Aviation sector must be a lot more competitive

The Asian Age, November 13, 2014

By Pradeep S Mehta

In recent times several groundbreaking news have come in, such as entry of AirAsia and Singapore Airlines, permission to Etihad to expand its operation, double-digit growth in domestic traffic, etc

Lobbying in the aviation sector seems to be fading away with Air India deciding to pull out of Federation of Indian Airlines (FIA) despite being its founding member since 2006. According to news reports there were differences over the re-organisation of the aviation sector. FIA, so far, has been relying on domestic carriers such as Air India, Jet Airways, IndiGo, SpiceJet and GoAir to keep itself going, not yet extending its membership to the Malaysia-owned AirAsia.

While some players in the aviation sector may say FIA is losing its relevance as it has not been able to push the interests of airlines on issues such as fleet and equity requirements, aviation turbine fuel pricing and sales tax, slot allocation etc, the question that arises is, should the Narendra Modi led government itself not be looking into the much needed reforms in the sector which faced accumulated losses of over Rs 10,000 crore in 2013-14. In recent times several groundbreaking news have come in such as entry of AirAsia and Singapore Airlines, permission to Etihad to expand its operation, double digit growth in domestic traffic, Etihad injecting much needed investment in Jet and most of all re-entry of Tata Group in the aviation industry. All these developments have potential to revive the fortune of industry.

The industry, however, still requires some progressive steps from the government to ensure a level playing field. One such act could be review of present regulatory regime governing the aviation sector in India, in order to remove inbuilt loopholes which have impeded the process of infusion of competition in the sector, for long.

Issue 1: Fleet and Equity Requirements

India‘s Civil Aviation Requirement (CAR) Section 3, Part 2 and 3 mandates that a scheduled service operator that applies to provide services using aircraft with a take-off mass of 40,000 kg or more must purchase or lease a minimum of five aircraft with start-up equity requirement of Rs 50 crore. Given that the cost of entry into the civil aviation sector is high, these regulations unnecessarily raise barriers to entry. Therefore, fleet and equity requirements regulations limit not only the number of new market entrants, but also the size of firms that enter.

Similarly, at present any Indian carrier is required to have experience of at least five years of flying in India and fleet of at least 20 aircraft for getting permit to start oversees operations. Such fleet and experience requirements deter entry and thereby reduce consumer choice of international flights. On the other hand, foreign carriers are not required to follow such norms to operate in India which certainly puts Indian carriers at disadvantage vis a vis foreign players.

Issue 2: Route Dispersal Guidelines

According to this regulation, Indian carriers are required to provide their services in all identified routes i.e. category 1 which includes large Indian city hubs and category 2 and III which mostly covers relatively small and unpopular service routes. The regulation definitely serves social need of catering to the demand of consumers living in small cities but at the same time it results into losses for airline companies as mostly they are not able to recover the cost of operation in these routes. This adversely affects the entry of potential carriers, and their ability to compete and respond to prevailing demand for air transport.

In fact, officials from the Aviation ministry on several occasions have admitted that time has come to revisit and modify these guidelines as they do not cater to the need of present day aviation industry.

Issue 3: Slot Allocation

India follows International Air Transport Association (IATA) slot allocation guidelines according to which an incumbent airline can retain a group of slots based on historic precedence. That is, if the slots in question have been allocated by the slot coordinator to a passenger air carrier and have been utilised at least 80 per cent of the time in the preceding season. Furthermore, guidelines states that slots may not be withdrawn from a carrier in order to accommodate new entrants. From the pool of available slots, new entrants have access to only 50 per cent of the slots. This is termed as grandfathering the allocation of slots. These rules create barriers to entry for new entrants, thus limiting the number and range of air carrier service providers.

Issue 4: Anti-competitive Behaviour and Pricing

Taking a close look at the trends of pricing in the airline industry over the past few years, one can observe that fluctuation level is quite high with prices swinging north to south in a very short span of time. It has adversely affected the financial viability of the carriers and consumer spending on air travel. Both the high prices and the low prices charged by the airline companies signifies different kind of anti-competitive behaviour of airline companies i.e. cartelisation in case of high prices and predatory pricing in case of low prices. Both of these approaches of existing carriers either to maximise their profits or to enhance consumer base, create barriers to entry for new players in the industry.

Issue 5: Taxation and Pricing of Air Turbine Fuel (ATF)

Multilayer fuel taxation system which determines the price of air turbine fuel (ATF) is another glaring issue affecting revenue generated by the airline companies and entry of new players in the industry. Moreover, there are only four suppliers of ATF in India out of which three are state-owned entities. Such market structure is conducive to cartelisation on the part of ATF suppliers in India.

However, during 2012, both oil and aviation ministry came together to jointly pursue the long pending demand for giving ATF a “declared goods” status, before the finance ministry. If implemented, the step will have a huge impact on the price paid by the airline companies for procurement of ATF as the sales tax will come down to three to four percent (uniform sales tax) from the current rate of around 30 per cent. It would help airlines to bring down their operating cost.

Issue 6: Investment Issues in the Aviation Sector

FDI limit of 49 per cent in scheduled air transportation services in India deters foreign investors to invest in Indian aviation industry. By setting out limits on foreign direct investment, the regulation ultimately limits the number and range of suppliers. Infusing fresh investment in the airports through privatisation or PPPs is also on the anvil and needs to be speeded up. Considering these arguments, the government should think on the lines of immersing long pending reforms in the aviation sector, which includes formulation of a new civil aviation policy. Such an approach would lead to infusion of competition in the aviation sector, enhancing consumer welfare throu-gh increase in the number of service providers and making aviation a profitable sector.

The writer is secretary-general of CUTS Internat-ional, a public policy research & advocacy group. The article has been drawn from research done by Nathan Associates for the Government of India

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