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SEPTEMBER 2014 ISSUE

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Force Magazine

The Road Ahead
Indian aviation sector can flourish if the government makes some fundamental structural changes
 

By Palash Roy Chowdhury

Pratt and Whitney It is well established that the Indian aviation sector has shown robust growth over the last decade and continues to offer significant potential for further growth in the coming years.

Aviation is a key infrastructure sector that is instrumental in the economy’s development. It increases the pace of urbanisation and technology enhancement that leads to employment opportunities.

India continues to add more than 10 million people on an average to the workforce every year. Millions of people are migrating to urban centres in one of the largest urban exodus in human history. These megatrends, coupled with infrastructure investments and the advent of low cost airlines, are some of the key drivers of growth in travel and aviation sectors.

The India aviation sector has been one of the fastest growing aviation sectors globally and has grown three times in the last decade. The total passenger traffic stands at more than 160 mn per year. Billions of dollars are being invested by the government and the private sector on world-class airports and billions more are being invested by airlines in state-of-the-art aircraft. In just the last three years, Indian operators have ordered more than 350 aircraft which will double the size of the flying fleet today. The megatrends continue to drive growth and the sector is expected to triple in size once again to 450 mn passengers in the next decade.

However, beneath these spectacular numbers lies a sector that needs fundamental structural change to keep pace with growth. Today, a large number of key sector participants – airport operators, airlines, MRO operators - are going into losses, a situation that is not sustainable in the long term. Additionally, while investments are happening in the scheduled airline and airport segments, there is a general disregard for the rest of the aviation ecosystem including key areas such as MRO, manufacturing, general aviation including rotorcraft.

A change in mindset, along with focus on economics, operations and talent should offer a roadmap for India Aviation.

Unfortunately, this is an industry where participants continue to be burdened by artificial and outdated regulations that overshadow the fundamental advantages that the country offers. India needs to quickly create an environment that attracts global investment. The root cause of the challenge lies in India’s onerous tax laws. MROs have to deal with a slew of charges including airport royalties, customs duties, service tax on labour, and VAT on total landed cost of spare parts.

The loss to the nation is colossal. It is estimated that of the USD700 mn in MRO spend last year, over 90 per cent went offshore. This not only impacted local MRO players, but the nation lost out on tax revenues, technology and capacity development and employment opportunities, and airlines were further exposed to long supply chains and global currency risks. Airline tax policies including Aviation Turbine Fuel (ATF) and airport tariff policy are other areas that need focus and rationalisation.

Hence, the government should identify aviation as a sunrise sector, offer investment incentives and create a path of least resistance for Foreign Direct Investment. Most large Original Equipment Manufacturers (OEMs) are introducing their next generation product families and looking for investment opportunities to be closer to their customers.

 
 
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