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Date: 25 July 2012

Remarks of Tony Tyler at the Confederation of Indian Industry

Thank you for the invitation to address the topic of Building the Future of Indian Aviation. This is my second visit to India this year. And it is my second engagement with the Confederation of Indian Industry (CII). India is a rising force in international aviation—with tremendous potential. At the same time, there is growing concern in international circles over its continuing challenges. CII is playing a critical role as a forum for the Indian business community to understand and influence the successful growth of this vital industrial sector. So it is truly a pleasure to be with you today for this important discussion.

Aviation is a topic about which I am passionate. It is a force for good, providing safe global mobility to some 3 billion people annually and delivering nearly 50 million tonnes of cargo. The most measurable impact of this is jobs for 57 million people and $2.2 trillion in economic activity. But, aviation’s contribution is much broader. By value, over a third of goods traded internationally are transported by air. And about half of international tourism is facilitated by air links. And later this week the world’s best athletes will gather in London for the Olympics—a celebration of human achievement that could not happen as easily without aviation.

Aviation in India

Aviation in India supports 1.7 million jobs, 0.5% of GDP and 90% of international tourist arrivals. That’s impressive but it could and will be much more. Today, India is a market of about 100 million passengers annually. Looking ahead, if Indians traveled as much as Americans, we would see a market potential of over 2 billion travelers.

To prepare for growing opportunities much can and must be done. For example, the work of the Airports Authority of India (AAI) on upper airspace harmonization was recognized internationally with a prestigious Jane’s Award this year. But despite such progress, India’s aviation sector is in a multi-faceted crisis. Before aviation can deliver greater benefits to the domestic economy, this crisis must be resolved with coordinated public policies.

Airlines in India

Building the future for a successful aviation sector must begin with solving the well-catalogued problems of airlines in India today. The sector is growing, but not profitably. Airline losses approached $2 billion in the year ended March 2012, after losing $3.5 billion over the previous three years. With some relief in oil prices and capacity rationalization the red ink may recede slightly. But the crisis continues. All the network carriers are struggling financially. Kingfisher’s situation is dire. And Air India is on government-provided life-support of financial bailouts and other forms of protection.

In the case of Air India, long-term state-aid has not rehabilitated the business and in the meantime it is having a destructive impact on the market. Governments must lay the foundations for fair competition and regulate safety, security and sustainability. And there are many examples of airlines being run on sound commercial principles while being partly- or wholly-owned by governments. Furthermore, while not desirable as a matter of public policy, governments sometimes find it necessary to intervene directly in the market, as happened in the US after 9.11 or with the restructuring of Japan Airlines (JAL).

The JAL case has some parallels with Air India. Both merged with a primarily domestic partner—JAL with Japan Air System in 2002 and Air India with Indian Airlines starting in 2007. The 2008 fuel price spike, global financial crisis and subsequent recession hit both carriers very hard.

JAL filed for bankruptcy in January 2010 and the Japanese government led a restructuring effort with an investment of over $3 billion.

There were many skeptics who thought that the constraints of Japan’s consensus-based culture would make it impossible for management to take the difficult decisions required to turn the carrier around. But they were proved wrong. The cuts were deep—some 50 routes and 16,000 jobs. That’s just short of a third of the workforce. With this bitter medicine, and other measures, JAL emerged from bankruptcy. After reporting a $2.5 billion profit in 2011 it plans to re-list its shares this autumn. There was controversy. A debate continues inside Japan over whether government intervention tilted the playing field against rival airlines. But I raise the JAL example to demonstrate what can be achieved in a short period of time if the parties are committed to a plan with clear targets guided by solid business principles.

In the case of Air India, even with government commitments approaching $6 billion, we are still waiting to be proven wrong. I don’t profess to have a comprehensive solution. But as a believer in India’s great potential, I urge all parties to take inspiration from the JAL example. Urgent and coordinated actions are needed to resolve Air India’s problems and return the market to normal commercial principles as quickly as possible.

Government aid must not be a blank check. Clear accountabilities and timelines for management, employees (including the pilots) and everybody involved have to be set. And transparent disclosure is needed to measure progress. Without this, the attempts to rescue the national carrier could well send the whole sector into intensive care.

The Agenda

Of course, stabilizing Air India is not a panacea. It’s one important step.

In March then Finance Minister Pranab Mukherjee announced the government’s intention to allow foreign airlines to make strategic investments in Indian carriers. This will be another important step—allowing Indian carriers the ability to benefit from closer ties with international airlines. I congratulate Mr. Mukherjee on his election to the Presidency. I hope the government will follow through with this policy change as part of a comprehensive strategy to fix India’s aviation crisis.

Even with India’s great potential, if critical problems are not comprehensively addressed, investors—foreign, domestic, aviation or otherwise—will not be lining up to put their cash in Indian airlines. Why? Simply put, because, under current circumstances, investors can’t see how they will ever enjoy a return. Despite the best efforts of the Ministry of Civil Aviation, a coordinated government-wide policy framework that will lay the foundation for those investments to yield profits does not exist.

For those who heard me speak in Hyderabad earlier this year, or who heard my predecessor in previous CII interactions, what follows will have a strong sense of déjà-vu. India needs policies to reduce the tax burden on aviation, lower external costs and ensure adequate infrastructure to meet growing demand. I will address these in reverse order.

Infrastructure

On infrastructure, India has shown that it can build world class facilities. In addition to the new terminal at Delhi, there are the airports at Hyderabad, Bangalore and Cochin, which have been developed via Public-Private Partnership—the so-called PPP model.

Bangalore is representative of the benefits of these developments. Over the last decade international services more than doubled to 17 destinations. And it certainly could not have become India’s Silicon Valley without international air connectivity.

Compare that to Mumbai, also developed under a PPP. Work is under way to expand the existing airport to handle 40 million. The new terminal will be ready by the end of 2013. And by 2017 the airport is expected to be running at full capacity once again. And there is no possibility of further significant capacity expansion. A new airport is needed or economic opportunities will be lost.
Consider that until a couple of years ago Mumbai was ahead of Delhi in terms of passengers. Today, Delhi is bigger. While this is certainly good news for Delhi, perhaps the Mumbai political and business communities ought to be asking some tough questions about the financial capital’s swift fall from the top spot and the impact that this will have on Mumbai’s future development.
I am pleased to see that Prime Minister Manmohan Singh has recognized the urgency of the situation and thrown his weight behind moving the Navi Mumbai project forward on a fast track—a project that goes back to the mid-90s. The 12th Indian Five Year Plan projects 274 million passengers flying in 2017. A “super-fast track” way forward may have to be developed to meet that expectation.

Costs

Infrastructure must also be affordable. Unfortunately, India’s airports are becoming increasingly expensive. The Airports Economic Regulatory Authority (AERA) approved a 346% increase in charges at Delhi Airport effective from May 2012. Including Consumer Price Index adjustments, that’s a 353% rise. How this ranks Delhi among the world’s airports has been the topic of much discussion. For the long-term success of the airport as well as India’s economic prospects, it’s the wrong focus.

The increase will add over $400 million  in operating costs for airlines providing connectivity to India through Delhi. That’s an indisputable fact. And any business that increases prices ahead of what the market can bear can expect demand to soften. Our estimate is that an increase of this magnitude will impact travel demand by 5-7%. That’s bad for airlines, for passengers, for Delhi International Airport Private Limited (DIAL), for the Delhi hub, for Delhi as a city and indeed for India as a whole.

AERA has given its decision based on its current reference framework. Mathematical formulas alone do not render decisions that are necessarily in the best interest of the national economy. We need to find a better balance to safeguard the important role of aviation in India’s national development.

In the meantime, the urgent short-term discussion we should be having is about how to make Delhi a more competitive airport, a successful hub and a major driver of economic growth for the city and the entire sub-continent. I hope that CII and other key economic and political stakeholders will ensure a robust debate.

Nobody wants DIAL to lose money. They have invested handsomely to build a world-class terminal. And unless they are turning a profit, the ongoing investments needed to maintain and build the hub will not be possible. At the same time, if airlines cannot afford to operate profitably from the airport, we have a problem of equal magnitude hanging over Delhi’s long-term success.

The middle ground might be found in the concession agreement. AAI gets 46% of DIAL’s top line revenue as a concession fee, much of which is then used to subsidize other public sector airports. This is in contravention of international standards, distorts competition and reduces Delhi’s competitiveness.

In the past, the government has shown flexibility in addressing the concerns of the airport developer in the form of an Airport Development Fee, which today contributes 27% of the total project cost at Delhi – compared to the private sector’s equity contribution of just 14%.

Now we need similar flexibility to address the much larger and more critical issue of Delhi’s cost competitiveness. I urge the government to initiate deliberations on utilizing the 46% concession fee to offset the increase in aeronautical charges and the cost for passengers.

This could be the basis for a way forward that protects the interests of DIAL, its airline customers, the fare-paying public, and the economy. And it is important that we find a workable solution soon to avoid Mumbai, with a similar concession structure, falling into the same dire situation.

Tax

The next element to address is taxation. Aviation can deliver the greatest value to national coffers by facilitating business that expands the tax base. Unfortunately, many Indian Ministries see aviation as a revenue source, rather than as a revenue generator.

At one level, the Ministry of Finance imposes a service tax on air tickets, landing and navigation charges. This contravenes International Civil Aviation Organization (ICAO) policies—policies which India as a long-standing Council member helped to set. Equally if not more damaging to India’s airlines are the taxes on domestic fuel that can add an additional 30% to the fuel bill. On top of that is an excise duty of 8.2%. It is no wonder that for Indian airlines, fuel is about 45% of total operating costs, compared to a global average of 33%.

Taxes may provide short-term gain for finance ministries at various levels of government but they are compromising the initiatives and strategic priorities of other ministries.

Earlier this month the Commerce Ministry announced a plan to increase India’s exports to $500 billion by 2013-14—double the 2010-11 level. They propose to do that by reducing transaction costs for exporters and ensuring they do not face non-tariff barriers in the importing countries. Reducing the tax burden to facilitate more competitive business travel and cost-efficient shipping should be part of this effort.

Similarly, in April Union Tourism Minister Subodh Kant Sahai announced that India would target 10 million tourists in 2017—nearly double this year’s expected arrivals. Foreign visitors arriving by air currently spend nearly half a trillion Rupees. Reducing visa requirements and increasing the supply of hotel rooms are a key part of the strategy to grow that spending. But that is not even half of the solution. Reducing costs and increasing capacity for the 90% of international tourists who arrive by air are equally critical elements of any strategy to increase tourist arrivals.

Coordinated Approach

Indian aviation has broad impacts across the economy. Increasing access to capital, building infrastructure, ensuring a cost-efficient operating structure and creating a tax regime focused on growth form the basis of an agenda to improve the competitiveness of Indian aviation and drive broad economic and social benefits. But there will be no success if policies are not coordinated--- or even worse—if they work at cross purposes. Aviation is the responsibility of the Ministry of Civil Aviation. Its success though rests on the coordinated efforts of the Ministries of Finance, Tourism, Commerce, Environment and others. It’s time for a grand plan to build India’s aviation future and thereby strengthen the Indian economy. For lack of a better description, what is needed is an “India Inc.” approach to manage interests for the widest possible benefit.

Environment

At the international level, India has recognized the importance of coordinated efforts in the environment debate. In fact, India is among the leaders calling for the European Union (EU) to forego its unilateral and extra-territorial inclusion of international aviation in its Emissions Trading Scheme (ETS).

And the resistance to the EU ETS should not be confused with a reluctance to deal with the important issue of managing aviation’s 2% contribution to global manmade CO2 emissions. Introducing a divisive regional ETS risks a trade war that nobody can afford. And it will not help the industry to achieve its goal of improving fuel efficiency by 1.5% annually to 2020, capping net emissions from 2020 and cutting net emissions in half by 2050 compared to 2005.

Governments come together at ICAO to set global standards. For example, earlier this month states reached agreement through ICAO on a metric to define CO2 standards for new aircraft. This is an important milestone that will help to ensure the maximum benefits from airline investments in future generations of aircraft.

ICAO is also examining options for market-based measures. Excellent work is being done by the technical experts to identify the best way of implementing market-based measures on a global basis in time for the 2013 Assembly. We are counting on India to play an active role in those discussions to ensure the global outcome that we all need. But getting agreement isn’t just a technical matter. Political forces must be aligned. And there’s little evident progress here – indeed the insistence of the European Commission’s Directorate General for Climate Action on the EU ETS makes the politics ever more difficult.

Nobody can deny Europe the credit for moving sustainability up the global agenda. States are focused on the issue as never before. The onus is on Europe to seize the moment, take credible action to defuse the situation and get on with finding the global solution for which everybody is hoping. And I am confident that India will continue to vigorously remind them of that.

Conclusion

Aviation is a team effort. Common purpose brings a value chain together with governments and regulators. Roughly 80,000 times a day a remarkable choreography of cooperation gets an airplane and its passengers and cargo safely into the air – and back on the ground. That happens in India and around our planet.

Knowing we are capable of that, we should have every confidence in building a successful future for Indian aviation.

The world is focused on Indian aviation—from manufacturers, tourism boards, airlines, global businesses to individual travelers, shippers and businessmen.

Now, if we can find common purpose amongst all stakeholders in Indian aviation, a bright future is at hand. India must not settle for a bronze medal in global aviation. I said it in March, and it has even more significance given the Olympics which opens later this week. If we can take decisive action on a handful of critical issues—restoring the market, reducing taxes, ensuring capacity and keeping costs in check—a gold is entirely possible. And the benefits of such an effort will be shared across the entire economy.

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