Indian Aviation Sector Crisis – Reasons & Responses

Last year, India’s aviation sector saw numerous problems. Amid an overall economic downswing, the sector started 2019 with the grounding of Boeing 737 MAX aircraft in the country following the deaths of over 300 people in the Lion Air and Ethiopian Airways crashes. Then it witnessed the closure of India’s only privately-owned full-service carrier Jet Airways. By the end of that year, Air India sought to go down the privatisation route to save itself from towering debts. There were also notable incidences of runway excursions in some of India’s prominent airports, which brought forth doubts on the sector’s overall safety standards. The technical glitches and increasing debts are leading to the reducing potential of India’s civil aviation market.

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India’s aviation sector:

  • India’s aviation sector is one of the standout sectors in India in the last 28 years.
  • India is the fastest-growing aviation market in the world.
  • India’s passenger traffic is currently growing at an exponential rate.
  • In the FY18 alone, India’s passenger traffic grew more than 16%.
  • In 2010, 79 million people travelled via a flight in India (includes domestic and international trips). By 2017, that figure has doubled to 158 million and in 2037, more than 52 crore Indians are expected to use flight annually.
  • The aviation sector is a major job provider – 75 lakh people are employed through direct and indirect means.
  • It contributes to $30 billion to India’s GDP.
  • Nearly 90% of the aviation traffic is domestic and the low-cost carriers account for nearly 70% of the domestic seats.
  • The average domestic fare has fallen by more than 70% since 2005.

What are the crises faced by the civil aviation industry?

2019 was not favourable for India’s civil aviation industry. Here are some of the problems faced by this sector:

Financial crisis:

  • According to December 2019 report by the aviation consultancy firm CAPA, Indian carriers are estimated to report a consolidated net loss of over USD 600 million in 2019-2020.
  • This recent report is completely contradicting the agency’s previous report on June 2019 when it projected a consolidated net profit of USD 500 to 700 million for the ongoing fiscal.
  • CAPA called the latest projection as the most significant downgrade within one quarter in more than 16 years.
  • This latest report came after SpiceJet and IndiGo reported huge losses for the September quarter due to new accounting norms, grounding of certain aircraft and rise of total expenses.
  • The consultancy firm also revised its projection for Air India and said it might report a loss of over USD 500 million against the earlier estimation of USD 150 million.

The Jet Airways crisis:

  • Jet Airways, India’s only private full-service carrier, was grounded following the increasing debt and competitions from the domestic low-budget carriers like IndiGo and SpiceJet.
  • In 2017, it came second to IndiGo in terms of passenger market share.
  • Later, in 2018, it reported a negative financial outlook because of the increasing losses.
  • In March 2019, nearly a fourth of its aircraft were grounded due to unpaid lease rates and in April, the Indian Oil Corporation (OIC) ceased to provide fuel to the airline because of the non-payment of dues.
  • The airline failed to attract fresh funding, leading to the loss of membership in the International Air Transport Association (IATA).
  • At the time of its closure, Jet Airways was going through insolvency proceedings with a debt of $1.2 billion.
  • However, the crisis faced by Jet Airways helped its competitors SpiceJet and Vistara Airlines to increase their profits and fleets.

Air India privatisation:

  • On December 12, 2019, the government had announced that it is going to sell its entire 100% stake in Air India under the proposed disinvestment process due to the high debt.
  • The airline reported an estimated net loss of Rs.8,556.35 crore during 2018-19.
  • The government had guaranteed that the jobs in Air India would be protected. However, the employees, who are facing delayed payments, fear otherwise.
  • The government also stated that the government-owned carrier’s privatisation process will be completed by March 2020.

P&W engine and grounding of Boeing 737 MAX:

  • IndiGo, the low-cost budget carrier, is the biggest airline in India as of 2019 in terms of passengers carried and fleet size
  • This airline made a $33 billion deal with the Airbus to ensure lesser operating cost and delivering fuel efficiency with high standards of reliability.
  • However, the order of Airbus’s A320neo family did not produce the desired result as the Pratt & Whitney (P&W) engines installed on the A30neos faced severe problems in the form of high vibrations and a stall-like situation in mid-air, along with false alarm going off inside the cockpit.
  • Another budget airline, GoAir also faced similar problems.
  • This led to DGCA to order grounding old A320neo with unmodified PW engines from its fleet within January 31, 2020.
  • Boeing, in 2019, suspended the production of 737 MAX planes as the certification process of the safety of these planes by the Federal Aviation Administration had moved into 2020.
  • The 737 MAXs have been grounded by the aviation authorities across the globe, including DGCA, after two fatal crashes in Indonesia and Ethiopia.
  • The halting of production and grounding of the 737 MAXs could affect India’s already struggling aviation sector.

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What caused this crisis?

  • In the past years, aviation was one sector that was shining in terms of double-digit growth in passenger traffic for many years.
  • However, that too is currently seeing complications, reflecting the adverse growth in the general economy.
  • It should be noted that the aviation sector is a very high multiplier of both economic growth and employment and any downturn would affect the economy itself.
  • However, airlines are currently in a financial mess.
  • The government policies are to be blamed for this crisis apart from the mismanagement and bad decisions.

High fuel prices and taxes:

  • As far as the domestic sector is concerned, airlines work at a huge disadvantage as they are burdened by high taxes and levies at one end and high Air Turbine Fuel (ATF) prices on the other.
  • The ideal cost of ATF should not exceed beyond 25% of the total operating cost. In India, however, due to the oligopolistic nature of the ATF supply, the domestic price is much higher than in other countries.
  • Also, a central excise imposition of 14% and sales tax levied by the state governments on ATF can be as high as 30%.
  • Attempts to bring ATF under GST and cutting it down to 12% have not been accepted by the GST Council.

Rupee depreciation:

  • Any deterioration of the exchange rate of rupees to the US dollar also causes adverse impacts on the profits of the airlines.
  • Deterioration of international fuel prices also plays a role.
  • Due to this toxic mix, the operational cost in the domestic sector remains high.

High fare tickets:

  • Due to the large order of planes, the total capacity of seats is increasing, leading to the increasing need to fill up the growing availability of seats.
  • Thus, airline ticket prices are decided by algorithms that change fares based on several factors like past bookings, remaining capacity, average demand per route, probability of selling more seats later etc.
  • This computer-based dynamic pricing system causes passengers acute distress during holidays/festivals or calamities when price sharply increase.
  • With the low-cost carriers now dominating the domestic market, the model followed by the full-service airlines is under stress.

Airport maintenance:

  • The Airports Authority of India (AAI) is the custodian of all civil airports in India.
  • While a dozen airports are profitable, the rest are cross-subsided by AAI.
  • Airport improvement involves not just upgrading the terminals, but also the runway, navigational aid and equipment needed for the safety and security.
  • The AAI is currently leasing out bigger airports on a long-term basis.
  • However, the lessee company is selected based on the highest percentage of revenue it can share with the AAI.
  • The Delhi International Airport share 46% of its revenue while Mumbai is a little less. The newly privatised airports are even higher.
  • With such a high level of sharing, private airports charge airlines and users at higher rates, which again add to costs.
  • IATA considers Indian airport charges as one of the highest in the world.

Skill shortage:

  • Although India has the world’s second-largest population, the aviation industry faces a severe shortage of skilled workforce.
  • The low-quality training institutes are not training the necessary engineers, technicians and other professionals to meet the demand of this sector.

Disproportionate workforce:

  • While some airlines like Air India have surplus manpower, some like IndiGo are suffering from manpower shortage.
  • In fact, the surplus manpower of Air India is one of the major causes of its financial crisis.

Congestions:

  • India’s major airports suffer from congestion of passengers and limited runways.
  • For instance, Mumbai Airport, which is a single runway airport handles over 900 flights each day on an average.
  • That is approximately 38 to 40 flights each hour.
  • Thus, congestion leads to delay in operations and a decrease in the operational efficiency of both airlines and airports.

Maintenance, Repair and Overhaul (MRO):

  • MRO is one of the major problem areas for civil aviation in India.
  • Currently, India’s MRO industry is insufficient to deal with the demand of industry and outsourcing is costly due to the high duties.

What are the steps taken by the government to promote the growth of this sector?

National Civil Aviation Policy (NCAP), 2016:

It is the first-ever policy to be launched by the government exclusively for civil aviation. Its salient features are:

  • Regional Connectivity Scheme: It aims to connect those areas that are not yet connected by airways through Viable Gap Funding (VGF). It provides cheap airfare of about Rs.2,500 per passenger for a one-hour flight.
  • Replacing 5/20 rule with 0/20 rule: As per the 5/20 rule, the local airlines must have at least 5 years of domestic operational experience to be eligible to fly overseas. The Civil Aviation Policy scrapped this rule. However, an airline will have to allocate 20 aircraft or 20% of their total fleet of aircraft, whichever is higher to the domestic sector if they wish to fly overseas.

Route Dispersal Guidelines (RDG):

  • It mandates the airlines to fly in unviable routes, connecting cities in the North East, Jammu and Kashmir, Andaman and Nicobar Islands and Lakshadweep.
  • The routes are divided into three categories i.e., Category – I, II and III.
  • The category I include all the traditionally surplus generating routes, category II consists of all the loss-making routes and category III consists of the remaining routes.

Maintenance, Repair and Overhaul (MRO):

  • The government aims to make India an MRO hub of Asia by faster sanctioning of visa to MRO experts, temporary landing permits to foreign pilots working for MRO and removal of airport royalty charges for five years.
  • According to the current FDI policy, the government has allowed up to 49% in Scheduled Air Transport Service/Domestic Scheduled Passenger Airline and regional Air Transport services.
  • In November 2018, the government approved a proposal to manage 6 AAI airports under the public-private partnership (PPP).

Project DISHA (Driving Improvement in Service and Hospitality at Airports):

  • It aims to improve the operational efficiency and the overall travel experience of the travellers.

Draft Charter of Passenger Rights:

  • It seeks to enhance the passenger experience.
  • Its key provisions are:
  1. Passengers will be compensated if the airline is at fault for any delay.
  2. The passengers will get a full refund if a domestic airline cancels a flight one day prior to the departure or delays it for more than four hours.
  3. If the delay causes the flight to depart the next day, the airline should provide free hotel stay.
  4. Free cancellation of flight tickets 24 hours of booking and within 4 days before the scheduled departure. Further cancelling charges cannot be more than the sum of basic fare and fuel surcharge.

Air SEWA mobile app:

  • It enables the passengers to check flight status and connecting flights in real-time.
  • The passengers will also be able to get information on the facilities available in all airports within India.
  • It also helps the users to address their grievances through an application.

What can be the way forward?

  • The government should look into the aviation sector holistically, as a part of the economy as it is going to play a crucial role in the economic development and is no more a sector of the privileged class only.
  • The issue faced by this sector is multidimensional. Therefore, the Civil Aviation ministry alone should not decide on the issues faced by this sector.
  • An inter-ministerial group headed by the finance minister must be set up to address this issue.
  • The current model of taxation of the civil aviation industry is unsustainable. Therefore, fuel taxes should be brought under the GST to reduce the operation cost of the airlines.
  • If there is no policy support from the government, the market may turn monopolistic i.e., it is controlled by a very few players, which is not good news for the government as well as the passengers in a long run.
  • When a sector does not register profit, it will only lead to bad loans and insolvency and eventually job losses.
  • Though bailout seems to be an attractive option right now, it is not prudent.
  • Rather, a policy change and shift to cost-efficiency are vital for the long-term sustainability of the sector.

Test Yourself:

Critically analyse the issues faced by the aviation sector. What are measures the government should take to address this crisis? (250 words)

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