On Tuesday, Air Arabia and Emirates Airline, both based out of the United Arab Emirates (UAE), called on India to allow them to expand their allotted capacity in the Indian market. Similarly, there have been widespread calls from newer domestic Indian airlines for the government to scrap the “5/20 rule” – requiring Indian airlines to have at least 5 years of experience and 20 planes before they can begin to operate internationally.
The Indian airline industry is plagued by problems, particularly cutthroat price competition, high taxes, and poor infrastructure. Over the past eight years, Indian airlines have lost a combined $11 billion. In order to maintain their prized market share, many airlines sometimes operate at losses, especially state-owned Air India which has been repeatedly bailed out. The private carrier Kingfisher Airlines was grounded in 2012 after its accumulated debts and losses reached untenable levels. SpiceJet, the country’s third largest carrier, had to ground its fleet briefly in December 2014 when it ran out of money to pay creditors, and it only avoided bankruptcy through an emergency rescue plan in January.
A shakeup is needed. An end or loosening of the 5/20 rule (a final verdict by the Director General of Civil Aviation is eagerly anticipated), and/or granting further capacity to foreign airlines to operate domestic routes, would have a major impact. The new market dynamics would likely cause some Indian airlines to discontinue operating on unviable routes if new entrants can outcompete them there, leaving the market more efficient and sustainable.
However, the major established airlines oppose the entrance of new competitors, and they have significant political clout. While it is inevitable that more Indian airlines will emerge, like Air Kerala, Air Pegasus, and Vistara (a joint venture between India’s Tata conglomerate and Singapore Airlines), potential expanded capacities for foreign airlines will be harder to swallow politically. The specter of foreign airlines taking revenues away from Indian firms and causing job losses makes them ripe populist-protectionist targets.
India tried to sidestep this touchy subject by opening up its aviation sector to FDI of up to 49% by overseas carriers for the first time in September 2012. Abu Dhabi’s Etihad Airways subsequently bought a 24% stake in Jet, India’s largest carrier. Prime Minister Narendra Modi has pledged to build 200 low-cost airports in second and third tier cities across the country over the next twenty years to boost regional connectivity, and is also vigorously pursuing a “Make in India” campaign. Air Arabia and Emirates Airline may therefore have better luck following Etihad’s example than hoping for India to allow them greater domestic capacity.
However, the biggest limit on airlines’ profitability is not over-competition but taxes. Aviation turbine fuel accounts for the biggest portion of Indian airlines’ expenses, at over 40%, due to state taxes on it. While some states tax just 4%, most levy over 20%, reaching a maximum of 30%. Airport charges, which are among the highest in the region, can hopefully be reduced by the government’s still-unspecified plan to privatize the state-owned airport operator, Airports Authority of India.
Lowering fuel taxes and airport charges would greatly help all airlines to be profitable in the Indian market, and those steps are far less politically controversial than allowing in new competitors.