Wednesday, March 24, 2010

Aviation in India - The Current Scenario

The Outlook…

With the global economic recovery on the horizon, the aviation industry in India is poised for a spectacular takeoff. Unprecedented changes are anticipated in the aviation sector as

the domestic passenger segment is expected to register annual growth rates of over 50% . Even the international passenger segment is slated to grow at 25% annually as per industry forecasts.


The looming crisis

Notwithstanding these glowing projections, the current situation in the industry continues to alarm policy makers, regulators and industry leaders alike. Presently, flights to India can be effortlessly found on the internet as popular web portals compete aggressively to sell cheap tickets to consumers who are increasingly becoming price sensitive. This has exerted severe pressure on the margins enjoyed by air carriers. Adding to the woes of the industry is the abysmal airport infrastructure visible in the acute shortage of parking bays, takeoff / landing slots& air traffic control facilities.


The recent hike in the price of Aviation Turbine Fuel (ATF) has further added to the anguish of the airlines as it has the potential to take the industry on a downward spiral that can prove fatal. Rising fuel costs will lead to a steep rise in the price of air tickets that would result in a significant reduction in passenger traffic. As a consequence, airlines may reduce the frequency of flights in the non-lucrative routes severely impairing India's well developed airline network. As destinations begin to lose connectivity, passengers will either respond by reducing their frequency of air travel or choose to travel by train or buses. Such a scenario will have disastrous consequences for the entire aviation sector in India. Foreign investments will dry up and fresh domestic investment will be hard to find; taking the industry to a point of no return.


The Response

In response to the crisis, the industry has embarked on a cost-cutting spree and that too with a vengeance. Most full service carriers have chosen to outsource ancillary functions like ground handling, reservation, aircraft maintenance, catering, training, accounting, IT infrastructure, loyalty programme management to reduce their operational costs. Air lines are now paying  more attention to the air cargo segment and develop its revenue potential by maintaining a dedicated fleet of aircraft for handling air cargo. To cut down their labour costs, airlines have also resorted to hiring contract labour for cabin crew, ticketing and check-in functions and retired personnel from Air force and PSU's have been engaged at senior management positions as part of the cost –cutting exercise.


The government on its part is acutely conscious of the crisis and has stepped in to avert an implosion in the aviation space. By keeping the tax on jet fuel at a low rate of four percent for smaller planes, it has offered an olive branch for regional carriers that typically use smaller aircrafts. It wants to aggressive promote regional aviation and has chosen not to cut the tax rate on aviation fuel for full service carriers which currently hovers at around 30-40%. 


The Ministry of Civil Aviation has advised air -carriers to consume less engine power and reduce their operations on routes attracting lower load factors. The government is also contemplating several fiscal and monetary incentives to make India a major hub for Air craft Manufacturing and MRO (Maintenance and Repair Operations) in Asia. It is expected that these strategic moves will give the much needed fillip to the industry  and propel it to a new trajectory of growth.

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