Airlines bullish on growth despite some air pockets
India’s aviation industry, which contributed 5% to GDP, provides four million jobs and another seven million through tourism and related activities. Aviation jet fuel (ATF) is an important deciding factor in the cost of operation in the aviation industry. Jet fuel accounts for 45% of an airline’s operating costs. Brent crude oil has jumped more than 30% to $101.40 since the start of the year. The commodity was at $77.78 a barrel.
Following the rise in crude oil prices, the cost of aviation turbine fuel (ATF) increased by 19% to Rs 90,519 per kl from Rs 76,062 per kl. Rising ATF prices can hit the airlines balance sheet which accounts for more than 35 percent of the cost of operating an airline in India.
Maintenance and repair taxation in India remains the highest in the world. With an 18% tax on the GST, suppliers have to compete on the selling price with foreign players who only pay 5% – that too at cost price. Consequently, most airlines outsource their maintenance overseas, resulting in loss of jobs and production.
Convergence between the defense sector and civil MROs will be established to bring down the cost of maintenance for airlines. Airport (aeronautical) charges levied by the Airports Authority of India are higher. According to a latest survey, airport charges collected by Indian airports (Domestic and International Terminal) are among the highest in Asian and Gulf countries. This adds an additional burden to airlines. Established airlines are threatened by low-cost carriers, which are eating away at their market share. In order to consolidate their market share, the main premium airlines have been forced to reduce their ticket prices to around 15-20%. Such a drop in prices will eventually lead to a price war between airlines with the sole aim of increasing their market share.
The country has a total of 449 airports, but metropolitan airports dominate in terms of air traffic with around 61% of domestic traffic and around 73% of international traffic still coming from the six metros – Delhi, Mumbai, Bengaluru, Hyderabad, Kolkata. and Chenai. With the exception of Bengaluru, which will see the addition of an additional runway this year, capacity expansion at other airports is lagging or non-existent. The government has launched the construction of Navi Mumbai Airport which is expected to be constructed at a cost of $2.58 billion.
Passenger traffic in India is expected to grow by 6.2% annually by 2040, the fastest growth among major economies. India’s metropolitan airports are largely suffocated and they have already exhausted their capacity in terms of landing and parking spaces. Additionally, passenger traffic at these airports continues to gallop at nearly 18-20% each year.
To manage traffic, existing airlines have responded by ordering planes that could nearly double existing plane capacity within three years. This will further expand India’s airport capacity in metros. A long-term plan must be formulated for advanced research in aeronautical technologies. This will help create a manufacturing ecosystem in the country. There is a need to promote collaboration between original equipment manufacturers (OEMs), industry and educational institutions to assimilate the latest technologies and management practices in the aviation industry.
The aviation jet fuel (ATF) taxation and pricing structure should be aligned with global benchmarks by considering subjecting it to GST. Vacant properties near Airports Authority of India (AAI) airports in all major centers can be monetized to increase non-aeronautical revenue.
Air traffic has grown tremendously and is expected to grow over 25% in the travel segment. India’s air transport sector directly contributes to 3,90,000 jobs and indirectly supports over 5,70,000 jobs in different supply chains. Moreover, air transport facilitates tourism and investment in India.
Foreign tourists arriving by air in India are estimated to support an additional 6.2 million jobs. Overall, the aviation industry contributes $72 billion per year to India’s GDP. The reduction in overseas air travel has been one of the worst impacts of Covid-19 on the airline industry. Experts are bullish on the air travel market as air traffic in India has grown by 9% over the past 20 years and will continue to grow.