There are few things in this world that offer quite as much joy as taking to the air and exploring the heavens. Flying on planes is one of those things. Before a century ago, man could only dream of what it was like to fly in the sky like the birds. Man has always been looking for ways to overcome his physical limitations. It’s because of technology that we can dive deep into the ocean and go to the moon. In India, aviation started a century ago when in December 1912, the first flight took off between Karachi and Delhi.  India is to become the third largest aviation market by 2020 and is expected to be the largest by 2030. Last week, the Narendra Modi government brought several reforms in the Civil Aviation Policy to make it easier for new airlines to fly overseas, aiming to boost air travel and economic growth. The policy also aims to make flying more affordable for India’s expanding middle class, bolster competition and get more of the country connected. Under the policy, domestic carriers will no longer have to operate for five years before they can fly abroad, known as the 5/20 rule. Nevertheless, they must still deploy 20 aircraft or 20 percent of total capacity in India, whichever is higher.the Narendra Modi government brought several reforms in the Civil Aviation Policy to make it easier for new airlines to fly overseas, aiming to boost air travel and economic growth. 

In a free-wheeling interview with Nageshwar Patnaik, former Indian Administrative Services officer and director, International Civil Aviation Organisation,Vivekananda Pattanayak discusses various facets of the country’s burgeoning civil aviation sector.

BO – Indian airlines have piled up cumulative losses of up to $10.6 billion in the seven years running up to 2014. Do you see turnaround of state owned airline?

For the last forty years or more, according to a study made by IATA the airlines throughout the world have not been able to give adequate return to their investors on their capital in spite of more fuel efficient engines, better capacity utilization and advanced air navigation system. Main culprit has been the fuel which constitutes almost 40% of cost of operation. The cost has unpredictably fluctuated adversely. Since 2014, fuel price has fallen. This has increased profitability. Making operational profit, even net profit and giving dividends to shareholders are different from giving adequate return on capital. India is no exception. In addition, interest cost of borrowing and depreciation cost on new fleet acquisition have contributed to accumulation of loss. The state owned airlines have operated on many routes which are uneconomical both on domestic or international sectors. These operations may have been done on some pressing political and social reasons but they have caused accretion of losses due to unviability. Grounding of thirty A320 after Bangalore crash based on no rational commercial consideration contributed to heavy losses to the State owned airline then called Indian Airline. This back-breaking loss was carried forward. Although Air India and Indian Airlines merged with each other, for many years, there was no complete integration. In fact, they functioned as two different entities under one management. Both the state owned airlines for years like any other PSU have been under political and bureaucratic control of the Ministry. The human resource management including appointment, postings and disciplinary measures were subject to interference. Rationalization of the labour force could not be possible due to strong unions.

BO – What about private airlines? In the last couple of years, we have seen private airlines like Kingfisher Airlines, Air Deccan, Deccan360, MDLR, IndusAir and Paramount Airways wrap up their operations. Do you any future for them?

VP : The private airlines also did not escape this political culture. Overt and covert interferences affected even the private airlines. The state owned airline accumulated loss to the astronomical proportion until state support and restructuring of the debt of the nationalized banks were resorted to for bailing out the national carrier. That kind of approach did not take place with regard to private airlines. No wonder many private airlines folded up. At present, the fuel cost would make a big difference with regard to profitability. If the current level of price remains it would give tremendous relief to air lines if only taxes, impositions are not levied with fall in price. Secondly, in the recent civil aviation policy announced by the Ministry of Civil Aviation there is regional connectivity scheme which envisages viability gap funding. This is a welcome proposition. Both the state owned airlines and private airlines would take advantage of this policy. Thirdly, the demand for air travel has increased with the rising middle class with tangible annual growth of traffic. This helps in fuller capacity utilization. Seat unutilized is a permanent loss as an empty seat is a perishable commodity. It is hoped that the government maintains a healthy distance from day to day management of the state owned airline. The appointments to top positions of the state owned airline should be based on merit and on proven professional ability dictated by a transparent selection process by a neutral and independent body. The private airlines should also be given respite from interference from the Ministry, and when they have financial difficulties helping hand should also be extended just the way the state owned airlines are assisted during crisis. Both the category of airlines use public money. Closure of an airline is a loss to the economy, society and the State. The Boards of both private and state owned airlines should be composed of professional directors representing lending institutions and also independent directors as per the SEBI guidelines for the listed companies. The Boards should meet regularly and monitor the financial situation on a continuous basis.

BO – Do you think, the civil aviation sector should be totally privatized? As it is, to-day private airlines account for more than 75% of the sector of the domestic aviation market. Why is India still one of the most under-penetrated aviation markets in the world?

VP : The civil aviation sector includes airlines, airports and air navigation services and also regulatory body. There is a global trend towards privatization of airlines since a long time particularly after the fall of the socialist system. India after a long period of dominance of state and public sector has since nineties of the last century taken an approach towards privatization and liberalization. The aviation sector has been also hit by this wave. Since last ten years the private sector has produced a number of air carriers particularly after the concept budget airline came about. While the idea of privatization of Air India has been discussed and even a proposal had emanated from Tata house with Singapore Airline in joint venture but it did not make any headway In future, perhaps, the shares of Air India should be offered in the stock market in installments to see in what way the market responds. This would be a good way raising money for the national budget and if the profits are coming in the years ahead the government can use dividends as a source of income for the budget. Depending upon the situation in future decision can be taken whether to privatize fully or partly.

As regards the airports are considered, the overwhelming majority of airports are state owned through Airport Authority of India. Hyderabad and Bangalore models are new experiments. Cochin paved the way long before. Delhi and Mumbai are good examples of private and public participation. With announcement of civil aviation policy, attempt should be made to encourage the states to own and operate airports. If private parties are willing to own and operate airports for regional connectivity and intra-state connection they should be encouraged. In the western countries the municipalities have also owned and operated airport quite successfully.

Air navigation should remain within the control of the state as it involves security and safety which should the exclusive concern of the central government and its surrogate like AAI. Regulatory function cannot be privatized. The DGCA and Bureau of Civil Aviation Security should continue to discharge age old and traditional safety and security regulatory functions. Whether DGCA should be replaced by an autonomous statutory body is another question.

BO – The civil aviation ministry has been considering a slew of fiscal incentives for stakeholders across the country’s fledging aviation industry to reduce operating costs for airlines, rationalise air fares and realise its objective of enabling the common man to fly at least once a year. The new aviation policy is now out. Do you think, the policy will help rationalization of operating costs and reduce air fares which would enable every middle class family to fly at least once every year?

VP – The new policy is a step in the right direction. There are features in the policy which could reduce the operating cost of airline. Viability gap funding is an excellent example of measure to reduce operational cost for both private and state owned airline. Whether the policy would fulfill the dreams of the middle class to fly once a year would depend upon how the policy is implemented which in turn would depend upon cooperation and coordination between the Central and state governments. Intra-state connectivity would help in implementation of industrial projects and mining operations. Commuter service can commence with small aircraft with the entrepreneurship of professional pilots provided funding is available. Start up India and Stand Up India can be dovetailed to the new ventures of commuter service. The State promotional, financing institutions and banks can take initiative along with angel investors.

BO – The operating environment continues to be challenging. High taxes on aviation turbine fuel, or ATF, have made its price in India among the highest in the world. Fuel comprises around 50 per cent of an airline’s operating expenses. To add to it, the salaries of pilots have risen sharply and international airlines have often raised concerns about the high airport charges in India. Indian carriers today prefer to get their fleet serviced in places like Colombo, Singapore, Malaysia and Dubai due to the prevalent tax structure in the country. The Aviation Maintenance, Repair and Overhaul (MRO) industry can double in size to clock business of $1-1.5 billion by 2020, if the tax structure is set right. Do you any bright future of this industry?

VP – Under the present policy on civil aviation MRO has been covered. MRO itself will generate not only local employment directly it will create ancillary industries and downstream industries. The policy on MSME and policy of Ease of Doing Business can be dovetailed with Start Up India and Stand up India to develop cluster of industries around MRO. India has definite infrastructure for MRO. Skill development should be aimed towards providing manpower to MRO. The present policy of civil aviation is not cast in stone. If any tax incentive is required to make MRO a success the policy can be revisited if there are hurdles.

BO – The controversial 5/20 rule has been dropped but one part of it has been retained. Do you think the policy should have completely done away with the norm itself?

VP – 5/20 rule has been relaxed but it would have been better if it would have been totally done away with. Operating on foreign routes whether an airline has 20 aircraft and has five year experience is not material since what it is important is whether it can generate adequate traffic and that too tourist traffic. It does not matter whether cat is black or white as long as it can take mice. The remnant of 5/20 rule is foggy.

BO – Critics say only a few airlines will benefit from the new policy. Also, that the policy lacks infrastructure framework for long-term growth. How do you view these flaws in the policy?

VP – One can always find fault with anything. Positive attitude and optimistic outlook are most needed in the country today. They say “well begun is half done”. Let us try to implement this policy with right earnest. As and when one encounters obstacle one can review the position.

BO – There is a major focus on growing the regional network, especially among tier II and III cities, in the policy. While it is a laudable move, how “implementable” is the policy at the ground level?

VP – The policy implementation can be done if both state and central government are on the same page. The initiative should be taken by the state governments to establish task force and interact with the Ministry to augment regional connectivity.

BO – The policy says that the Center will compensate the airlines if they incur losses on one-hour flights. For this, it will collect a cess of 2 per cent from the airlines. What might have been the rationale behind fixing the fare at Rs 2,500?

VP – There is in this policy an element of subsidy for passengers. This would encourage air travel. The tariff is affordable, and in comparison to alternative mode of travel there is saving of time. Time is money. This will encourage business travel.

BO – The policy has ignored the issue of privatisation of Air India and setting up of an independent Civil Aviation Authority (CAA). Do you think it is a failure on the part of the government not to have addressed these issues in the new policy or will these changes need to be first vetted in Parliament before the Centre decides to act on them?

VP – As earlier stated DGCA can be replaced by CAA as an autonomous statutory body. There are merits in having a regulatory body which is independent and autonomous like Electricity Regulatory Commission. ICAO had played a part in developing the draft legislation. Safety should be outside the purview of the political control. It is both in the interest of travelling public and government. Although it is not a part of the policy, CAA can be established by reviving the bill.