Speedy reforms needed for UDAN to fly

Indian aviation is in a time warp. If there is one sector that needs the most of Prime Minister Narendra Modi’s punch line ‘minimum government, maximum governance’, it is aviation. Plagued by poor regulations, the sector is choking on high taxes.

Air India, once an unrivalled lodestar, is today a decrepit moribund organisation. For Maintenance, Repair and Overhaul (MRO) services, our aircraft fly to Sri Lanka, Middle East or Singapore where, ironically, Indian engineers work on them.

All our active airports put together handle less cargo than Hong Kong airport, which fuels the growth of southern China. General aviation – comprising helicopters, business jets, and small turbo prop planes that offer regional connectivity – that exploded during UPA-I had already shrunk.

The aviation business has remained stagnant during the last seven years. Growth has been reported last year but if viewed over a period of seven years – from 2009 when Kingfisher collapsed – the total number of passenger aircrafts in the country has remained static.

The grounding of Kingfisher-Air Deccan, the SpiceJet crisis and shutting down of Paramount saw 145 aircraft exiting the country. An equal number has been imported. Though Indigo filled this vacuum and grew, the market itself did not expand.

Hard numbers tell that story. The market shrank from 57 million to 55 million three years ago. At present, the total number of domestic passenger tickets sold is a measly 75 million for a population of more than a billion. Less than 3% of Indians can afford air travel and of this, 80% comes from four metros.

Mumbai-Delhi sector still account for 55% of total number of fliers. Such an aviation penetration and per capita consumption compare only with Sub-Saharan countries. This is at a time a small economy like Ireland sells 25 million tickets a year for a population of five million and Malaysia carries more than 18 million for a 28 million population. Not to mention the US that sells more than 700 million tickets, almost double its population.

In such a bleak scenario, a visionary aviation policy was the need of the hour and the NDA government responded with the National Civil Aviation Policy (NCAP) and Regional Connectivity Scheme, nicknamed UDAN (Ude Desk ka Aam Nagrik or Let Common Man Also Fly). Both are laudable initiatives but the document that was advertised as the first aviation policy since independence falls short of major reforms that could bring down costs and facilitate ease of doing business.

Aviation eco-system

The NCAP addresses mainly issues of fliers and airlines. It does not cover the entire aviation eco-system. One should not forget that consumers’ interests are best served when there is fierce competition. One of the biggest impediments to growth is the flawed airport policy, which has created oligopolies and stunted the sector.

Today, a quarter of airline’s expenses go to airport related expenses in long haul flights and over 30% on short haul flights by smaller aircrafts. It is 50% on 10-15 seaters, which are the only ones that can land on remote bush strips. Many airport services and contracts have been bagged by crony capitalists or politicians through their kin. It is an open secret.

At present, public sector airport monopolies have been replaced by private sector oligopolies, which have morphed into real estate players. The whole world has moved towards competition– London has five airports, New York has four and Hong Kong four international airports within 150 km.

The UK Parliament in recent years broke the stranglehold of one player controlling three airports in London. But what we do? We shut down existing airports in Bengaluru and Hyderabad. Instead of creating new airports in Mumbai and Delhi and infusing competition, we mortgaged the most critical resource of land and airspace in major metros on a cost plus profitability basis to a couple of players. Hope the new government will tackle such issues if it wishes to have meaningful reforms that are inextricably linked to growth.

Another issue is the toothless airport regulator with limited ambit, which is regulating monopolies instead of monitoring competition. The new policy is silent on regulator. It is also quiet on Air India and Air Navigation Services, which needs to be professionalised, made autonomous and accountable.

India has the most over regulated aviation sector in the world, where Director General of Civil Aviation (DGCA) is enforcing Aircraft Rules of 1937, when jet engines and helicopters were not invented. The BJP-led NDA spoke of bold reforms and promised of scrapping antiquated laws. But there is disappointment that the NCAP does not address reforms in the DGCA, which has choked the sector.

The regulator is not expected to be popular. But aviation rules in the US and Europe have undergone large changes keeping with changes in technology. There, regulators have to ensure safety and facilitate growth. In India, unfortunately, the DGCA is like any other government department following archaic rules that is interpreted subjectively thus leading to undesirable practices.

It is under-staffed, under-trained and demoralised. The government needs to have a thorough cadre review so that technocrats take over the DGCA in place of ubiquitous IAS as in ISRO or Atomic Energy Commission.

How do we create an ecosystem for MRO, air cargo, aircraft parts manufacturing, avionics, air express logistics, charter aviation and design so that we can tap the huge pool of technicians and engineers we have? We face a strange paradox.

There is an inexhaustible market of 97% of the population who are yet to fly and in contrast more than 5,000 pilots and lakhs of technicians are languishing without jobs.

It is against this backdrop the ‘UDAN’ has been unveiled. The incentives offered under the scheme, which the government describes a 'game changer', is well intentioned and can create huge economic impact along with job creation in the 'other India'.

However, it is too cumbersome and complicated to implement it. Our past experiences also show that the schemes based on subsidies are difficult to oversee with a nexus of politicians and middlemen controlling it.

Let me illustrate by an example. Regional connectivity largely means encouraging connectivity and integration of rural towns with metros. You need to connect Kolhapur to Mumbai, Cooch Behar to Kolkata and Kullu to Delhi. That will push reforms and investments to hinterland and promote tourism. The emphasis is not to link Cooch Behar to Kolhapur.

If a small ten seater flies from Delhi to Kullu in Himachal Pradesh or Gauchar and Uttarkashi in Uttarakhand to cater to the four Dhams, the present airport monopolies do not give a preferential time slot as small aircrafts do not fetch much revenue.

Besides, they charge them the moon and do not offer free landing even though the statute provides it, taking refuge in technicalities saying Delhi or Bombay are now by nomenclature international airports. The bigger airports argue that it is free only in domestic airports, pushing the fares above Rs 6,000 thereby snuffing out the small operator.

Remote tourist spots

What we need is hundreds of entrepreneurs who connect these remote tourist spots and outposts of commercial significance who are not scheduled regional airlines and who cannot and must not wait forever for government subsidies. If we need explosive growth as well as deep and wide penetration into underserved regions, we should actually simplify the policy instead of offering subsidies.

This can be achieved by eliminating all tariffs – like sales taxes on fuel, airport charges, service tax, customs duty on imports of aircrafts and spare parts, landing and parking charges – for all operators who fly from metros to Tier-II and Tier-III cities and remote towns.

We have more than 100 charter operators. They are flying but struggling to keep their head above the water. They are the ones who can connect the 500-odd unused or underserved airports and airstrips with their small aircraft.

These operators should be unshackled and incentivised. State governments, which still want to develop specific routes, can still do so by giving subsidy. But the rest of the operators, who may not want to be bogged down in a subsidy regime, are the key to enhancing regional connectivity. They should get all other tax and tariff benefits. One should also remember that regional connectivity will remain a pipe dream if the current airport tariffs continue to be extortionist.

Along with this, various regressive and oppressive rules that are choking growth also need urgent changes for realising the aspirations of ‘UDAN’. For example, the DGCA recently introduced a bizarre rule banning second flight or a series of flights on a daily basis to remote air strips.

It drove the last nail in the coffin of budding regional operators, forgetting that these kind of bush strips are the mainstay of tourism and connectivity in African game parks as also the backbone of regional connectivity in the US, Canada, New Zealand, South America and Australia.

Our customs duty and other state taxes like Octroi and Entry Tax are presently a huge disincentive – till probably the coming GST addresses it. Coupled with cumbersome procedures, this is nightmarish. Established airlines lobby with government to ban entry to new players.

They forget they would never be flying in the first place, if the government had not ushered in reforms. How do we break these entry barriers and make it easy for new airlines to fly? How can we rework the airport policy to facilitate growth?

The announcement of 100% FDI in airlines and airports is a bold step. This kindles hope as increased investments combined with intense competition will be good for passengers and the economy. But foreign airlines and bigger players will not fly to remote towns.

In such a scenario, incentivising regional connectivity is a great step forward as big airlines and regional scheduled and small charter flights will feed on each other. Hope the government will continue with the initiative and enlarge reforms speedily and simplify it so that large number of small charters and regional scheduled operators embrace it.

(The writer, who founded Air Deccan,  pioneered the concept of budget airlines in India)