The Indian domestic passenger air traffic has not only rebounded but has already surpassedpre-pandemic levels, showcasing the pent-up demand for travel and the industry’s adaptability. India’s commercial aviation market is set to become one of the world’s top three by 2041, with a fleet size nearly quadrupling since 2019. According to the BoeingCommercial Market Outlook 2023, South Asia is about to welcome over 2,700 new airplanes in the next two decades, with 90 percent destined for India. This growth projection also demands approximately 37,000 pilots and 38,000 mechanics in the region, largely led by India.
India’s burgeoning middle class with increasing disposable incomes fuels the demand for air travel, both domestically and internationally. This prompts airlines to expand their fleets,benefiting aircraft manufacturers, maintenance, repair, and overhaul (MRO) providers, and related service industries. The growth in e-commerce drives demand for narrowbody conversions, and the expansion of India’s electronics manufacturing industry, especially inhigher-value segments, fuels cargo demand. The Indian Government’s regional connectivity schemes open up underserved markets, making air travel accessible to a broader population.Additionally, India’s positioning as a global manufacturing hub promises increased investment in aerospace manufacturing.
While India’s civil aviation sector outlook is promising, it faces some challenges amid rapid growth. As the industry aims for new heights, it must navigate a complex airspace ofobstacles.
Navigating Aviation Fuel Taxation
High taxes on Aviation Turbine Fuel (ATF) in India present a multifaceted challenge to thedomestic airline industry. ATF accounts for a substantial portion of airline operating costs, sometimes reaching as high as 40-45 percent, in contrast to global counterparts with fuel costs in the range of 20-30 percent. These high taxes strain airlines’ financial viability,potentially leading to reduced margins, exit from few routes, and fare hikes, hindering thesector’s growth. To alleviate this issue, the Government may consider bringing ATF under the GST regime at an optimum rate.
Meanwhile, as a short-term measure, the central and state Governments may considerreducing the excise duty and Value-Added Tax (VAT) on ATF, respectively. This will providerelief to airlines, fostering a healthy aviation ecosystem, and boosting tax collections. Lower tax rates on ATF stimulate passenger numbers, resulting in increased revenue and socio-economic growth for states.
Financing and the Cape Town Convention
As India embraces this aviation boom, the need for infrastructure and policies to sustain growth is evident, given the impending arrival of over 2,700 new airplanes. As lessors play an expanding role in India’s aviation, considering robust financing mechanisms is paramount. However, a critical challenge lies in the absence of India’s ratification of the Cape Town Convention, impacting the leasing environment. Without this ratified treaty, creditors lack priority in case of airline insolvency. This scenario introduces a level of risk for creditors who may face potential loss of their investment should an airline default on loan or leasepayments, resulting in significantly higher leasing rates for the Indian airlines. While the Indian Government is contemplating the ratification of the Cape Town Convention, a clear timeline for this process remains to be determined.
Enhancing India’s Maintenance, Repair, and Overhaul (MRO) Capabilities
As India’s skies swarm with an expanding fleet, robust maintenance, repair, and overhaul (MRO) capabilities are now imperative. Ensuring aircraft safety and reliability demands significant investments in MRO infrastructure and expertise. This effort not only enhancessafety but also fosters job creation and technological advancement in the aviation sector.
Presently, MRO is decentralized because no single entity controls all aspects, and critical segments are contractually governed by OEMs. While India handles line and hangar maintenance (Less than 20 percent of total MRO expenditure), over 80 percent goes abroad, primarily for component and engine maintenance. India missed the opportunity to localize these services a decade ago, resulting in their establishment in multiple foreign locations.
The primary challenge lies in component and engine MRO, where most spending occurs.However, new aircraft models driving local repair stations are a decade away. Efforts tobolster India’s MRO capabilities, especially in components and engines, are essential to support the growing aviation sector, create jobs, and enhance technological prowess.
We believe that to address these concerns, the Government can consider several steps.
• While airlines enjoy customs duty exemption, components and spares required for MRO continue to attract full duty, making Indian MROs less competitive.
• A 0 percent customs duty and expedited customs processing for these critical components may be considered.
• Ensuring that there are no restrictions on Goods and Services Tax (GST) input credits for Indian airline customers can significantly support the MRO sector.
• It is essential to confirm that MRO services provided to foreign aircraft flying into India, even for transit purposes, are zero-rated for GST. This aligns with facilities incompeting hubs like Dubai and encourages foreign carriers to choose India for MRO services.
• Ensuring a 0 percent airport royalty policy at all Government-owned airports is essential. Negotiating a similar policy at major privatized hub airports will furtherincentivize the sector.
• Implementing a minimum GST rate on spares and components used for MROs is crucial. The current effective GST often ranges from 15 percent to 28 percent,including engine components, which hampers the industry’s competitiveness.
• Developing policies such as Production-Linked Incentives (PLIs) for components and spares, along with tax waivers and priority sector lending, can incentivize capitalinvestments in the MRO sector.
• Co-recognizing DGCA regulations through bilateral agreements and memorandums ofagreement between FAA and EASA can streamline regulatory processes.
• Establishing guidelines and policies to facilitate convergence between civil and defence MRO sectors will ensure the efficient utilization of available infrastructure and capacit
In summary, as India’s aviation sector ascends to new heights, it’s crucial to prioritizefinancing mechanisms, taxation policies, and MRO capabilities to sustain this remarkablejourney. Striking a balance between growth and trategic investments and policies will ensure that India’s aviation narrative continues its upward trajectory, delivering benefits not only to the industry but also to the nation’s economy and its people.
This article was contributed by Mr Salil Gupte, Chairman, CII Aerospace Cmittee & President, Boeing India. It was first published in the October 2023 issue of CII ARTHA.