Can new airlines save Indian aviation?

Thu, 24 Jul Pre-Open

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India's aviation sector is financially in the doldrums. A myriad of issues plague the sector. Intense competition, bureaucratic hurdles and high cost of fuel are just some of the main problems. On top of this, there exists a complex regulatory and taxation structure in India. The Centre for Asia Pacific Aviation (CAPA) has pegged the combined losses for the industry at US$ 1.77 bn in FY14. The accumulated losses for the eight Indian carriers over the last seven years stand at an enormous US$ 10.6 bn. It's no wonder that .

Has the government obliged? In its first big policy move, the civil aviation ministry has given the go ahead to six new airlines. What's more, the ministry has identified 50 locations around the country to set up low cost (no-frills) airports. Many of these airports are planned in tier 3 and tier 4 towns. These moves are expected to give a boost to air connectivity and improve the prospects of the tourism sector. However, a closer look tells us that a lot more needs to be done.

For one thing, no major reforms have been proposed. Currently, no blueprint exists to set up a no-frills airport. Yet the government has estimated the cost of setting up one will be Rs 700-800 m. We wonder how the government arrived at these figures. Important issues relating to land, security and road connectivity have also not been addressed. While the announcements must be taken in the right spirit, we would like the government to be more proactive.

For example, India has a regional airline policy. However, most regional airlines have either failed or are struggling financially. The policy is not conducive to small low cost airlines. It is not possible to profitably operate a regional airline while facing the same issues as a national carrier. Also, would regional airlines like to fly to far flung areas where the demand may not exist? The government should move decisively with reforms to encourage investments.

The sector is also affected by overcapacity. This has led to huge discounts being offered to fill up empty seats. Air Asia and Tata-SIA have also entered India. In such a situation, six new airlines will only add to the competition. If the new six airlines start another price war, it will increase to the financial woes of the sector. Considering the huge debt burden that the sector is under, we believe that India cannot afford another Kingfisher like disaster. Hopefully the government is listening.

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