Future Lies in Regional Aviation

Growth in the Indian civil aviation industry will come from extending connectivity to the smaller towns and cities that currently do not figure on the air map of the nation

Issue: 6 / 2015By B.K. PandeyPhoto(s): By ATR, Wikimedia, Embraer

Reports by professional analysts and reputed organisations such as FICCI and KPMG are congruent on the future prospects for the Indian civil aviation industry. The studies carried out by these agencies and their reports clearly indicate that the Indian civil aviation industry has been on a high growth trajectory for some years. Currently, the industry ranks as the ninth largest aviation market in the world and as per prognosis by these agencies, it is set to become the third largest by 2020 and possibly even the largest by 2030.

The high rate of growth in the industry has been driven by a number of factors such as the emergence on the scene by low-cost carriers just a little over a decade ago with the arrival of Air Deccan, commissioning of new greenfield airports, expansion, upgrade and modernisation of existing ones, involvement of the private sector in airport infrastructure development, greater affordability in air fares through fair and fierce competition and expansion of connectivity networks. There is, however, the potential for further growth which can be easily visualised by the fact that currently, the utilisation of the facility of air travel is limited to just under three per cent of the population of 1.3 billion in India. Currently, out of the total of over 500 airports in the country both in use and disused, the Airports Authority of India (AAI) operates 125 including the civil enclaves located at the military airfields. Of these, just six major airports in the country, namely Delhi, Mumbai, Kolkata, Chennai, Hyderabad and Bengaluru handle 65 per cent of the civil air traffic. The density of traffic at the remaining 119 airports that handle the balance of 35 per cent of air traffic, is thus pitifully low. There is undoubtedly much scope for growth of air traffic at these 119 airports provided the right conditions by way of an industry-friendly environment and one that is conducive to economic growth, are created by the government.

The Future Lies in Regional Aviation

In an interview conducted three years ago, Captain G.R. Gopinath who established Air Deccan and thereby ushered in the era of low-cost travel with his innovative approach, said that the growth in the civil aviation industry in the future will come from extending connectivity to the smaller towns and cities that currently do not figure on the air map of the nation. These cities hold a huge potential which has so far remained untapped. The essence of Captain Gopinath’s observation was that the Indian civil aviation industry needed a decisive shift of focus on to regional aviation which has the potential to open up opportunity of air travel for a very large segment of the population estimated at around 300 million, that has hitherto not had access to this facility even while they could well find it affordable. It is regional aviation that has the potential to significantly alter the statistics related to the percentage of population in the country that avails of the facility of air travel.

Infrastructure Development

Assessment by agencies of the Government of India indicates that by 2020, around 500 ‘Brownfield’ and ‘Greenfield’ airports would be required in the country to keep pace with the growing demand for air travel. While this assessment may appear to be somewhat overpitched, the UPA-II Government had in fact drawn up plans to commission around 200 no-frills airports including construction of greenfield airports as well as operationalisation of unused strips in areas not so far connected by air. The plan was to expand connectivity to the smaller towns and cities categorised as Tier-II and Tier-III including those in the remote and inaccessible areas especially in the North East region of the country. However, despite the declared intentions of the Narendra Modi-led NDA Government soon after coming into power, to provide impetus to the regional aviation segment of the Indian civil aviation industry, the ambitious plans of the UPA-II Government for expansion of airport infrastructure, was placed on hold. The reason cited for this decision was the lack of commercial viability owing to low demand and the heavy financial burden on the airlines owing to high taxes and airport charges as well as the exorbitant cost of aviation turbine fuel (ATF) which is one of the highest in the world. This inevitably tends to push up operating costs as expenditure on ATF constitutes around 40 to 45 per cent of the operating cost of airlines in India. Incidentally, of the 125 airports operated by the AAI, only around 10 per cent are profitable. Therefore, as a first step, there is certainly an urgent need to find ways to ease the financial burden on regional airlines to make operations at airports in Tier-II and Tier-III cities commercially viable and hence attractive.

There is an urgent need to ease the financial burden on regional airlines to make operations at regional airports commercially viable

There has, however, been a rethink since then on the part of the NDA Government on the plans to develop regional airports that had been placed on hold. As things stand, the AAI plans to revive the plan to build 200 airports of which in Phase I, 50 locations have been identified for operationalisation over the next 10 years to improve air connectivity in Tier-II and Tier-III cities and remote areas of the North East region. Construction of five new airports is already in progress. These are at two locations in Karnataka and one each in Rajasthan, Arunachal Pradesh and Odisha.

Policy Changes

Nearly a year-and-a-half after coming to power at the Centre, the NDA Government has finally come out with a draft National Civil Aviation Policy which has focused on providing the much needed impetus to regional aviation through some financial restructuring. The draft National Civil Aviation Policy has suggested the creation of Regional Connectivity Scheme (RCS) from April 1 next year. The scheme proposes capping fares at Rs. 2,500 for domestic flights of about one hour. As per R.N. Choubey, the Secretary, Ministry of Civil Aviation, “The scheme will be implemented by way of un-served or under-served airports and building no-frills airports”. The draft National Civil Aviation Policy calls for levy of two per cent on all domestic and international tickets on all routes other than Cat IIA and under the RCS. The government expects to raise resources to the tune of approximately Rs. 1,500 crore every year which will be used to provide viability gap funding to operate flights in remote areas. For this financial compensation to regional carriers for the losses suffered due to operations under the RCS, the Central Government will bear 80 per cent of the burden and the remaining 20 per cent would have to be borne by the states in which the regional airports that are located and are regarded as not commercially viable. In addition, there will be a number of tax related concessions, for example, total exemption of service tax on tickets for flights under the RCS. Also, scheduled commuter airlines picking up ATF at RCS airports will not be required to pay any service tax. Other financial concessions proposed in the draft National Civil Aviation Policy include reduction of value added tax (VAT) on ATF to one per cent or even less. Also, the state governments are expected to provide land free of charge for building or expanding airport infrastructure, thus reducing the overall level of investment in no-frills airports.

Regional Aircraft

The legacy carriers equipped with large size airliners will not find operations to the regional airports financially attractive enough primarily on account lack of certainty in demand. For operations in the regional segment to be profitable, it is essential for the regional carriers to have aircraft of the right size on their inventory. As the existing regional airports or even those that are expected to be operationalised in the future, will have runways that are of smaller than standard length, regional carriers would have to operate aircraft from ATR, Bombardier and Embraer that are specifically designed for such operations instead of aircraft of the Boeing 737 or Airbus A320 class. India’s first low-cost airline Air Deccan, had successfully carried out regional operations with aircraft from ATR.

The Final Word

If the vision of the Indian civil aviation industry to be the largest aviation market in the world by 2030 is to be a reality, the government and the industry will have to join hands to unlock the potential the regional aviation segment holds. There is undoubtedly the need for a major shift in focus, creation of the required infrastructure in areas hitherto neglected, appropriate policy changes, considerable easing of taxation burdens across the industry and deep structural changes. Fortunately, the draft National Civil Aviation Policy that appears as the proverbial “light at the end of tunnel” does hold some hope for the Indian civil aviation industry. It would be in national interest that the new Civil Aviation Policy is finalised without any further dithering and is implemented as soon as is possible in all earnestness.