September 2018

EDITOR Devangshu Datta

The civil aviation sector has seen a lot of activity in the past year or so. There has been expansion in airport capacity and the new RCS has taken off in an encouraging fashion. A series of greenfield and brownfield expansions have been planned, with a high reliance on private investments. Airlines are also aggressively expanding capacity and overall passenger traffic is growing at better than 20 per cent for the current fiscal year (2018-19), while cargo traffic is also showing reasonable growth rates.

But, at the same time, airlines are struggling to stay profitable in the face of aggressive competition (meaning low fares), high crude prices and rising operational costs as the rupee declines. Challenges such as delays in land acquisition remain bottlenecks to growth in ground infrastructure.

As such, the ambitious RCS or the UDAN initiative seems to have been successful. There has been plenty of interest in increasing connectivity to unserved and underserved destinations. In the first two rounds of bidding, over 450 routes have been awarded, although most of these are not yet operational. Flights are taking off from 16 RCS airports while another 11 are on the verge of going operational and passengers seem happy.

On the regulatory side, apart from amendments to the AERA Bill of 2017, there is the NABH plan to expand airport capacity fivefold, and the draft National Cargo Policy. There is also the interesting phenomenon of states such as Maharashtra and Uttar Pradesh announcing local aviation policies, potentially including subsidies for international travel. A lot of the policy projections will, however, depend on the private sector coming up with the lion’s share of Rs 4 trillion in airport development costs. There has been some movement on this front with awards of the long-delayed Mopa and Navi Mumbai contracts to private developers.

The aviation sector is cyclical in nature. The demand for services depends on growth in general commercial activity; costs depend on international crude prices. While demand is strong, domestic airlines are struggling to cope with the rising trend of crude prices.

There are aggressive fleet expansion plans on the anvil for most private airlines. But the fact is, only one – Interglobe Aviation (which operates the Indigo brand) – is making profits at the moment. The rest are struggling with losses. This is also one example of comprehensive policy failure in that the divestment of Air India has not happened, and there are no prospects of it happening in the foreseeable future. The loss-making white elephant continues to be a burden on the government exchequer.

So we see a sector on the cusp of change. On the one hand, it seems to be receiving a fair degree of policy support and there’s an increase in activity and investment. On the other hand, it’s an open question whether the airlines can cope with the challenge of higher crude prices. Going by global trends, well-designed airports can become highly profitable business hubs but very few airlines consistently make profits. We may well see this scenario playing out in India as it becomes the third largest aviation market in the world.

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