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Thu, Nov 06 2014. 03 46 PM IST

Why Indias airlines cant take off

The role of the govt has made Indias airlines virtually unviable, states are allowed to set their own exorbitant rates on ATF, which
average around 30%
For airlines, Asias skies arent terribly friendly. According to data
compiled by Bloomberg, six of the 10 initial public offerings (IPOs) by
airlines in Asia during the past five years are trading below their sale
prices. Legendary investor Warren Buffett, who swore a decade
ago never to invest again in the airline business following his losing
$358 million bet on US Airways, is surely feeling vindicated.
India should stand out amid this grim landscape. Passenger traffic
has grown rapidly over the last decade. At its peak between 2003
and 2009, traffic grew somewhere between 20 and 40% per year.
Growth hardly slackened even after the economy stalled in 2013:
Traffic that year was up 5% over 2012.

Prime Minister Narendra Modi has promised to implement a

nationwide GST, which would impose a uniform rate
somewhere between 12 and 16%. Photo: Ramesh
Pathania/Mint

Packed airplanes, however, have not led to profitable airlines. The

one success story somewhat profitable Indigo is far
outnumbered by the failures. Kingfisher Airlines has been
grounded. Once high-flying Jet Airways is on life support; SpiceJet
is up for sale. State-owned Air India has accumulated losses of $5
billion contributing more than 60% of the $8 billion in total losses
for the sector as a whole.

As Buffett can testify, airlines are inherently a high-cost business in terms of equipment, fuel and manpower. In India, the role of the
government has made them virtually unviable. Fortunately, this means that at least some of the headwinds currently facing the industry can
be lifted.
The most easily addressed problem is the exorbitant rate of tax imposed on aviation turbine fuel (ATF). Currently, states are allowed to set
their own rates, which average around 30%. Only some small states have moved to slash rates to 4% in a bid to attract airlines. Prime
Minister Narendra Modi has promised to implement a nationwide goods and services tax (GST), which would impose a uniform rate
somewhere between 12 and 16%. He should stick to his pledge against opposition from some state governments, which are lobbying hard
to exempt jet fuel from the GST.
Air India poses a more difficult challenge. If its outstanding loans are included, the state carrier is $12 billion in the red. Despite that, Air India
continues to slash fares in an effort to undercut competitors. It can afford to compete only because it is living off a $5 billion bailout
announced in 2012.
This zombie existence, fueled by taxpayers money, seriously distorts Indias aviation market and prevents appropriate price formation in
terms of airfares and landing fees. Air India has been unviable for far too long. It clearly cannot reform its bloated workforce and inefficient
management under government ownership. It must be privatized something that finance minister Arun Jaitley earlier this week hinted
might be a possibility.
The third problem requires a more long-term solution. At the moment, almost 70% of Indias air traffic connects six big cities Delhi,
Mumbai, Chennai, Kolkata, Bangalore and Hyderabad. This is a limited and brutally competitive market. There is a much wider market to tap
in smaller cities and towns. Despite rapid growth in air traffic, only 61 million Indians traveled by air in 2013 out of a population of 1.2
billion. The scope for further expansion is huge.
Whats needed is better and more expansive infrastructure. Past governments, working through the inefficient Airports Authority of India,
have neither invested in airports in smaller towns, nor opened them up to private-sector development. Modis government says it plans to
build 200 low-cost airports over the next 20 years. Theres also a strong case to be made for expanding the number of airports in the big
cities. That will introduce competition and lower landing and parking fees, and should allow low-cost airlines genuinely to exploit their
model.
Of course, existing monopoly airports will resist, but the government should stand firm. By some estimates India will be the third-largest
aviation market in the world, behind China and the US, by 2020 and the largest in the world by 2030. Given commitment and political will in
New Delhi, theres no reason it shouldnt also be among the most profitable. Bloomberg
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