Date: 23 September 2010
Confederation of Indian Industry, New Delhi
Thanks to Confederation of Indian Industry (CII) for today’s invitation. I am happy to see many familiar faces. Vijay Mallya chairing this event, the Chairman of Kingfisher Airlines, IATA’s newest Indian Member.
The industry mood is more positive than on my previous visits. Recovery from the global financial crisis is faster than expected. Traffic is 3-4% above pre-crisis levels. And this week, we upgraded our profit outlook from $2.5 billion to $8.9 billion.
In most industries, it would be a party if you more than tripled profits. But on $560 billion in revenues, this means our margins moved from 0.5% to 1.6%. That is still not enough to cover our cost of capital. With a $5.3 billion projected profit in 2011, this year will be the cycle peak.
Where does India fit into this picture? You are a leader in the world’s most interesting region - Asia-Pacific. The phenomenal growth of this region has seen it overtake North America as the largest single market with 647 million passengers. With a projected profit of $5.2 billion in 2010, Asia-Pacific is also the most profitable region.
India is sharing the success. Private Indian airlines are now reporting profits, or at least shrinking losses. In the face of major challenges, the Air India situation is also improving. Indian carriers will still lose an estimated $0.4 billion this year. And I am concerned about their $13 billion debt. In a market as rich in potential as India, this precarious financial situation indicates that structural weaknesses must be addressed.
This is not a call for bailouts. I welcome plans to raise new equity by some. I believe in creative destruction. The industry grows stronger from successes and from failures.
India is a big market – 42 million domestic passengers and 34 million international passengers. And there is still enormous potential for growth. India’s current capacity is 117 million seats per year. That’s 0.1 seats for each of the 1.2 billion population. The US has 3.5 seats per person. When India reaches that level of maturity, even with no population growth, it will become a 4 billion passenger market. Indian spending power is set to triple over the next two decades and fueling continued rapid growth.
Airlines with great ideas and different business models will enter the market. Some will succeed, and some will fail. This will make Indian aviation a strong center for innovation. But the creative destruction model only works if we get the basics right. This means safety, infrastructure, liberalization, costs, security and environmental responsibility.
Since my first CII dialogue in 2005, I have seen both great progress and great disappointments. Let’s review, starting with safety.
Safety is our number one priority. In 2009, there was one accident for every 1.4 million flights. That makes air transport the safest way to travel. The recent tragic Air India Express crash reminds us that safety is a constant challenge. Improvements are being driven by data. Next week, I will sign an agreement with ICAO, the FAA and the European Commission to exchange audit information. This will identify safety trends and help us to take action.
India’s rapid growth must be accompanied with a strong focus on safety. Setting up the Civil Aviation Safety Advisory Council (CASAC) is an important step. I congratulate the DGCA for their swift action and fast progress towards filling its nearly 600 new positions. As a member of this Council, IATA will contribute its global expertise.
I strongly encourage the Council to recommend that audit programs, such as the IATA Operational Safety Audit (IOSA), are mandated for all Indian carriers. All IATA members are on the IOSA registry. This helped them achieve an accident rate that is 2.5 times better than the global average. Taking advantage of this global standard will add a new dimension to India’s safety oversight.
Infrastructure is also critical. Developments in Delhi are impressive. The modernization and runway construction were efficient. The new terminal is fantastic. At 500,000 square meters, it is the eighth largest terminal building in the world, with a capacity of 34 million passengers. For the first time, India has hub potential to rival Singapore or Dubai.
Delhi traffic has already overtaken Mumbai. Every arriving aircraft brings business potential and tourism rupees to benefit the economy. Delhi’s plans to handle 100 million passengers by 2030 is very good news. The challenge will be to build capacity ahead of demand.
I have growing concerns over Mumbai. IATA is helping with stop-gap measures for incremental capacity. By 2016, Mumbai might be able to handle 40 million passengers. And then what? Where is Mumbai’s 100 million passenger plan? After years of discussion, there is still no agreement on a site for Mumbai’s second airport. The latest concern is environmental impact of the preferred site. Finding an environmentally responsible site is important. But the clock is ticking and a conclusion is urgently needed.
Even with enormous optimism, it will take many years between finalizing the site and opening the airport’s first phase. Every day that we wait is filled with lost opportunities. Mumbai ranks among the world’s great cities. But history tells us that no city remains great without efficient transport links. India has a well-respected democracy on an awesome scale. But democracy cannot be an excuse for bureaucratic logjams that delay critical infrastructure developments.
It is time for all parties to urgently work together. Agree on a site and get on with it.
Minister Praful Patel took an enlightened approach to opening markets. In the last 10 years, international frequencies nearly tripled to nearly 2,300 departures per week. And since 2006, passengers numbers increased by a third on international markets, including domestic by 70%. And average fares dropped by 27% for international travel and 35% overall. Consumers benefited with more choice and lower costs.
Carriers were challenged to improve their competitiveness. NACIL combined Air India and Indian Airlines. Jet and Kingfisher expanded internationally and absorbed several smaller players. And a low-cost industry was born.
In stark contrast to Minister Patel’s pragmatic liberalization, is the very old world approach to foreign direct investment in aviation by the Ministry of Commerce. India allows 100% foreign direct investment in mass rapid transport systems, ports and harbors, hotels and tourism, inland water and ocean transport, and toll roads and tunnels. But it restricts foreign ownership of airlines to 49%. And no foreign airline can invest in an Indian airline.
Why this unique restriction on airlines? The logic is very difficult to understand and is inconsistent with India’s open approach to other sectors. Does it make sense that a foreign airline could make a 100% investment in a green field airport project but cannot invest even one rupee in an Indian airline? Indian airline fleet investments could cost up to $140 billion over the next 20 years. Relying only on domestic sources limits competition and could lead to an investment gap. Moreover, the insular approach cuts India off from global expertise and global trends.
Airlines around the world are cooperating to build economies of scale and pursuing multi-hub, multi-brand strategies. Look at some major mergers: Air France-KLM; Lufthansa, Swiss, Brussels, bmi, Jade and Austrian; Continental-United; Delta-Northwest; British Airways-Iberia; Cathay Pacific, Dragon Air and Air China; and LAN-TAM in Latin America.
Where is India? Joint ventures in India have a long history. For example, Tata Motors began producing commercial vehicles with Daimler-Benz in 1954. And Maruti Suzuki captured 45% of the Indian market in a Japanese-Indian partnership. The success of India’s airlines should not be compromised by an investment policy that isolates it from the world.
Aviation must become a normal business with normal commercial freedoms. India is moving in the right direction on market access. I hope it will follow with a modern approach to capital investments.
A coordinated policy approach among Ministries is urgently needed. Efforts to reduce the high cost of Indian aviation illustrate how this is not happening. As part of the airports privatization, the Airport Economic Regulatory Authority (AERA) was established in September 2009. It has a critical role - independently enforcing ICAO principles to keep infrastructure costs competitive.
AERA is already delivering important results. AERA refused the application of Mumbai and Delhi for automatic 10% annual charges increases. Automatic annual increases are a license to print money, not a way to promote efficiency. AERA’s refusal showed that it is serious about cost efficiency.
But this progress is being compromised by the Ministry of Finance. Since 2006, it has imposed a 10.3% service tax on international first and business class tickets. The annual bill is $93 million. Such taxes are illegal by ICAO rules. It is an embarrassing situation for such a relevant country as India is an ICAO Council member and a signatory the Chicago convention.
In February, the Minister of Finance announced the extension of the tax to economy and domestic tickets at a potential cost of $624 million. Eventually a cap was agreed that reduced the added burden to $236 million. The disconnect between the Ministry of Finance and the Ministry of Civil Aviation has put India in an embarrassing position. It is not following the rules that it helped to create.
This is not the only example. India improperly collected $34 million in fuel sales tax between 1994 and 2001. Eight years after a parliamentary act made it illegal, and despite the efforts of Minister Patel, the Ministry of Finance has not complied and airlines are still waiting for the cash.
Another example is the disconnect between the Ministry of Civil Aviation, the Ministry of Home Affairs (Immigration), and the Ministry of Finance (Customs). Through ICAO, India helped formulate global standards for advance information on passengers to improve security. But India’s Immigration Bureau developed its own standards and processes which were enforced 18 months ago. Customs offices in Bangalore and Mumbai then added local non-standard requirements.
Each deviation adds costs but does not improve security or border control. The government committed to developing a program based on global standards with a single portal for transmitting data. The deadline passed and we are still waiting. But to add insult to injury, airlines are being threatened with fines for data transmission errors resulting from the complexity of the requirements.
India is an important player in the air transport industry, shaping global policies and standards. AERA is a shining example of the value of using global standards by local institutions. The Ministry of Civil Aviation has the foresight to reduce the costs of doing business. This is being compromised by other Ministries adding costs, reducing competitiveness, and making the Indian Government less influential in the global community.
For a successful aviation industry to deliver maximum economic benefit, all ministries and agencies must act with a common vision.
Lastly I want to address the issue of environment. The Kyoto protocol recognized that aviation is a unique industry. It gave ICAO the responsibility to find a global solution to manage aviation and its emissions in coordination with the United Nations Framework Convention on Climate Change (UNFCCC).
Environment is high on the agenda of next week’s ICAO Assembly. The global aviation industry has committed to a 1.5% average annual increase in fuel efficiency to 2020, capping emissions from 2020 with carbon-neutral growth, and cutting emissions in half by 2050 compared to 2005. No other industry has such ambitious global targets, and no other industry has such an impressive track record. Since 2004, IATA’s work has saved over 75 million tonnes of CO2. For example, working with the Airports Authority of India, this year we implemented new procedures that will annually save 333,000 tonnes of CO2.
UN Secretary General Ban Ki-moon commended aviation as a role model for other industries. But as a global industry, we can only achieve our targets with a global framework agreed by governments under ICAO. Next week’s ICAO Assembly is our best opportunity to achieve that in time for COP-16 in Cancun. Success is not guaranteed. India, for example, has some reservations. Let me address them.
First is the issue of Common But Differentiated Responsibility (CBDR). This is a guiding principle of the UNFCCC that separates the obligations of developed and developing states. ICAO operates by global standards with the principle of universality. An agreement at ICAO on a global framework for aviation’s emissions will not compromise the principle of CBDR in UNFCCC negotiations.
This is not just my view. The Executive Secretary of the UNFCCC, Christiana Figueres, formally confirmed this to ICAO and to our Aviation and Environment Summit last week in Geneva. Moreover, ICAO can develop solutions that accommodate the needs of developing states. A decade ago, ICAO achieved a global approach to noise that included extended timelines for developing nations. It can do the same with a global approach on emissions.
Second, we must be clear that the industry targets do not limit growth. Our goal is to find technology solutions that allow aviation to grow even as we cut our emissions. For example, sustainable biofuels could reduce our carbon footprint by up to 80%. Certification is expected within months, and commercial production could bring economic development to production areas in many parts of India. Until technology solutions are in place a global framework for economic measures is also a part of our strategy.
I hope that India will demonstrate a responsible position at this year’s ICAO Assembly. This means taking a strong voice supporting a global framework in line with industry agreed targets and opposing regional punitive schemes like the European emissions trading scheme.
I am a great fan of India. To support India’s success, IATA continues to expand its Indian operations. As IATA’s Director General, I have watched amazing developments under the leadership of Minister Patel. Arriving at Delhi Airport yesterday, it was clear that this could be the decade when Indian aviation will reach the potential that we have all been waiting for.
But there are no guarantees. Success must be earned with coordinated policies, a responsible position on climate change, cost-efficient infrastructure, competitive cost structures, a balanced approach to liberalization, and constant attention to safety.
India has come a long way in addressing the challenges of growth. The foundations are half-laid and IATA will continue its support to finish the job.