The ancillary segment in the airport sector is primed for growth because of the presence of tailwinds. The Covid-19 pandemic which has disrupted air travel worldwide is only likely to be a short-term hindrance to the segment. In the long run, the segment can achieve sustainable growth due to the presence of factors such as an increase in air travel, the rise of e-commerce and favourable demographics.
Cargo
The rise of e-commerce in Tier II and Tier III cities has led to the need for better infrastructure and greater capacity to process both international and domestic cargo at airports in these cities and presents significant growth opportunities. Further, transshipment cargo constitutes 60-70 per cent of the total volumes handled by some of the leading global airports, while it is almost negligible in India. Thus, there exists significant potential for the country to become a transshipment hub, given its geographic location, global flight connections and improved relations with its neighbours.
The country faces challenges with respect to its cargo handling infrastructure and this is magnified by the fact that it still does not have major freight airlines. Currently, Blue Dart is the only major domestic freighter airline. However, recently, SpiceJet also introduced dedicated cargo services, SpiceXpress. Further, the cargo infrastructure is in urgent need of electronic customs processes and documentation through the full adoption of electronic data interchange. Electronic communication for import and export registration, clearance, drawback, and e-payment of duty will help free up a number of customs officers who can then contribute to 24×7 operations.
The disruption in air travel caused by Covid-19 led to many airliners, both international and domestic, converting part of their fleet to dedicated cargo freighters leading to growth in the cargo handling segment. For instance, Delhi airport handled 77,000 million tonnes (mt) of cargo during September 2020, its highest since April this year. This comprised 48,000 mt of international and 29,000 mt of domestic cargo, a volume growth of 94 per cent year on year. This trend was also observed at the Kempegowda International Airport at Bengaluru that saw cargo volumes rise during September, after a prolonged slump, with international freight leading the recovery. Bengaluru airport processed 32,449 mt of cargo in September, registering a growth of 0.3 per cent against the same period in 2019. These trends indicate the increasing importance of the cargo handling segment for the future growth of the country’s aviation industry.
An important player in the segment, Air India SATS (AISATS) has played a key role in increasing the cargo handling capacity. Over the past decade, AISATS handled 125,867 flights with 1,094,284 tonnes of cargo. It has also established the country’s first integrated on-airport perishable cargo handling centre – AISATS COOLPORT – that has a capacity to handle 40,000 tonnes of perishable cargo per annum at the Kempegowda International Airport. Since its launch in October 2016, the facility has handled 28,000 tonnes of perishable cargo (export and import) and will be used to meet the extensive handling requirements of temperature-sensitive shipments. AISATS COOLPORT also has a drug controller testing lab, a plant quarantine testing/clearance lab and a customs clearance facility.
MRO
The maintenance, repair and overhaul (MRO) industry is highly regulated, so as to ensure safe and correct functioning of aircraft.
A robust MRO system is required as there are over 600 operational aircraft, the majority of which are narrow-body. A number of new aircraft have also been inducted by domestic airlines between 2017 and 2020, and these will require maintenance and overhaul in the 2023-25 period. At the current fleet size, over 10 aircraft undergo major overhaul at MRO facilities at any given time. However, 90 per cent of these aircraft are in facilities outside the country, such as those in Sri Lanka and in other countries in Southeast Asia and the Middle East.
The MRO segment has seen an increasing push by the central government. In Union Budget 2019, the government announced that it would adopt suitable policy interventions to leverage the domestic engineering potential for the development of the segment. Besides this, other key initiatives taken by the government include exempted customs duty on tools and toolkits; reduced goods and services tax rates on various spare parts, accessories, and consumables; simplified clearance processing of parts; relaxed restriction on utilisation of duty-free parts from one year to three years; extended the stay of foreign aircraft in India for the entire duration of MRO work or six months, whichever is less; permitted 100 per cent foreign direct investment via the automatic route for MRO; liberalised the policy for borrowing and lending in foreign currency and rupees on competitive terms for MRO service providers, prescribed modalities for concessional imports of spare parts by foreign airlines for repair of their aircraft in transit, and prescribed the policy provisions for allotment of land by the Airports Authority of India (AAI) to promote MRO at its airports. Further, under the Rs 20 trillion Covid-19 relief package, the tax regime for the MRO ecosystem was rationalised with convergence between the defence sector and civil MROs to be established to create economies of scale. The government adjusted the rates of MRO taxation from 18 per cent to 5 per cent via a notification in March this year. In addition, it also changed the “place of supply” for B2B MRO services to the location of the recipient. This move not only reduced taxes for domestic MRO service providers but also gave them full input tax credit (ITC). Foreign MROs continue to be ineligible for ITC. The issues of subcontracting and taxation were thus addressed. This move will further encourage domestic airlines to source their maintenance needs from providers within the country and not from those overseas.
In spite of the tax rationalisation, other pending issues remain. Key amongst these is the issue of airport royalties which is in direct contravention of the National Civil Aviation Policy, 2016. As per the policy, airports had to refrain from the levy of royalty and additional charges on MRO service providers for a period of five years from the date of approval of the policy. The intent was to give a boost to MRO services which would then gain volume and service providers would be able to afford the levy in five years time. Yet, airports went ahead and levied the charges under different classifications such as ground handling, revenue share and demurrage, ranging from 11 to 20 per cent. As a result, MRO services continued to falter with most providers racking up significant debt.
Finally, there is the outstanding issue of certification of workers. Due to a regulatory misalignment, aircraft technicians who are able to service aircraft overseas are forced to take an exam for certification in India, and this acts as a disincentive for them to return to the country.
Ground handling
The 2007 ground handling regulation allowed ground handling services by AAI or its joint venture (JV), a subsidiary or JV of Air India, and third-party ground handling agencies. In 2011, domestic airline operators were permitted to carry out self-handling. In 2018, the ground handling regulation was updated with foreign airlines being allowed to undertake self-handling with respect to passenger and baggage handling activities excluding security functions at all airports except civil enclaves. Further, there was no payment of royalty in the case of self-handling.
There is significant scope for growth in the domestic ground handling market. Increase in air traffic, growth in the number of airports, growth in airline fleet sizes and modernisation and expansion of old airports will expand the scope of ground handling in the country. For instance, there are five new airports that are going to be completed in the next three years (Navi Mumbai, Jewar, Bhogapuram, Mopa and Dholera) that will offer ample opportunity for ground handling firms to expand their footprint. The segment will also benefit from the trend of rising e-commerce as this will increase the demand for cargo handling.
Technology will play a key role in the development of the ground handling segment. Advancements such as automated passenger movement and automated ground support equipment will lead to minimal airport congestion and higher safety standards. For instance, Taxibot, a semi-robotic pilot-controlled towing tractor, reduces fuel consumption and increases operational efficiency and throughput at airport gates. Indian firm KSU Aviation Private Limited, in partnership with Israel Aerospace Industries Limited, initiated TaxiBot operations at Delhi airport in 2018.
Another technology used to increase ground handling efficiency is the in-line baggage screening system (ILBS). A multilevel ILBS not only improves security at airports but also streamlines the screening process, making it more efficient. At present, ILBS is operational at four AAI airports (Chennai, Kolkata, Ahmedabad and Calicut) as well as most private airports.
Due to the ongoing pandemic, cash flows of companies in the ground handling segment have been severely impacted. Payments of dues by airlines have also been choked. With no meaningful fiscal relief as yet, the situation is quite challenging.
The segment is heavily dependent on international flights and a few domestic customers. Without international flights returning to normal, the ground handling business may continue to face immense challenges. To compound these problems, the segment is labour and capital-intensive and thus has a high fixed cost base, which makes its position even more precarious.
A slow recovery is expected in the segment and therefore immediate direct support from the government is needed to survive the current crisis.
Conclusion
The ancillary industry in the aviation sector has been waiting for a major growth spurt for a long time. Now that the sector is struggling for survival, the time is ripe to develop these segments to give the country a competitive edge vis-à-vis its global counterparts.