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“Need For Speed” in the Aviation Industry

“Need For Speed” in the Aviation Industry

By Sibin Sabu

Last month, when a relative of mine returned from the UK after 5 years, I asked him what his experience was like. He said that it felt like travelling in a tram after a bullet train ride. Life had slowed down all of a sudden. Transportation, in particular, was painfully slow. He asked me whether we still considered aviation a luxury or an essential commodity. This question stuck with me, and being a researcher, I turned to numbers for answers.

In India, aviation is still a distant dream for 99.5% of our population. Only 1% of the travelling population takes the aerial route.

The reasons include higher prices, lack of access to airports and limited connectivity via airways. Despite this, India is expected to become the third largest aviation market in the world by 2020, and the largest by 2030. Our relatively large share of young population and their rising purchasing power has made India the fastest growing aviation market in the world.

Until last year, the aviation industry had been growing unprofitably. Indigo was the only airline registering profits consistently. The recent slump in global oil prices resulted in declining costs of Aviation Turbine Fuel (ATF). Consequently, the industry has now propelled in a different direction altogether.

The price of Aviation Turbine Fuel (ATF) increased by a steep 9.2 percent on 1 Jun, 2016, resulting in an increase in airfares. | Photo Courtesy: Indian Express

The price of Aviation Turbine Fuel (ATF) increased by a steep 9.2 percent on 1 Jun, 2016, resulting in an increase in airfares. | Photo Courtesy: Indian Express

Despite the global price ease, aviation at home is costing more than it should. Airlines in India continue to pay a higher tax on ATF compared to those worldwide. ATF generally accounts for more than 40% of total operating costs for any airline. Its cost in India is 40 to 45% higher than the international costs because of high taxation. Furthermore, aircraft fuel is currently supplied by Indian oil companies, which are state monopolies. The ambiguity in this pricing mechanism enables them to exploit the system to their benefit.

This raises an important question. Why is the government insistent on keeping air travel expensive? To put it more directly, what is the rationale behind the high taxes on ATF?

Aviation vs Railways

One underlying reason could be that the government still considers aviation to be a luxurious commodity. Another reason could be that it doesn’t want state-owned enterprises such as the railways and oil companies to be affected.

Today, travelling long distances by a second-class AC train compartment would cost almost the same as travelling by a budget airplane. For instance, the cost of tickets from Hyderabad to Delhi by flight (booked in advance) is comparable to the ticket rate in a second AC train.

Here, it must be noted that the ticket fare of sleeper and AC compartments is subsidized by taxpayers’ money. All passenger services (with the exception of AC third tier) have registered losses as per a CAG report. The net loss on an operating passenger train for one Kilometre was estimated to be ₹138.75 in 2007-08. To add to this, the opportunity cost and loss of productivity incurred by travellers due to greater travel-time counts as an intangible loss. This indicates that the actual cost of travel by train is likely to be higher or similar to that of air travel for longer routes. It is, therefore, important to evaluate whether we need railways in all long-distance routes when the option of travelling by air is available.

Incentives for Indian Aviation

Given that ATF largely determines air travel fare, reducing tax on it for longer routes would make air travel cheaper than travelling by train.

Airlines could be a much better option when compared to railways for long-distance routes. For this, the cost must be brought down. Bringing ATF under Goods and Services Tax (GST) and rationalizing the tax can be a good beginning to cut these costs. The government could also incentivize air travel for long-distance routes. To reduce air travel fare in these cases, the tax structure could be altered such that the tax imposed is inversely proportional to the distance.

Railways could shift its focus to short-distance routes. This is likely to improve the efficiency and punctuality of trains as well. Long-distance trains are generally delayed more than short-distance ones. Railways would also be able to achieve better route optimization in short-distance trains. Consequently, the profitability of the sector would improve.

Under this model, people can still travel long-distance routes via trains if they so wish. The only difference would be that they would have to change two or three trains to reach their destination (similar to bus travel).

If the Indian Railways focuses on short-distance travel and air travel is incentivized for long-distance routes, the profitability of the aviation industry would increase. This would attract more players and competition would increase. As a result, prices will reduce even further.

One major challenge for implementing this would be the airport infrastructure, which as it stands may reel under increased traffic. At present, we have one airport for every 4.6 million members of our population, which is one of the lowest airport densities in the world. It is imperative to have much higher airport density for better and faster connectivity with Tier II and Tier III cities.

There is no doubt that speed has become synonymous with productivity and socio-economic development. The faster the travel, the better it will be. In light of this need for speed and in view of the vastness of our country, policymakers would do well to treat aviation as an essential commodity, at least for long-distance routes. Once this shift in perspective sinks in, reform will automatically sprout by itself.

Sibin Sabu is an academic associate at Indian School of Business, Hyderabad and specialises in Public Policy.

Featured Image Credits:  IMAM HARTOYO via / CC BY

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