Industry

Reviving Aviation will need Strategic intent and bold Measures

There are few industries in the world that touch lives, businesses, economies, and livelihoods as much as aviation.

Flying is by far the one of the safest modes of transport globally and will without doubt continue to expand its footprint, with rapid advances in technology, cleaner fuels, smarter services and more efficient assets, notwithstanding the setback aviation has suffered from an invisible enemy. As per industry sources, before COVID-19 crippled the industry, more than 25,000 aircrafts flew across 17,000 destinations ferrying close to 4.5 billion passengers and 85 million tons of cargo. Aviation businesses supported 65 million jobs across the value chain, contributing USD 2.7 trillion to global GDP.

Sadly, aviation businesses lost more than USD 125 billion in revenues in 2020, its biggest single year loss in recent years. According to IATA (International Air Transport Association) with domestic aviation markets recovering sharply in Asia, Europe and America, the industry looks to finish better in 2021, but has a long road ahead before it recovers to pre-COVID-19 levels on traffic, revenues, and profits.

A lot has changed in the last eighteen months which could have long-term impacts on travel and work choices, consumer behaviour, traveler profiles, international flying, trade, tourism, regulation and mobility in general, each with a significant impact on demand, growth and sustainability of the industry.

India is the third largest domestic aviation market in the world with the potential to become the third largest by total passengers carried, in less than a decade as per industry reports. The country has a fairly low air traffic penetration among the top five aviation markets and promises to be one of the fastest growing post COVID-19. However, that may be not be guaranteed, given the current state of the industry. The key to securing that future is collaboration. What is needed is not just a bold vision but a strategic and a collective intent, political will, and an emphatic show of strength between airlines, airports, government, regulators, and financial institutions to provide much needed succor to a precariously placed industry.

The pandemic has caused a massive reset of airport and airline businesses globally challenging historical market leaders, disrupting competitive advantages and reshaping operating models, with data technology key motifs of the transformation, all of which have opened the gates for new players and winners in an emerging, yet uncertain new normal.   We would be naïve to lose the chance to not only redefine the new normal, but also chart the course for achieving global leadership, underpinned by a robust well-thought out strategy.

Tentativeness has been the Achilles heel of our policy machinery particularly when it comes to addressing persistent challenges and demands of our aviation businesses. We need to abandon old ideologies and discard quite a few perceptive biases shaped perforce by precedence and sometimes a lack of poor understanding of the costs of indecision.

Notwithstanding the setback caused by COVID-19, the Indian aviation industry can still become a global powerhouse.

Here are three key elements for a future strategy that could help turnaround the industry and set the stage for faster recovery and bring back confidence of global investors in our market. 

Drop the elitist tag

For far too long, flying has been considered a privilege of the elite. And politics has preserved that view. Sadly, policies have tailed the elitist tag, burdening this high-capex business with high operating costs as well, acutely encumbered by irrational taxes and duties. The fact is, this industry employs more than 3 million people across the value chain, predominantly blue-collared workers, and middle-income earners, without whom running airports and flying planes would be impossible.

India’s domestic air traffic quadrupled in the first decade of this millennium and almost tripled in the next 9 years pre-COVID. Many of these were first-time flyers from Tier 2 cities and towns with modest economic backgrounds, living their dream, helped by rapidly growing choices for low-cost air travel. The success of UDAN (regional connectivity scheme) and the livelihoods it has supported is antithetic to the elitist slant. It’s time to change our mindset and get pragmatic on tax policies and regulation.

The truth is with lower taxes, lighter regulation and better financial incentives, the industry can become much more competitive and profitable, creating many more jobs, attracting bigger investments and contributing to better economic outcomes along the way, a path transcended by many mature aviation markets in the world.

Provide adequate financial support and fiscal relief

Governments across the world have committed in excess of USD 150 billion in grants, soft loans, and other forms of credit to airlines and aviation businesses affected by the pandemic. This is a reflection of the importance nations place on the aviation industry and the impact it has on economic growth and prosperity. The multiplier benefits of aviation sector growth have been undisputed, with trillions of dollars added to global GDP.

Indian private carriers, however, have not received substantive financial support or relief, despite suffering the consequences of muted demand, revenue shortfalls and crippling costs of leasing, capital and taxes, all of which are now in a way threatening the very survival of many carriers. The pandemic-induced crisis has already disrupted many livelihoods, caused untold hardship to people dependent on the industry and eroded significant economic value in just 12 months. The combined losses of Indian carriers were over USD3 billion in FY 21, notwithstanding the sharp recovery in domestic demand in the last two quarters of the fiscal. We could be bracing for a difficult year, if current trends persist and the continuing prospect of more lockdowns and quarantining norms, pending widespread vaccinations.

Airports are now beginning to feel the heat of airlines and other commercial businesses becoming cash-trapped. While some airports have more room to maneuver the headwinds, the cumulative impact on revenues and cashflows have become worrisome. Industry estimates show that Indian airports incurred a net loss of USD730 million in FY21 and the impact of the second wave would exacerbate cash losses further in the first two quarters of this fiscal.

We continue to endlessly debate form and substance of relief but some options are known – rationalization of VAT on ATF, moratorium on loan payments, waiver or deferment of revenue share payments, royalties, concession fees, import duties and enhanced credit in the form of soft loans or short-term working capital support – but there needs to be a bias for action. Speed of response is critical because the costs of inaction more often than not can be very high.

Sharpen the regulatory approach

Tariff regulation at major airports has followed well accepted international principles but has also been contentious on many elements given the distinct nature of assets, locations, user profiles, concession agreement provisions, state support and precedence on key decisions by the regulator. Despite these differences and complexities, airports have invariably benefited from a fairly predictable and consistent approach to economic regulation, which provides assured returns. Airlines haven’t had it as good though their business has been largely unregulated commercially, because of competition, market risks, low margins and volatility in demand. However, as principal users of airports (that is now changing with more non-aero uses of airport real estate), airlines continue to be key stakeholders and influencers of investment and commercial decisions at airports. Since privatization of airport assets, tariffs and user development fees (UDF) have become an integral part of their revenue stream. The present crisis has unsettled the tried and tested approach which uses pre-determined building blocks and true-up principles.

  • One, the ability to predict or forecast traffic, has become difficult, challenging yield calculations.
  • Two, the lumpiness of assets, sunk costs, scalability, and trade-offs between present and future value of completion costs, adds to the complexity of determining fair forward-looking tariffs.
  • Three, the potential difference between approved peak tariffs and what the market can bear in the current crisis, could create an unintended wedge in cash flows and debt servicing capabilities of airports.
  • Four, the riskiness of assets, which has a direct bearing on the cost of equity and expected shareholder returns, has been brought into sharp focus, though it may be a temporary aberration triggered by current market conditions.
  • Five, any significant revenue shortfall caused by a cumulative impact of these building blocks can impact future tariffs adversely and needs a fine balancing act, against uncertain market conditions.
  • And lastly, the acute financial distress that most airlines are in, puts immense pressure on regulators to keep tariff increases to the minimum, with the risk of undermining airport balance sheets.

Solutions are not easy, with so many variables. Some fundamentals of airport operating models are also changing to adapt to emerging market realities. Technology is already impacting mobility, travel choices, passenger journeys and buying behavior. Governments may look at revisiting bilateral air service agreements to preserve national interest and find ways to protect the domestic industry. Legacy assets may be run down or re-purposed to monetize them better and passenger terminals may become smarter in design, costs of construction and productivity, afforded by innovations in new technology. The sharp focus on climate change, decarbonization and compliance could also have a major bearing on long-term costs of infrastructure and services for airlines, airports and other aviation businesses, as it can go a long way in ensuring ensure better economic and social outcomes. For example, the shift to green fuels and electric mobility could save millions in operating costs for airport and airline businesses. All of these will significantly influence the key building blocks of tariff determination, with no precedence to benchmark on.

In essence, the most appropriate approach to deal with the current imbroglio is probably to persist with current tariffs till such time the market stabilizes and allows better predictability on future trends. This will also entail a periodic review of the market situation and flexibility in re-baselining tariffs at regular intervals to balance the interests of investors, passengers, and airlines. Regulators would also be prudent in amending the philosophy and framework to deliver better commercial and economic outcomes, with the lessons we have learnt over the last decade and from the current crisis. It needs to be aligned with the expected new normal, our renewed vision for the sector, and encourage investments across the eco-system.

About the author:

Dr Vasudevan S. is Partner and Global Sector Lead (Airports), KPMG India

 

This article was first published by the in The Economic Times -TravelWorld.com

(Disclaimer: Views expressed in the article are personal)

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