Civil Aviation Sector and Economy: Issues and Challenges

Airline is a difficult business and the last two decades witnessed at least five airlines going bankrupt in India. On the other hand, as compared to the past 40-50 years, air travel has become affordable for some segments of the middle income groups in countries like India. Writes Dr. Ananth. S

Hyderabad:The Airline business has been in the news over the last few weeks. It started with the good news about companies in India lining up to order nearly 1120 airplanes for their business development plans in the next year – a big jump from the nearly 300 commercial airplanes at present.

The World’s largest airplane manufacturers, Boeing (USA) and Airbus (European consortium owned by Germany, France, Spain and other shareholders from the UK, Belgium and Italy) are extremely optimistic about the demand for airplanes in India. While Airbus predicts that India will need 2840 new planes in the next 20 years; Boeing predicts that India will need 2500 new airplanes by 2042. International airlines usually hire between 100 to 150 persons for every airplane they operate. Hence, the human resources required for efficient operations should be substantial; unfortunately, there is a huge shortage of skilled human resources.

Airbus predicts that India will need an additional 41,000 pilots and 47,000 technical staff to service these new airplanes. Akasa Air presently has 76 aircraft and has placed an order for 150 Boeing 737 MAX type and these are expected to be delivered in a phased manner till 2032. Air India, now owned by the Tata Group, wants to induct 470 new airplanes over the next few years. Indigo has planned to acquire 500 Airbus airplanes in the next 10 years.

However, airlines are a difficult business and the last two decades witnessed at least five airlines going bankrupt in India. The nature of the business was succinctly put forth by Richard Branson, the British entrepreneur who owned Virgin Airlines in the UK, who once said that if one wants to be a millionaire in the airline business, one should start as a billionaire.

The Sector

While the common perception is that the Air travel and aviation sector are those for the rich, the growing reality is that unlike four or five decades ago, air travel is now within the reach of some parts of the middle-income groups in a country like India.

This is in part due to rising incomes, growing corporate travel and ever-growing spending by middle-income groups. The aviation sector is also an economic enabler in most developed countries. Its role in the economy of India is growing fast. Globally the Aviation sector contributes about US$3.5 trillion to the global GDP and has a multiplier effect of 1.

As a generalization, this means that Rupees One spent by the aviation sector add another Rupee One to the economy by supporting other economic activities. It has been pointed out that globally it supports about 1.13 crore direct jobs and another 8.3 crore indirect jobs. About 58% of all international tourists travel by air 1. However, in India Civil aviation is a sector that is quite small, but one that has huge potential: direct employment in the aviation and aeronautical manufacturing sector is about 2.5 lakhs.

The reduced losses, growing passenger traffic, and recovering economy have led to optimism that employment in the Civil Aviation sector could increase by nearly 40% in the next 3 years. One of the growth areas is expected to be aeronautical manufacturing and those related to the maintenance, repair and overhaul (MRO) segment wherein, with the right policies India can take advantage of its strategic location.

However, so far India has not been able to attract most of the large multinational businesses due to its restrictive economic policies resulting in it losing business to the Middle Eastern countries. India has 148 airports of which 17 are international airports. By 2030, it is expected that there will be 200 airports. Last year nearly 15.3 crore Indians used domestic commercial airlines against 6.95 crores in 2004 and this is expected to double by 2030.

International passenger traffic is expected to be around 3.1 crores this financial year. On average India’s airlines carried about 4.17 lakh passengers per day and the number of domestic flights were 2891. Despite this rise in number of flyers, most airlines lose money and the net losses of airline companies were an estimated Rs.17,000 crores in 2022-23 but are expected to reduce sharply to around Rs.3000 crores this financial year.

The rating agency ICRA, notes that the revenues of the aviation industry have increased sharply: from a pre-covid Rs.84970 crores in the financial year 2019-20 and is expected to touch about Rs.1,11,000 crores in the present financial year. This is due to increased pricing power and the ability to charge higher prices as air travel recovers from the impact of the pandemic. Reduced capacity due to supply chain issues has only helped increase prices. Among the bigger challenges for India’s civil aviation sector is the one caused by supply chain and maintenance issues.

In the last year, nearly 150 aircraft were unable to fly due to supply chain issues, maintenance issues and safety concerns. This was also due to the problems in about 25% of the airplanes that used a particular type of engine (Pratt & Whitney) – which came at a time when passenger traffic was increasing. On average about 20% of the fleet was unable to fly. Airlines lose a lot of money if the planes are grounded and this invariably leads to an increase in maintenance costs.

The biggest cost item in an airline is the cost of fuel or Aviation Turbine Fuel (ATF) which is about 40% of the expenses followed by the cost of lease payments, maintenance and then salary costs. ATF costs are lease payments that are usually denominated in foreign currencies and every decline in the value of the Rupee only adds to the increase in costs. Moreover, ATF price is highly volatile since it is linked to international oil prices and receives little subsidy.

A major issue that has not received much attention from the civil aviation sector and the government is that Airlines are simply not investing in training human resources, especially pilots. The recent problems over the past two months have brought out the deep structural issues plaguing the civil aviation sector. Fog and the resultant problems of poor customer service and lack of quality control show the airlines in a bad light.

Viral videos of Worms in food, frustrated passengers forced to sit for long hours in the airplane, passengers eating on the tarmac, and frustrated passengers attacking the captain are clear examples of the rot – many of which are self-made and due to the lack of foresight by the participants in the business. There is no doubt that fog is something that cannot be controlled.

However, India is not the only country where climate reduces visibility: in fact, in winter most of the countries of the world face it and hence we cannot shriek responsibility for the underlying problems. Indian airports have not invested in advanced equipment so that flights can operate with zero visibility like other large airports. It clearly shows that the privatization of airports has not led to commensurate investments in technology. Instead, it gives the impression that many of these airport companies preferred to invest in ancillary real estate rather than their core aviation business.

Airport runways are graded into “categories” based on the ability to guide an airplane to land when visibility is low. The more advanced systems and runways like those in the largest and busiest airports like JFK and Heathrow can guide airplanes to land even when there is zero visibility – which unfortunately is not the case for most airports in India. It is not just airports that need to invest: low visibility requires a unique set of training for pilots. Such training reportedly costs nearly Rs.7 lakhs per pilot.

Airlines are not interested in investing in such training for two reasons: a shortage of experienced pilots and the fear of high attrition rates. Further, the highly cyclical nature of the business and the large losses due to the impact of COVID have led the aviation sector to avoid investing in quality, human resources, and technology.

Road Ahead

Urgent measures are required to unlock the full economic potential of the civil aviation sector. A more meticulous approach that encourages long-term investments rather than simply physical airport structures like buildings and interior decoration is the need of the hour.

Second, there is a need for the government to relook and strategize measures that help the growth of the commercial aviation sector in the background of the pandemic and economic changes after that. Hence, there is a need for the government to relook the 2015 Report of the Working Group on the Civil Aviation Sector.

Third, the training of pilots is costly and requires infrastructure that is present only in a few cities. It is estimated that the total cost for a person to get a commercial pilot license from a good flight training organization (FTO) including the fees for airline transport pilot license, multi-crew coordination, practical flight training, etc varies from Rs.30 lakhs to Rs.50 lakhs – which is clearly beyond the range of most households.

Furthermore, there are very few institutions that offer good quality training for pilots. This forces most of the aspirants to go abroad to study thereby increasing the cost. Hence, there is a need for the government to offer financial assistance at two levels – for those who are establishing high-quality training and support infrastructure and for students desirous of pursuing such training.

One of the fastest ways to establish such training programs that require large amounts is to get the large universities, especially the Central universities, to start such departments and be funded by the Central Government. This offers the added advantage of tight supervisory and quality control while monitoring the end-use of funds. The design of such financial support will be crucial and in the case of students, it can include a combination of phase-wise grants and loans spread over a long period of time so that it does not create an undue financial burden immediately after completion of the course and during the early phase of their career.

(Disclaimer: The opinions expressed here are those of the author)

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