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National Conference on Civil Aviation with

State Ministers, January 18, 2008

Organised by the Ministry of Civil Aviation

Address by Mr V Thulasidas, Chairman, Federation of Indian Airline (FIA)

  • Hon'ble Ministers
  • Delegates from the States
  • Ladies & Gentlemen
It is a great pleasure for me to address the National Conference on Civil Aviation, in my capacity as the Chairman of the Federation of Indian Airlines. I do wish to compliment the Ministry of Civil Aviation for taking this timely initiative to engage with the States for building India's aviation growth. And I welcome all of our dignitaries and officials from the states.

Federation of Indian Airlines

The scheduled carriers in India, as some of you may be aware, came together to set up an airline industry body in India. The Federation of Indian Airlines - FIA - was established to address a collaborative growth-agenda for the industry - with an overall objective of safety & growth of civil aviation in India.

With the inception of FIA, India joins the league of major Aviation powers whose airline industry has constituted themselves under apex airline industry institutions - like the Air Transport Association in the US; the Association of European Airlines in the EU; or the Arab Air Carriers Association.

FIA operates through an Executive Council which includes all the Airline chiefs in India; and which meets periodically to take up common issues which have a bearing on safety, growth, passenger servicing & also discussion on aviation policy aspects.

The Federation has a separate and an independent secretariat; and we have also set-up functional committees on flight operations & HR among others, which bring together functional heads from each of the Indian carriers to deliberate on common-industry issues.

The Economic Impact of Aviation

To start with the obvious & the proven, let me state that An expanding aviation sector has a significant impact on the overall economy.

Numerous studies the world-over have brought-out a strong correlation between aviation growth and economic prosperity. Travel, commerce, hospitality, tourism and a host of other sectors benefit from business and wealth creation which aviation drives.

Growth in air traffic has enhanced demand for a host of critical service disciplines in the Aviation sector - from Pilots to aircraft engineers; and from Air Traffic Controllers to structural engineers and ground crew, among others. It is estimated that a 20% growth in air traffic infact results in a 8-10% growth in aviation manpower. In addition, for every single job added in the aviation sector, nine additional jobs are created in the overall economy. These jobs are in the unskilled & semi skilled sector.

Given the acknowledged competence and expertise of skilled Indian manpower, which has brought recognition globally, for example in the IT sector, aviation provides our states with an opportunity to skill and train their youth across multiple aviation streams.

Clearly, India's growing aviation market translates into increased connectivity and growth in trade and logistics

Aviation growth is driving investments

India today is the toast of commercial aircraft majors who owe a significant portion of their record-sales growth to orders from India. We are seeing a welcome transition of our economy with increased investments in related aerospace and avionics areas. Aerospace is clearly a cutting-edge industry and we believe that investments here will provide a tremendous technological impetus to Indian manufacturing.

The centre-stage which India has come to occupy for global aviation growth, bodes well for investments in a whole host of related sectors. We are seeing investments in MRO facilities for Engines and aircraft-frames; and for avionics & aircraft components.

Boeing has announced its plan to set up an MRO facility with an investment of US$100 million jointly with Air India; and Lufthansa Technik too has announced its plans to create an MRO facility at Hyderabad. EADS, the European aerospace and defence group of which Airbus is a subsidiary, has announced plans to invest $2.57 billion over the next 15 years in India in production as well as R&D facilities in India.

There are also investments in training establishments which are currently underway - all of which will go a long way in equipping our youth with knowledge and experience in a whole host of aviation disciplines - Pilots & Engineers certainly; but also professionals in disciplines like lease-finance and aviation law. The global aviation market is skill-starved and our States can well position themselves to reap rich demographic dividends.

Aviation growth is thus driving Investments; and the investments of-course reside and benefit our States.

States are the power-house for Aviation growth

Today's Conference puts 2 critical players in the emerging Aviation growth story of India, on the same platform. The 2 critical players being the States & the Airlines.

For the domestic airline industry quite clearly, the action is at the state-level. You would be well aware that the airlines have focused on providing increased air-connectivity to not just the state capitals, but also the Tier-2 / Tier-3 cities and townships in India. Improving and growing the connectivity for the states is our responsibility; one which the airlines are happy to undertake.

In the past 4 years, Airlines have grown the number of operational Airports in India from just 50, to now 82. FIA believes that we can touch 150 centres - which really will make air transport available in physical proximity to a large part of our rural populations.

Touching 150 would require active support of our States though, since many of these routes will be economically unviable. Any incentives & concessions by the states though, would help us carry forward our joint-agenda of providing connectivity. These concessions could be in the form of abolition of sales-tax at new airports; underwriting of seats on new city-pairs etc. - all of which will certainly encourage airlines to introduce new services.

FIA believes that our domestic Airlines need to engage the state-governments more closely to understand their growth-blueprints; and understand the states' perspective on transport & freight connectivity.

I would like to encourage you to leverage and use the FIA platform, to engage with the Airlines. We would welcome any dialogue which presents any insight or concern regarding where air connectivity may be perceived to be deficient in the state vis-a-vis economic potential. So we would welcome to hear what you and your state needs from the Airlines. And I offer you FIA as a vehicle to disseminate this to the Airlines.

The Sovereign (State) Responsibility

To just highlight how the States & the Airlines are stake-holders in each other's success, we need only study some of the responsibilities that you as State government are entrusted with.
  • The Responsibility of the state is to provide transport, especially mass-transport facility for its people, at an affordable cost. The Responsibility is also to provide infrastructure. Our Airlines provide mass transport connectivity at increasingly affordable & low-cost; they do so without being subsidized by the exchequer; and they also pay for their own infrastructure use. Furthermore, our Airlines provide air connectivity to remote regions of the country. This too, with no state funding unlike in Australia or the US where federal funds subsidise air services connecting remote communities.

  • The state also has a responsibility to providing education and training to its youth. There is also a responsibility towards employment opportunities for the youth. Here too an airline powered growth, positions our boys and girls to seek training in related disciplines and be poised for employability in global aviation positions.

  • And I do wish to remind you another of the State's responsibility, that of encouraging industry and enterprise. It is important that the health of Indian industry - of which Airlines & Aviation are a significant part - be also foremost in your mind.

Aviation is a Growth Driver

Aviation is a major growth-driver for the economy.

According to Airports 2007 survey conducted by Airports Council International, it is quite interesting to note that the top 6 airports registering the highest growth in the world are in India and China, which confirms the growing importance of these two markets given both their population size and their fast growing economies.

The highest growth from amongst Airports around the world in 2007 was registered by New Delhi Airport, at 28.4%, according to this International Airport survey.

Passenger traffic grew by 45% in 2006; and by 33% in 2007.

Infact, the Aviation sector has more than doubled between 2003 & 2006 in all respects - in terms of passengers, in terms of number of flight departures, in aircraft fleet; and even in terms of jet-fuel consumed.

The State of Airline business in India

I want to use our interaction today to also update you a bit about the state of the Airline business in India. This is to familiarize you with issues and challenges that our industry faces.

  • The advent of low-cost carriers in 2003 has transformed the Indian airline business. The liberalization of air services has brought about an influx of new carriers; which have competed fiercely in the market place; and the result is for all to see - where the fares have fallen dramatically and passenger volumes have increased dramatically as well.

  • While the sector is fiercely competitive on the demand side, on the supply side Airlines deal only with monopoly players - be it Airports; the fuel suppliers; & the aircraft and equipment manufacturers. While our business model demands a control on cost, there is a high cost environment all around.

  • Our Airlines operate as a small part of the larger global aviation environment - be it for aircraft-slots or for aircraft-finance.

Despite losses the Airlines are still adding fleet & adding capacity. We doubled our fleet size from 2003 to 2007; and the fleet size is expected to double once again to over 600 aircraft by 2010-11.

  • Globally, airlines have come out of the post 9-11 slowdown and started making profits; but Indian carriers are moving faster and deeper into the red. Globally, the passenger traffic grew by 5% in 2006 & the global airline industry recorded a profit of 5 billion. In India, our passenger traffic grew at 45% & still the Indian airline industry recorded a loss of 0.5 billion USD.

  • The more flights that our domestic airlines add to their schedule; and the more that they connect new towns & cities; the more losses do they incur. This sadly, is the reality of Airline business in India.

  • India's taxation policies have placed taxes on the inputs for Airlines. These fees and taxes on inputs are either not present in the U.S. and most of Western Europe, or are much lower there.

A health airline industry would make the sector attractive for foreign, as well as promote additional investments for the much-needed infrastructure. Financial health for our Domestic Airlines would allow them to invest in the growth of our fleet; our facilities; in expansion of connectivity; passenger servicing; and also to invest in employee retention and training.

States can address many Aviation Issues

There are a host of areas where some intervention by the States will, we believe trigger further expansion of Aviation growth in India.

  • There is a clear deficit on account of Airport Infrastructure which has come to hold back aviation growth. Flight movement per hour are being capped in an increasing number of airports in India. Congestion - both on the tarmac & in the air, has a impact both on the airline costs and also on the environment.

  • Both the air-side Airport infrastructure (runways, parking bays, apron, taxi-ways); and the air traffic infrastructure, needs to be ramped up. States are stake-holders in many new projects and in airport upgradation projects, and FIA believes that it creation of new infrastructure is critical & we seek you leadership in this.

  • The other issue is relating to City connectivity and the city-side and social infrastructure. If we want to leverage fully from the aviation activity, then connectivity of the airport through metros, expressways etc need to be looked at.

India's aviation growth has till now been fuelled solely by passenger traffic. Freight & cargo will be the next growth driver for Indian Aviation; and investments in warehousing, cargo airports, technology, e-freight, multi-modal connectivity etc, let me assure you, will pay rich dividends to your state.

The last issue & also my final point relates to ATF, and I wish to take this up in some detail.

The Reality on ATF

ATF has come to be the single-largest determinant of whether our Airlines can compete effectively with global carriers or not; and it is clearly the single most critical-issue for our Carriers.

ATF is Jet fuel or Aviation Turbine Fuel for short; and it is the single largest element contributing to the airline costs in India. ATF accounts for 40% of the operating cost of Indian carriers, as against a figure of only 20% for international carriers. Also, ATF is priced 70 to 90 % higher at Indian airports compared to international benchmarks. The ATF price in Mumbai in October 2007 for example, was Rs 41,105 per kilolitre as against the price in Singapore at Rs 23,064 per kilolitre, which is about 78% higher. The difference was 97% in the case of Kolkata. Paying near-double the actual price of ATF, quite clearly unsustainable for Indian carriers.

There are multiple factors and players which result in the high cost of ATF in India. There is a high base price charged by the Oil PSUs itself on top of which various taxes and duties are levied. Import Parity Price mechanism; Customs & Excise Duties charged by the Central government; Throughput fees charged by the Airport operators; are some of the other reasons for the unusually high cost of ATF in India.

The state Sales Taxes have a huge & a significant impact on the price of ATF.

As you are aware, though the VAT rates on inputs and final products are 4% and 12.5% respectively, the VAT Act allows higher rate to be charged for fuel and ATF under Schedule III of the States' VAT Act.

And there are many states which have kept the rate at levels in excess of what maybe termed fair.

ATF sold to turbo-prop aircraft and also regional jets is already categorized as "declared goods" under the sales tax Act. With crude touching US$ 100 per barrel this month & thus a further hike in ATF, we do need your support in extend the declared good status for all aircraft type - not just limiting it to the ATRs & Regional jet family of aircraft. This tax-variance on account of aircraft type is quite unique to India; and FIA seeks your support in addressing this disparity.

From the period of 2005 to 2007, the price of ATF has more than doubled.

Also, the flight-departures have more than doubled between 2003 & 2006, so has the fuel uplifted by the Airlines.

Given the doubling of both the fuel uplift & also the ATF price over the past few years, the contribution of revenue from sales tax on ATF to the state exchequer has also grown exponentially.

Between 2004 & 2007, the Revenue from Sales Tax levied on ATF has grown by 130 to 160 % on average for the states. ATF is also the fastest growing petroleum product line, compared to growth in revenues from other products like Motor Spirit or High Speed Diesel.

So the states are receiving a huge upside of the ATF sales-tax revenue - on account of the high ATF-price & the growth in ATF-uplift.

While the growth rate in revenues from Sales Tax on ATF have been significant, it still barely contributes 0.5% - 2% of the total sales tax collection in the States. The impact of a reduction on Sales tax rates for ATF for the state exchequer will thus be, we believe negligible

The impact on the Airline industry would however be huge & transformational. This essentially was, as the slide says - the Reality on ATF.

States are a critical stakeholder in Aviation Growth

I do strongly believe that our States are critical stakeholders in the growth of Aviation in India. A focus on revenue maximization alone by any stakeholder, at the expense of our Airlines may jeopardize this growth.

On behalf of the airlines I will say that we are keen to support the States in every way to enhance their agenda of growth & connectivity.

Once again I invite a Partnership between you and the Airlines; a Partnership which our Federation would be delighted to anchor.

I do thank you for your patience.

Thank you