Budget 2022: High-cost Environment Of Indian Civil Aviation Sector Needs Relook

Atul Chandra
29 Jan 2022
11:30 AM
3 Min Read

India’s commercial aviation sector operates in one of the highest cost environments globally and requires Government intervention for airlines to thrive in a post COVID environment.


Civil Aviation Sector Needs Relook

Expectations are high that new Civil Aviation Minister Jyotiraditya Scindia will leave his imprint on this year’s Union Budget to aid the aviation industry buffeted by two successive waves of the pandemic. Indian carriers have survived a total lockdown imposed in March 2020 and then faced an even more severe second COVID-19 wave a year later. 

Combined losses of Indian airlines in FY21 are expected to touch INR 20,000 crore, leaving many of them with weak balance sheets and poor liquidity. According to a report released by aviation consultancy CAPA India titled: Key Trends in Indian Aviation in FY2022: Impact of Second Wave, released last year, “The extent of the challenge is reflected in the fact that Indian carriers under-recovered almost INR 5,000 ($70) per passenger in FY21.” 

As per the consultancy, pre-COVID traffic is only expected to be restored by FY24.

It also remains to be seen if Scindia can convince the Finance Ministry to lower taxes on Aviation Turbine Fuel (ATF), meeting a longstanding industry requirement. Any announcement towards this effect will drive market momentum in the civil aviation sector, which is already on an upward trend with the successful disinvestment of Air India and its handover to the Tata’s earlier this week. 

Moving To Low-cost Environment  

The call to reduce Central Excise Duty on ATF received strong backing from IndiGo CEO Ronojoy Dutta earlier this month, who called on the government to strongly consider bringing it down from 11% to 5% to provide relief to airlines. Dutta said the civil aviation sector pays 21% of its revenues back to the government in indirect taxes and called for the removal of customs duty on aircraft spare parts. States such as Kerala, Andhra Pradesh, Meghalaya, Nagaland, Sikkim and Telangana have already brought down the Value Added Tax (VAT) on ATF to 1%, providing some relief to airlines. As of January 16, ATF prices averaged INR 80,000 per kilolitre for domestic airlines in India.

Civil Aviation Sector Needs Relook

Rising oil prices are a growing matter of concern for Indian carriers. Prices have already crossed the International Air Transport Association (IATA) estimate, the trade association for the world’s airlines. IATA had forecast that the price of Brent Crude Oil would average $ 67 per barrel in 2022, but tensions between Russia and Ukraine have already driven prices past $ 90 per barrel. In 2021, the average price of Brent Crude Oil was nearly $ 70, up from an average of $ 43.5 per barrel in 2020. 

Growing Airport Infrastructure

The Union Budget 2022 is also expected to support the growth of aviation infrastructure in India, which is vital for the entire industry’s growth. The Airports Authority of India (AAI), which owns 136 airports in India, will implement government initiatives in this arena. The civil aviation sector will remain an important sector of the Indian economy, and according to the Ministry of Civil Aviation, this sector has a high output multiplier of 3.25 and an employment multiplier of 6.1. Moreover, air connectivity directly promotes tourism growth, output growth, employment generation, and other indirect benefits to the economy. 

Over the last five years (FY17 to FY21), the government and AAI have spent approximately INR 17,784 crore in renovating/building airports. MoCA has already accorded in-principle approval to set up 21 Greenfield airports, requiring investments of INR 36,000 crore. In comparison, China, the world’s second-largest and fastest-growing civil aerospace and aviation services market, had 241 large commercial service airports by the end of 2020. It plans to build more than 200 new airports while expanding many others over 15 years. According to Oliver Wyman’s MRO Market Economic Assessment, China is expected to become the largest air travel market in the world by 2030. 

Maintenance, Repair, Overhaul (MRO)

Despite the growth in passenger traffic and the number of aircraft operating with Indian carriers, the MRO sector has not kept pace due to restrictive government regulations and high taxation. Airlines in India had approximately 700 aircraft in their fleets as of last year, but in the past, they have been forced to send the bulk of these aircraft outside India for MRO work. As a result, nearly 80% of the aircraft with Indian carriers are narrowbody single-aisle jetliners (mainly Airbus 320 Family and Boeing 737 Family), approximately 14% are regional transport aircraft, and 8% are widebody twin-aisle jetliners. 

The market size of the MRO industry in India has remained stagnant at INR 5,500-6,000 crore over the last few years and has been unable to cross the magic figure of INR 7,500 crore ($1 billion), despite India’s attractive location as a gateway between the Middle East and Asia-Pacific, along with low labour costs and a large English speaking workforce. In comparison, China’s MRO market is slated to grow at 10.5% annually over this decade to reach a market size of approximately INR 168,000 crore ($ 23.1 billion) by 2030.

Civil Aviation Sector Needs Relook

The MRO industry has certainly benefited from the government’s earlier move to reduce the GST rate on domestic MRO services from 18% to 5%. In addition, it had set a target in 2020 to increase aircraft component repairs and airframe maintenance from INR 800 crore to INR 2,000 crore by 2023. However, additional incentives are required to enable the large investments that MRO providers need to make in equipping themselves with the latest technologies. 

Towards this end, measures such as reducing the purchase cost of spare parts for MRO activities through GST reduction or waiver would provide the necessary impetus. Government initiatives such as the allotment of land for MRO services for 30 years will also give a much-needed boost to the industry. In October 2021, AAI had issued a Request for Proposal (RFP) for leasing of land for establishing an MRO facility on Design, Build, Operate, Maintain and Transfer Basis (DBOMT) at Bhopal, Begumpet (Hyderabad), Chandigarh, Chennai and Juhu Airports. AAI has also rationalised the airport levies on MRO services’ providers, including concession fees and additional charges leviable at airports across the country to encourage MRO activities.

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