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Published on : Tuesday, July 14, 2015
It is great to be back in India. My last visit was in March 2013. Since then much has changed, including the government. IATA is a business association. We do not get involved in politics but we interact with governments around the world. And it is refreshing to see one that has declared its unabashed focus on making it easy to do business.
IATA shares the same focus. By representing, leading and serving the airline industry we want to make it easier for our 260 members to do the vital business of providing air transport to connect and enrich our world.
Of course, Prime Minister Modi’s view is much broader than a single industry. A country as large and complex as India has many priorities in facilitating the economic and social development of its people. That includes the basic necessities of clean water and health care as well as creating opportunities for education and employment. Meeting these needs requires a growing, healthy economy, and the connectivity that aviation delivers is a key driver of just such an economy.
Now, while this day has been called India Aviation Day, in reality every day is an “aviation day” with, on average, 100,000 flights safely transporting 9 million people and 150,000 tonnes of goods from one place on our planet to another. What makes today very special is that we have all of the key stakeholders who make this happen in India. In particular we are honored to have the Minister for Civil Aviation, Mr Ashok Gajapati Raju. representing the highest level of responsibility for aviation within the government of India, join with the leaders of the industry who together represent the entire value chain.
Aviation accounts for about 1% of global GDP. The whole aviation value chain supports 58 million jobs and accounts for $2.4 trillion of economic output. It is the means to market for a third of the goods—by value—which are traded internationally. And it plays a unique role in connecting business to markets, uniting families and friends, bringing people together to solve problems, build understanding and develop global insights.
Aviation is a force for good in our world and it contributes much to India today. My opening challenge for today is to find ways for aviation to be an even more effective tool for India’s development.
Already aviation and aviation-related tourism support nearly 7 million Indian jobs and over $23 billion of its GDP. That’s with just over 100 million people traveling by air this year— to, from and within India. We see the potential for that to increase to nearly 280 million by 2029, by which time India would hold the rank of the world’s third largest aviation market. And by the end of our forecast period in 2034 we see a further rise to nearly 360 million passengers. That amazing growth will bring even more benefits to India’s development.
Despite this potential, it is no secret that India’s aviation sector faces immense challenges. The global industry is expected to make profits this year which, for the first time in IATA’s records, will exceed the industry’s cost of capital. While Indian carriers’ collective losses have fallen—and a few are even profitable—and even thought demand growth remains robust, overall sector losses in India are still expected to exceed $1 billion.
There have been some positive developments in recent months, for which I commend the government’s leadership. The most important is the restoration of India to Category 1 of the US Federal Aviation Administration’s (FAA) International Aviation Safety Assessment (IASA) program. That follows over a year of hard work to build capacity for flight operations inspectors and all the supporting processes and people for global standard safety oversight. Congratulations on this important achievement.
Safety must be managed and improved every day. So it is important we continue this momentum as India undergoes the International Civil Aviation Organization’s (ICAO) Universal Safety Oversight Audit Program (USOAP) later this year. We certainly would not want ICAO to raise any red-flags in USOAP—as has recently been the case with some of India’s Southeast Asian neighbors. So I respectfully encourage India to move forward in four areas where adoption of global standards will deliver safety enhancements:
Improving safety and operational reliability is a critically important and constant challenge. In aviation there is no priority higher than safety. It underpins the very viability of the industry. There is no second best option. Global standards exist and safety is best served when they are followed.
The Aviation Business
Now I would like to focus on areas where the government’s priority to make India an easier place to do business could directly address aviation challenges. In the World Bank’s most recent Ease of Doing Business Ranking, India comes in at 142 and lowest among the BRICS group. The difficulty of doing business in India is a real issue.
The e-tourist visa initiative is a tangible example of progress and signals that India is open for visitors. It should do much to create jobs by boosting visitor arrivals – currently 7.5 million people annually. Given that Thailand—much smaller by population and area—attracts about 25 million visitors annually, even quadrupling the current numbers would not be an overly ambitious goal.
Aside from opening the door wider for inbound visitors, what else could be done to make the airline business in India easier? The short answer is: a lot!
There is in India a long history of government intervention on a ministry-by-ministry basis but without a comprehensive plan. And the negative effects of this have been exacerbated by conflicting national and state agendas.
Among other things, I would strongly recommend that India pursue a joined-up approach across the many ministries and official bodies which make rules for aviation: the Petroleum Ministry, the Finance Ministry, the Environment Ministry, the various State governments, and so on. The Ministry of Civil Aviation (MOCA) should take the lead to meld the various agendas of these different elements of governments into a coherent national plan for aviation.
A key guiding principle for this plan is to follow global standards. Aviation is not only an Indian industry—it is a global one guided by global standards and best practices. The more that India aligns with global standards and best practices in developing its aviation policies, the stronger its airlines will be in the face of international competition. And, that will pay dividends to individual consumers and to the wider economy.
The Top Three
The big issues can be summed up as: onerous regulation and processes: debilitating taxes; and expensive infrastructure that struggles to meet the demands of its users. You are certainly more familiar with the details of these issues than I am. My members constantly tell me about the high costs involved in operating in India. Let me suggest three points to address this:
1. The first is to sort out the tax burden. The true value of aviation to the government’s coffers is its ability to catalyze economic activity. Focusing on receipts through a layered web of taxes does a disservice to the country’s economic potential. There has been a Tribunal decision on the application of Service Tax to the fees of Global Distribution Systems. It confirmed the principle that the tax should not apply to services rendered outside of India. So why aren’t all payments for services that don’t touch Indian soil—including overflight charges and extra baggage fees unequivocally exempted by the same principle? And, in line with international standards, international tickets should also be exempt from the Service Tax. And Service Tax should not be applied to taxes and charges collected—effectively being applied as a tax on a tax. Looking ahead, the incoming GST regime should also zero-rate international air transport services in line with OECD guidelines. And on top of this, it’s time for India to implement standard double taxation provisions that would see profits from international services taxed only in the location where the airline has its head office. We are not trying to avoid taxes, but airlines should not have to pay twice!
2. The second item should aim to make India’s fuel pricing regime competitive. There is a tax component to this as state taxes on fuel can be exorbitant—as high as 30%. Granting jet fuel “declared goods” status would be a good start to addressing this far too onerous burden. Simultaneously, it was a good decision to introduce competition in jet fuel supply at some key airports including Delhi, but what about opening access to the pipelines that get the fuel to the airport? The efficiencies of a liberalized market cannot be realized unless all fuel companies have access to key off-airport infrastructure that brings fuel onto the airport site.
3. The third item is to let the Airports Economic Regulatory Authority (AERA) do its important work in the independent economic regulation of airport charges. There are a number of issues to deal with. First, while respecting the legal process, we must find a way beyond the current legal challenges which are preventing the implementation of AERA’s recommendation for a 78% reduction in airport charges at Delhi. That’s for the second control period which was meant to begin on 1 April 2014. And that follows and helps to address the 340% increase in the first control period.
A further issue is to protect AERA’s independence. We are very concerned that stock exchange filings by Hyderabad airport show that MOCA “instructed” AERA to use a hybrid till, and not a single till, for its “independent” determination on the airport’s charges.
That leads to a third issue which is adherence to the single till principle for airport charges, the public benefits of which have been confirmed by the Finance Ministry. The single till principle and AERA’s mandate to determine airport charges independently should be firmly at the core of all discussions as the government considers concession contracts for Jaipur, Kolkata, Ahmedabad and Chennai.
The form of the “privatization” should be examined. Large sums of public money have already been invested in these four airports, so the goal of privatization cannot be to secure investments that the government could not achieve. Given that, there should be a robust cost/benefit analysis on whether a concession contract is needed or if the public interest would be better fulfilled by, for example, a management contract.
These are three challenging items—particularly with issues such as taxation where several ministries and levels of government are involved. But it’s worth the effort. Most of these concern costs. And surely the high cost of providing connectivity is holding back India’s development. But cost is not the only factor.
Regulation is also holding back the development of the sector. Well-intentioned regulations but which are inconsistent with global standards, make doing aviation business here very difficult.
The fact is that India imposes rules and requirements on its carriers that are not seen anywhere else. Some of them, like the route dispersal guidelines, stem from the understandable desire to see the benefits of aviation connectivity extend to places which would not be served if it were left to market forces to drive airlines’ decisions about networks and fleets. But the world was a different place over 20 years ago when these rules were put in place. Is this really the best way to achieve the purpose for which the guidelines are still being implemented?
Another example of a uniquely Indian approach is the 5/20 rule. This was established with the understandable aim of ensuring that international flights would only be operated by safe and financially robust carriers. But there are other ways of achieving this.
The problem with such regulations is that by creating distortions to the free market, they influence long-term decisions made by airlines. And so, once they are imposed they become very difficult to change as circumstances evolve, because doing so can’t help being unfair to some or other key industry player.
I’m now hearing about a new proposal for Domestic Flying Credits. I have to ask: what will be the long term effect of introducing another twist to the market? Are we sure we have thought through how the effects this system will have in the medium to long term? Why is it that no other economy has found such a measure to be necessary?
And, for that matter, why is it necessary for regulators to intervene in setting fare levels? My time is too limited to list all the examples, but there are many.
There are no easy answers to how to change India’s aviation regulations to make doing business easier, but there are clear lessons to learn.
I suggest to you that India needs “smarter regulation.” This essentially means taking a business-like approach to regulation using some common-sense and proven principles. These include targeting regulation to address real issues, using global standards where they exist and satisfying a rigorous cost benefit analysis. A key process element of this is consultation with industry.
As we can see from today, industry and government are aligned in wanting aviation to deliver the best possible results for India’s development. If we can work together to build regulations that meet the public interest, are consistent with global standards and which can be implemented efficiently then we are all winners. And we will avoid the angst involved in unwinding mistakes—made difficult because businesses have invested time, money and effort to adapt to them and because they carry the weight of regulation.
Let’s harness this momentum in today’s dialogue. It is clear the government is deeply committed to making it easier to do business in India. So I have asked our office here to lead the development of a comprehensive list of what could realistically be achieved for the aviation sector in this regard. Some elements are obvious.
There is a great opportunity for the government’s “ease of business” agenda in aviation. Aviation is already a largely standardized industry with many global references to guide us. And by working with MOCA based on airline input, we could develop and deliver an effective action plan for aviation in India. And I would like to be ambitious about what we can achieve. Aviation should be the model sector demonstrating India’s efforts to make it easier to do business.
Building on Success
I am proposing this with great confidence as a loyal partner of India. Both Air India and Jet Airways are long-standing IATA members. Our Delhi and Mumbai offices work closely with all the industry’s stakeholders, including MOCA and the Airports Authority of India, on a broad spectrum of issues—from safety and security, to advancing passenger convenience with Fast Travel and providing the financial link between agents and airlines. And we are helping to build the future of aviation in India through training activities that help thousands of students advance their aviation and tourism-related careers each year.
There is some tough work ahead, but I am confident that if we focus on a few key areas we can start to make a very positive difference. And that will only grow with the broader agenda to follow. To give credibility to this optimism, I would like to close my remarks by reflecting on an unfolding success story from the world of air cargo.
Thanks to the hard work and dedication of many in this room, the Cargo Accounts Settlement System has brought the benefits of global standard procedures and best practices to financial transactions in this area. India is helping to lead the modernization of cargo processes with e-Air Waybill adoption approaching 40% and e-freight proof-of-concept delivered in four of India’s gateway airports. E-freight complements India Custom’s plan to establish a “Single Window” for all bodies involved in the clearance of air cargo. Combined, these initiatives will contribute tremendously to the ease of doing business in India. And they illustrate what industry-government partnerships and smarter regulation can achieve.
Minister Raju, I look forward to working closely with you to replicate this growing success story in cargo in addressing all three highlighted areas. We have a great opportunity. We both want to make it easier to do business in India. And it is a momentous prospect to develop an agenda to capture the economic and social benefits of being the world’s future third largest aviation market.
I have been in aviation for nearly four decades. I am passionate about what aviation makes possible. I have seen it change lives for the better and improve prosperity in nations where the industry finds a supportive home.
All this gives me the confidence to say that you have the most exciting job in the Indian Cabinet today. The combination of your leadership, a determined government focus to make it easy to do business and the pent up demand for connectivity to this amazing sub-continent is an opportunity not to be missed. And you can count on my personal support and that of IATA.