31 0.29
Sardar Vallabhbhai Patel International Airport Ahmedabad Gujarat AMD 0.49 0.41
Pune International Airport Pune Maharashtra PNQ 0.52 0.48
Goa International Airport Goa Goa GOI 0.47 0.43
12.76 11.45
Total* 16.89 15.18
% of Total 76% 75%

*Total Passenger traffic of all the airports in India. Figures in crores.

Need for Intra state regional Airlines:

There is an urgent need to have intra-state regional airlines that provide low cost, small seater planes connecting important cities within larger States like – UP, Gujarat, Maharashtra, Karnataka, Tamil Nadu and Rajasthan. There are still a lot of cities in the countries that are deprived of airports. If this scenario continues, the small cities would never be able to become smart. The subsidies and modalities as an incentive driven mechanism would encourage the operators and the commuters.

Dealing with multiplicity of taxes on ATF prices

Aviation turbine fuel (ATF) in India is subject to a multiplicity of taxes and fees, the result of which is that domestic carriers pay up to 50 per cent more for fuel than in say Dubai or Singapore. It’s interesting to know that around 40% of the expenditure of the airline companies comprises ATF expenditure. A 4% reduction in fuel cost may potentially add around 2% to operating margins.

The Delhi govt. recently slashed the value-added tax (VAT) on aviation turbine fuel (ATF) to 1% from the current 25% for flights to the north-east regions and other remote parts of the country. Similarly, several smaller states should follow suit cutting the tax rate and take benefit from an increase in frequencies and fuel uplift. Thus, with a concerted effort it may be possible to convince them of the benefits of providing a lower cost environment that will stimulate business and tourism flow.

Below are the details of the ATF duty that is paid in various states (as on 1st April,2016)-

States/ U.T. ATF (Duty Paid/ Bonded) States/ U.T. ATF (Duty Paid/ Bonded)
Andhra Pradesh 1% Manipur 20%
Arunachal Pradesh 20% Meghalaya 20.00% + 2% surcharge
Assam 22% Mizoram 20%
Bihar 29% Nagaland 20%, surcharge on tax 5%
Chandigarh 20% Orissa 5%
Chhattisgarh 5% Puducherry 14.50%
Delhi 25% Punjab 13%
Goa 18% Rajasthan A) 26% B) 5.50% when airlines maintain hub or connect two cities of Rajasthan
Gujarat ATF Duty paid 30% and 5% Sikkim 25%, cess Rs. 3000 per KL, Sikkim Consumer Welfare Fund `100 per KL
Haryana 20%, Additional tax on VAT 5% Silvasa 20%
Himachal Pradesh 27% Tamil Nadu 29%
J&K GST 20%, surcharge on tax 5% Telangana 16%
Jharkhand A) 4% for non-scheduled airlines Tripura 18%
Karnataka 28% Uttar Pradesh 21%, In case of sale to civil aircraft at Agra & Varanasi – 5%
Kerala 25%, Additional tax 15% on tax, surcharge 1% on tax & Additional tax Uttarakhand 20%
Madhya Pradesh 4% West Bengal 25% + 20% Add. tax on tax. For Bagdogra AFS- nil (No tax)
Maharashtra ATF – duty paid Mumbai Pune 25%, ATF – duty paid except Mumbai & Pune 5%

 

Private Public Partnership in managing major airports

Traditionally, airports were owned, managed and operated by governments but there has been a worldwide trend towards private sector involvement with varying degrees of private ownership and responsibilities, including the use of public-private partnership (PPP) models.

One such airport coming up is the Navi Mumbai International Airport, to be built at Kopar-Panvel in Maharashtra, India. It is being developed as the second international airport for the Mumbai Metropolitan Region. It will function alongside the Chhatrapati Shivaji International Airport (CSIA) and will make up India’s first urban multi-airport system.

The Rs. 16,000 crore project will be executed by Mumbai International Airport Limited (MIAL), which won the contract in February 2017. MIAL is a Joint Venture between the Airports Authority of India (AAI) and the GVK Industries Ltd. led consortium.

Summarizing….

The aviation industry in our country doesn’t stand at a place where it should. In terms of domestic air traffic, India has been ranked number 3, outpacing Japan. This sector in undoubtedly growing, but not as effectively and efficiently as it should. To sum up, it could be said that ways that’d lead to the improvement of the state of aviation in India have been shown but its even implementation plays a more crucial role. There is a lot of potential to be unleashed.

-Report by Prerna Pincha