Skip to main content

Test Home
You & IATA

Search

You are here: Home » Pressroom » Speeches
  • Print this page
  • Share this page

Date: 24 September 2008

Confederation of Indian Industry, Delhi

Delhi, India - On my last visit in 2005 the global industry was struggling with losses of US$4.1 billion. All eyes were on India: a rising industry star with new carriers, US$12 billion in new aircraft orders, liberalised policies and high speed growth. But even India’s robust development cannot resist the downward pressure of the perfect storm that is rocking the industry.

Global Crisis

The global economic slowdown and high oil prices have plunged the industry into crisis. Airlines will lose US$5.2 billion this year, and a further US$4.1 billion next year. The oil price is the villain. The 2008 fuel bill will be US$186 billion. That’s a US$50 billion increase in just one year. For perspective, in 2002, the entire fuel bill was US$40 billion. Oil prices came down from their mid-summer peaks. That was good news for costs but bad news for revenues as the drop was fuelled by weak economies. Then we had a shock this week when oil spiked to US$130. It has since dropped again but the situation is clearly volatile.

And demand is already falling. Global international passenger growth in July was 1.9% compared to 7.3% in 2007. And freight traffic declined by 1.9%. The situation is bleak.

India Today

On my last visit I made it clear in my presentation that India’s aviation dream -built on market liberalisation and new aircraft orders - could become a nightmare. Certain issues needed to be handled correctly: improving infrastructure, matching capacity growth to demand, harmonising to international standards and building a competitive cost structure.

None of this has happened, and today the situation is critical. India’s airlines expanded quickly taking advantage of new opportunities. But targeting market share put the bottom line at risk. Rising food and energy costs are eating into disposable income. So cutting fares to fill seats is not working. Low labour costs are a competitive advantage that will come under pressure with rising prices.

Meanwhile growth slowed from 33% in 2007 to 7.5% in the first half of this year and went negative in the last two months.

The global crisis is hitting India hard. While the established airlines are working to match capacity to demand, some start-up airlines continue to expand rapidly.

The bottom line is bleeding. India will post the largest losses outside the US -potentially US$1.5 billion this year. Airlines are starting to take some tough medicine. Domestic capacity growth will stop by the end of the year. Aircraft orders are being deferred and we have seen some consolidation. Among the consolidations, the historic merging of Air India and Indian Airlines was the biggest and most important. Now, effective implementation to achieve efficiencies is the challenge.

The next months are critical. The industry is sick. I had to suspend over 25 airlines from our settlement systems because they went bust. Many of these were because they were fighting to grow traffic instead of profits. This is not the time to grab market share. Action on external issues is also required to bring the industry back to health.

Let me highlight three: reducing costs, improving infrastructure and following global standards

Reducing Costs

Fuel
First fuel. It’s the biggest factor impacting profitability. While fuel is 36% of average industry costs, it is up to 50% for some Indian carriers. India is among the most expensive places on the planet to buy aviation turbine fuel (ATF). In August a kilo-litre of ATF cost 73,600 rupees in Mumbai. In Singapore it was 46,500 rupees. That 58% differential is robbing Indian airlines of their competitiveness.

Subsidising some fuel products -diesel and gasoline for example - distorts the price of jet fuel. So the base price for jet fuel in India is higher with supplier margins as high as 20%. And on top of that, the central government adds
Excise Duties, the Airport Operators charge throughput fees and States impose
sales taxes as high as 30% for domestic operations. This costly structure cannot support a competitive industry.

I see some progress. Eliminating taxation on international ATF brought India in line with the Chicago Convention. Now the airlines need to be paid back the US$34 million wrongly collected between 1994 and 2001. Reducing custom duties in June was also positive. Two additional important domestic tax measures must be taken - removing excise taxes and implementing a 4% standard state tax for domestic fuel in line with Ministry of Civil Aviation recommendations. We must also look at greater transparency in ATF base pricing and common-use fuel facilities. Achieving all of this, will give India’s aviation industry a much more solid competitive footing.

Service Tax

Then there is the issue of Service Tax. India imposes this tax on premium class tickets, overflight, landing and airport charges. Taxing overflight charges breaches India’s international obligations under the Chicago Convention. Imposing it on premium class tickets and landing charges is contrary to ICAO Council Resolution 8632 which calls for a reduction in such taxes. India is a long-standing membership on the ICAO Council. Not following ICAO policies is disappointing and an embarrassment.

Infrastructure Costs

India’s infrastructure costs are also an issue. Airport and air traffic management are monopolies that must be regulated in line with ICAO policies. These policies call for charges to be transparent, non-discriminatory and based on a cost-recovery model.

India does not measure up. There is no transparency in the cost base for either airport or air traffic control. Our best estimate is that there is a 20% over-collection for air traffic control. And, charging 33% more for international flights to land than domestic can only mean cross-subsidisation as the service is the same.

Establishing the Airport Economic Regulatory Authority (AERA) with the expanded scope of fuel related charges could be the solution. Its mission must be aligned with ICAO policies, and it needs enough teeth to provide effective incentives to improve service quality and efficiency. AERA’s timing is important for two reasons. First, the current industry crisis makes cost-efficiency a matter of survival. And longer-term, with the increase in public private partnerships, a regulator is needed to prevent abuse of monopoly position.

I hope that the AERA bill will be passed without dilution later this year. Then we must not waste any time in setting up the Authority as a real regulator with teeth, not like the phantom regulator we have in the UK.

Infrastructure Investments

While sounding the alarm bell on costs, infrastructure investments are urgently needed. Delhi is improving. A new runway will soon provide extra capacity as will the new terminal in 2010. By 2026 Delhi should be able to handle 100 million passengers. Greenfield projects like Bangalore and Hyderabad are helping as are upgrades in Chennai, Kolkata and others. But these are not complete solutions. They will soon be at capacity. Long-term solutions that think much bigger are required.

Mumbai is a good example. The situation is critical. Today its terminal handles 24 million passengers a year. That is twice what it was designed for. Plans to increase capacity to 40 million by 2012 with an expanded terminal will only just meet expected demand. But its cross-runway configuration limits movements to 35-40 per hour. And there is no possibility to build a parallel runway. The Greenfield site under consideration with a phase one capacity of 10 million might provide relief, but it is not a serious solution. We need an airport that can adequately serve the financial capital of the world’s second most populous nation. That means thinking much, much bigger. We must use the breathing space of the current downturn to engage the airlines and plan in the 100 million range like Delhi, Seoul, Hong Kong, Dubai, Beijing and other important cities.

Air traffic management also desperately needs an upgrade. Delays have recently reduced not because of new investment but because of the drop in traffic. On the airlines side, millions have been invested in modern avionics for ADS-B, Area Navigation and Datalink. But the infrastructure is not taking advantage of this. If the discussion to separate air traffic control from AAI proceeds with proper airline consultation, this could be a step forward. I hope that it will provide the opportunity to focus on infrastructure upgrades in line with airline needs that make the best use of on board technology. After all, airlines will eventually pay the bill and the operating cost.

Global Standards

Global standards - many coordinated through IATA - have played a crucial role in the development of an air transport network that links the world. These standards should be at the heart of India’s aviation policy and commercial development. I have already addressed some deviations from the standards. Let’s compare the approach to safety and security.

Safety

On safety, governments and industry have harmonised to global standards. The results are impressive. Air is the safest way to travel. Our membership is committed to global standards. That is why all 230 IATA airlines committed to the IATA Operational Safety Audit (IOSA) as a condition of IATA membership. We are working hard to bring all our members on board. But airlines that don’t make the standard by the end of the year will be out of IATA. Air India and Jet are on the IOSA registry. I encourage India to join the growing list of over 20 governments incorporating the IOSA global standard into their national safety oversight programmes.

Security

On security, India has taken a major diversion from global standards. I was very disappointed to see the Indian Government mandate non-standard data transmission requirements for Advance Passenger Information (API). Airlines have spent millions to adapt their systems to UN-EDIFACT. This system is used by every other country with API programmes. India’s go-it-alone decision is an added cost burden for an industry that cannot afford it. India’s unique standard provides no additional security benefit. And it limits the ability of the government
to share information with other jurisdictions. This is a serious flaw for India’s APIS
at a time when increased cooperation is needed. This must change.

Environment

The closer that India moves towards global standards, the stronger its global voice will be including on the environment - one of our most important issues.

Aviation is responsible for 2% of CO2. Like all industries, we are being asked to reduce. Despite India’s investments in modern fuel-efficient aircraft, strong growth as you catch-up with the rest of the world means that India’s aviation emissions are growing.

IATA’s four pillar strategy on climate change is a comprehensive approach. Invest in technology. Operate aircraft effectively. Build efficient infrastructure. And use positive economic measures. IATA’s vision is to achieve carbon-neutral growth on the way to a carbon-free future.

I see two specific ways for India to help. First, by joining our efforts to reduce emissions by optimising routes, improving procedures and using best practice in fuel management. Last year IATA helped the industry save US$2 billion and 11 million tonnes of CO2. Our 2008 target is 10 million tonnes. It’s good for the environment and for the industry bottom line. Our work optimising procedures in three Indian airports achieved annual savings of US$23 million and 67 thousand tonnes of CO2 . Much more can and must be done. For example, saving a minute on each of India’s 2 million domestic flights would reduce emissions by at least 200,000 tonnes and save US$67 million in operating costs.

Second, India must be a strong voice for a global solution on economic measures. Europe is pushing ahead with a unilateral approach to emissions trading. It is illegal. What right does Europe have to charge an Indian carrier flying over Canada on its way to the US from Europe? And it will introduce market distortions. Flights from Europe to India that make a stop in the Gulf, for example, will face fewer taxes than direct operations. I hope that India will be a strong voice to follow the Kyoto vision of a global solution on environment coordinated through ICAO. As a member of the GIACC, the ICAO group that is spearheading efforts, India is in a unique position to support a positive result.

Liberalisation

India must also be a strong voice for greater commercial freedoms. Minister Patel’s liberalisation of India’s domestic and international markets created tremendous new opportunities although pressure on the infrastructure still demands urgent solutions. And the expansion of airlines led to a process of consolidation building stronger carriers. But we must not lose sight of one important fact: aviation is making India a better place by connecting business to global markets, expanding tourism and creating jobs.

Now we must look beyond India’s borders. The 60 year-old bilateral system must change so that the airlines that facilitated the global village can enjoy its benefits. Almost every other industry can sell its products where markets exist, start businesses across borders or merge and consolidate where it makes business sense. But airlines need an international treaty to start services and cross border consolidation risks traffic rights.

The industry crisis highlights the need for airlines to be able to run their business like any other business. In this extra-ordinary situation IATA is taking the unique step to host the Agenda for Freedom Summit in Istanbul on 25-6 October. Only progressive governments have been invited to start a discussion to work within the bilateral system for significant change. US, Europe, Canada, Singapore and Australia are strongly supporting this initiative. India is attending. I hope it sends high level delegates to showcase India’s progress and be a strong voice for change.

The Future

Asia is the future of aviation in 2010 intra-Asia traffic will be our largest single market.

IATA and India

Within Asia, I am paying special attention to India. IATA is investing heavily in India. With a strong local team led by our new country director Amitabh Khosla, who I know is a familiar face at CII. IATA’s presence goes back to 1996, when we launched our BSP - the settlement system between travel agents and airlines. Today it handles US$6.3 billion in India and we plan to bring cargo on board in 2009. This week we are launching an IATA global leadership development programme in Delhi with a focus on India, so that our senior management is fully aware of developments here.

Indian Leadership

India has an important industry leadership role to play. Europe and America are our industry’s history. Asia is our future. India’s enormous size and tremendous potential give it natural leadership potential on policy and infrastructure issues.

Today, the high price of oil and the downturn in the global economy have landed the industry, including India, in a crisis. It is a signal that India has some homework to do. Some short-term measures could make a big difference. These are:

  • lowering fuel taxes
  • eliminating the service tax on aviation
  • bringing infrastructure charges in line with ICAO policies
  • quickly making AERA an effective instrument to promote efficiency
  • working with IATA to optimise air traffic management
  • and aligning APIS requirements with global standards

Longer-term priorities are finding a solution to Mumbai capacity and modernising air traffic management with globally harmonised solutions that take advantage of technology on board the aircraft.

And I also count on India to be a strong voice of leadership on environment and commercial freedoms. To address these issues requires vision and commitment from government. It’s not just the Ministry of Civil Aviation, but the entire government must understand that aviation has a key role to play in the Indian economy and India’s aviation policies have a critical role in the region. The Committee examining the Financial Crisis for Airlines in India shows that the government wants to address the issues from the highest level.

My biggest concern is speed. This is a fast changing industry and India’s decision-making is too slow. The crisis highlights this.

Speed

Along with implementing short-term solutions, the Committee must find ways to speed processes. As a reminder of the speed at which this industry changes and the importance of global standards, I am pleased to present CII with a very special memento. As part of the IATA Simplifying the Business programme, we worked as an industry to implement 100% e-ticketing in just 48 months. This is one of the last IATA paper tickets that became a part of our history on June first of this year.

I am an India optimist. India is not just a great potential market. This great country has a natural leadership role to play. But it can only achieve this by addressing the issues of today’s crisis with quick decisions based on global standards.

I have positioned IATA to provide maximum support to government and industry leadership so that aviation can continue to fuel the Indian economic success story. I look forward to a bright future aiming higher and working together.

ADVERTISEMENT


Additional information

© International Air Transport Association (IATA) 2014. All rights reserved.