Challenges faced by the aviation industry

Aviation is an important parameter of a nation’s economic health. This is a vital industry which contributes significantly to the Gross Domestic Product (GDP) and provides employment to the masses. Which in turn raises their standard of living.

An overview of the Indian aviation industry

Indian aviation industry is one the world’s fastest growing industries. The Government has taken several measures over the years to offer an environment of growth to the industry players. The efforts of Indian Government was to transform the aviation industry into a more liberal and investment friendly industry. The Government modernized the airports added new airports in the country. The Government also offered improved FDI policies that have contributed significantly to the opportunities. Apart from Government’s efforts, factors like:

  • Increase in disposable income of the consumers.
  • Changing Indian mindset towards air travel.
  • Entry of low-cost carriers.
  • Greater inflow of tourists from all across the world.
  • And increase in air cargo movement.

All these factors have resulted in better opportunities for the aviation industry.

But the aviation industry is also confronted with severe challenges posing threat to the survival of air carriers. Though many new entrants have joined the industry, a large numbers have also withdrawn themselves owing to heavy losses. And many others are struggling hard to survive. Air India and Kingfisher Airlines are good examples of this crisis. A major reason for Kingfisher Airlines behind quitting the industry is the heavy losses.

Reasons behind the losses of the aviation industry

The industry observed a growth of 1.74% in the passenger traffic carried by scheduled domestic airlines for January-July 2012 over the same period in 2011 but still incurred heavy losses. Some of the many reasons behind these losses are:

  1. High Aviation Turbine Fuel (ATF) prices: ATF is the major cost component in the airlines operations. The cost of fuel for Indian operators accounts for nearly 45% of the total operating costs which is around 34% for most operators in other parts of the world. One of the major reasons is the high sales tax levied on ATF by respective state governments. In different states of the country, the sales tax on ATF ranges as high as 25-30%. Moreover, direct import of ATF was not allowed until recently.
  2. High airport charges: The airport charges are very high in India as compared to other countries. The Airports Economic Regulatory Authority (AERA) recently approved a massive 346% rise in Delhi’s Indira Gandhi International Airport charges making it among the world’s most expensive airports.
  3. Service tax: There is 12.36% service tax on air tickets in India. The aviation industry players frequently use third party services for ticketing, aircraft maintenance, ground handling and catering etc. which come under the regime of service tax leaving Indian operators into trouble in stiff competition. This service tax on air tickets and on the services purchased by Indian airline operators further add to the operating costs.
    Some of the big costs that the aviation industry has to bear.
    Some of the big costs that the aviation industry has to bear.
  4. Emergence of substitutes: Air travel in India is facing tough competition from railways. The railways were facing competition with the introduction of low cost air carriers therefore various steps were taken to improve the rail services in the country. Many new trains with improved service quality have been introduced offering passengers a good substitute comparing to air travel. Though there is an overall growth in air passenger traffic but this has affected the traffic negatively.
  5. Advancement in technology: Technological advancements in the field of telecommunication have also replaced the need for air travel to a greater extent. The corporate sector is increasingly utilizing communication technology like video conferencing in order to save time and costs. Virtual communication facilities have negatively affected air passenger traffic especially in the international travels.
  6. Stiff competition: There is stiff competition in aviation industry which leaves the operators helpless. High operating costs along with highly price sensitive consumer profile compel Indian operators to reduce passenger fares in order to compete for market share. This tendency to lure passengers through attractive discounts and low fares has resulted in price wars in the industry.
  7. Flight delays: Flight delays are a common and everyday scene but they leave huge impact on operators as well as the economy. The delays result into money costs, time costs and cost of lost demand because it discourages many air passengers. A delay in flights not only negatively affects the aviation industry but other industries as well because aviation largely connects people with their businesses.

There is a need to make joint efforts towards the growth of aviation industry rather than indulging in unhealthy competition and price wars. The Government should also implement strong measures to reduce taxes and improve infrastructure.

References

  • Dhoot, V. (June 4, 2012). “Aviation Ministry proposes abolition of service tax on air tickets & sales tax reduction on ATF.” The Economic Times.
  • http://dgca.nic.in/reports/rep-ind.htm
  • PTI (June 12, 2012). “IATA attacks India for rise in airport charges.” Business Standard.
  • PTI (September 9, 2012). “Ask State Governments to Cut Sales Tax on ATF: Commerce Ministry advises Finance Ministry.” The Economic Times.
  • “Indian Aviation Scaling New Heights”. (2009). Deloitte Touche Tohmatsu India Private Limited.

Ankita Agarwal

Analyst at Project Guru
Ankita is working with the editorial board of Project Guru as a Research Analyst and Writer. With Masters in Commerce and Business Studies, Ankita learned much of what she knows about management through experience. She has previously worked in various financial institutions like Birla Global, HDFC Ltd. and Citi Financial. She is self-motivated and writes for the Knowledge Tank section of Project Guru. She has authored more than 80 articles so far in Human Resources Management, Strategic Management, Finance and Marketing. She likes to pen her thoughts about the latest issues gripping these areas across the world.
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3 thoughts on “Challenges faced by the aviation industry”
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