The second part of our Focus on India looks at a domestic air market stunted by high taxes but with the promise of growth
For a country with such a huge population, great distances and poor surface infrastructure, a remarkably small number of people travel by air in India. Last year only 13 million passengers were carried on domestic flights - that in a country with a population of more than one billion and a growing middle class of perhaps 150 million. In contrast, India's state-run railways carry about 13 million passengers every day.
Breaking the figures down shows just how staggeringly tiny the domestic air transport market really is. Of the air trips, nearly three million were flights taken by foreign visitors. And of the remaining 10 million, an estimated six to seven million were pure business trips - many of them multiple journeys by the same travellers. That leaves just three to four million non-business-related trips by Indian residents, a miniscule number in a country where more and more people have the money to travel.
"Everyone talks about how there are 100-150 million Indian middle class, so how come only three to four million are travelling by air?" asks Jet Airways executive director Saroj Datta.
Taxed to death
Datta, who heads an executive committee that runs day-to-day operations, knows the answer. Indeed, all Indian airline executives know it can effectively be answered with one word: taxation.
India's government taxes the aviation sector greatly - to death, in the case of some private airlines that collapsed over the past decade, following deregulation in the early 1990s. Fuel costs alone account for around 30-40% of operating expenses, largely because of federal customs and excise duties and because some states such as Kerala slap 39% sales taxes on fuel. This means taxes make up around 44% of the price of fuel, which still has high base costs despite the fact that the country's long-standing administrative price mechanism on fuel was abolished in April 2001.
The resulting high ticket prices keep many Indians off aircraft, most of whom turn to trains or roads for domestic travel. But, say the country's airlines, the potential for growth is enormous, and a few simple moves to reduce taxation could soon spark dramatic change.
"There is a huge market here," says Uttam Kumar Bose, chief executive of Air Sahara, India's second-largest private airline after Jet. "The numbers are here. If there is even a 0.5% increase in the number of passengers you will need almost 50 new aircraft to fly them. This is what is going to grow the market. If you keep increasing the cost of operation, then there is no room for us to give benefits and reduce the fares." He adds: "In a way, you can compare our country to China. The populations are similar, but in China there are more than 400 aircraft." That compares with the just over 100 on the local registry in India which are used for both domestic and international services.
Most expect growth in domestic passenger numbers this year of 2-3%, compared with a slight contraction after the Indian economy began to slow in early 2001. But some studies forecast that, with changes to tax structures, domestic airlines could be carrying 40-45 million passengers annually by the end of the decade. And India's carriers believe the changes that could lead to these sorts of traveller numbers may be just around the corner. They say the finance ministry is finally listening to them and is considering cutting taxes, which could well result in a traffic explosion and massive domestic expansion. Some states have also begun to cut their sales taxes on fuel, hoping it will result in growth in tourism.
"We have been constantly trying to impress upon the ministry of finance to do something about taxes," says the chairman of state-owned international carrier Air-India, Roy Paul. "We are hopeful that something might happen soon, but we will have to wait and see."
The Confederation of Indian Industry (CII), which works with the nation's industrial community and government, has been among the most vocal in calling for change. It says the high tax structure has greatly affected growth in the domestic aviation sector. With less onerous taxes, it says, ticket prices would have been lower, which would have led to a much bigger market in the years immediately following deregulation.
The confederation wants the 16% excise duty on fuel to be reduced, sales taxes on fuel imposed by the states to be slashed and the 15% Inland Air Travel Tax that is charged on basic airfares to be eliminated. It also wants lower landing and navigation charges.
"At present the high tax structure on aviation fuel is affecting growth in the sector," says the CII, adding that the average domestic price of fuel is 99% higher than in foreign countries.
A recent study by the CII's National Committee on Civil Aviation found that domestic fares are 23-30% higher than international fares for a comparable distance. A Delhi-Bangalore return flight, for example, costs as much as a Delhi-Dubai flight even though flying times to Dubai are 42% greater. "This has resulted in a greater outflow of domestic tourists with many choosing to holiday abroad due to the high cost of internal travel," adds the confederation.
Indian Airlines deputy managing director V Kashyap says that there is "no discretionary travel at all" within India and, as a result, the country's economy is being disadvantaged. "If the cost is high, the fares will be high," he says. "You've got to change the cost structure. Tourism will multiply, having a snowball effect on the rest of the economy."
Still, things are far better than they were a decade ago, when only state-owned Indian Airlines was operating. The partial deregulation in the early 1990s led to the launch of many new carriers. Although most ultimately collapsed - mainly due to poor management, but also thanks to the high operating costs - two key privately owned players remain: Jet Airways and Air Sahara (formerly Sahara Indian Airlines).
Jet, with a fleet of just over 30 Boeing 737s and eight ATR 72 turboprops, claims a domestic market share of 45-46%. That is about the same share claimed by Indian Airlines, which operates domestic and international services with 56 aircraft, including those with subsidiary Alliance Air.
Air Sahara has an 11-strong fleet of 737s and is adding Bombardier regional jets to build a feeder network. It greatly increased capacity in 2002 with additional 737s. Although its rivals dispute its claim that it now has a market share of around 12%, both admit that Sahara has made gains and Kashyap at Indian Airlines says it is "now relevant".
While developments have been relatively slow, the new players have caused domestic ticket prices to come down and service standards to be significantly improved. They have also helped grow the market, rather than purely taking share from Indian Airlines, although not as quickly as might have been expected after deregulation.
Air Sahara says it is profitable but does not reveal earnings figures, while Indian Airlines and Jet acknowledge that they have been operating in the red. Jet says it has been profitable every year since its establishment until the 2001/2 financial year to 31 March, when it suffered losses as demand fell - particularly from foreign travellers - and costs increased. A pickup is expected this year, however, as the Indian economy is growing again and the domestic market is starting to mature.
In addition to new advance-purchase ticket schemes launched last year in an effort to stimulate demand, the airlines have been revamping operations and boosting frequencies with smaller aircraft to help feed their trunk routes.
Air Sahara recently became India's first operator of regional jet aircraft with Bombardier CRJ-200s. It is using these to develop "hub-and-spoke services, which will be the first time that this is done in this country", says Bose. The aircraft will operate to smaller cities from Bangalore, Calcutta, Chennai, Mumbai and New Delhi in the mornings and evenings, while in the afternoons they will operate between the major cities.
"Excepting Delhi and Mumbai today, there is no other metro connection where you have afternoon flights," says Bose. "If somebody has a 3pm meeting somewhere, he still has to fly there at 7am. So this aircraft is actually going to create new markets."
While Air Sahara is the first operator of regional jets with its 50-seat CRJ-200s, Jet is planning to start operating larger Embraer 175s next year. Last year it signed a letter of intent to purchase 10 of the type and take 10 options, for delivery between 2004 and 2007, and a final purchase agreement is expected soon.
The Indian government has for years called on airlines to boost services to underserved destinations in remote parts of the country, but the pleas were generally ignored until recently.
Jet has been operating ATR-72 turboprops on secondary routes since 1999 while Indian Airlines subsidiary Alliance Air recently put ATR-42s into service in the northeast of the country. Bangalore-based air charter company Deccan Aviation is, meanwhile, pressing ahead with plans to move into scheduled operations using ATRs or Bombardier de Havilland Dash-8s. It expects to begin services in the second half of the year, flying to remote destinations in the south, says managing director G R Gopinath, who adds that it will be "no-frills and low-cost". He adds: "We will be connecting underserved or totally unconnected areas with the metros. We have been looking at this for the last two to three years and we feel the timing is right. India needs a low-cost airline."
But the slow pace of infrastructure development may continue to hinder growth. Paul says the government recognises developments are needed and is making progress, with plans to upgrade busy airports such as Delhi and Mumbai.
Says Bose: "The government must look into infrastructure growth. Today if I want to have some more primetime flights, I can't do it because they can't handle it. The air traffic control can't handle it, the arrival hall can't handle it, the departure hall can't handle it."
Jet's Datta concurs: "The government keeps talking a lot about it, but they need to do a lot more about improving their infrastructure." He says the government in particular needs to take a serious look at privatising major airports - something that has been repeatedly deferred. He also says the government should reduce landing and navigation charges in India, which he says are higher than in many other neighbouring countries.
The two private carriers meanwhile remain hopeful that the government will allow them to expand into the international market. The civil aviation ministry bars private carriers from flying beyond India's border, but has indicated it may be willing to ease the policy, initially to other countries in the South Asian region, such as Nepal and Sri Lanka. Currently only Air-India and Indian Airlines operate international services.
"If the policy said we were allowed to do it, we would be very seriously interested and would start planning," says Datta. "In the long run, I think the airline requires the ability to go international - for feed and for growth."
Adds Bose: "This will generate a lot of foreign exchange, so it's good for the country and good for everybody. I think the government is starting to take transportation and tourism seriously - so it is important that the government should allow some private airlines to go international and help grow the market."
Bose says the private carriers have proven that lower ticket prices spark demand, and the same will apply to international operations. Last year, all three domestic players began offering advance-purchase tickets at lower prices and passenger numbers picked up.
"The little that we did - the advance purchase scheme - helped, and we saw good growth. We saw train travellers going to flying," says Bose. "Domestic tourism can be big, but that requires a bit of help from the government."
Jet's Datta warns that if taxes do not come down and infrastructure is not improved "India may ultimately end up with the aviation industry not surviving because it doesn't produce the profit surpluses which you need to reinvest".
Source: Airline Business