Indian Defence Review

Air Asia

Infrastructure Development

Infrastructure remains a continuing challenge and potentially is the critical restraint upon the growth of India’s civil aviation. Only 21 airports in India served more than one million passengers in 2012, according to figures published by the Airports Authority of India (AAI) and some of these do not match Western standards. Six airports dominate the traffic statistics – Delhi, Mumbai, Chennai, Bengaluru, Kolkata and Hyderabad. Considering a ‘middle class’ population variously estimated at between 300 million and 600 million, India is woefully short of airports. The potential demand for domestic air travel in India will not be realized without massive improvements in airport infrastructure and there are reasons to question whether that can be accomplished on the scale required or in time to answer demand.

Despite the impressive recorded growth in domestic traffic, measured over the past ten years, air travel “penetration” in India (total domestic passengers divided by total population) has been reported at about five per cent far behind developed countries and one-fifth the domestic traffic of China which is only ten per cent larger.

A 2009 Deloitte Report on Indian civil aviation cites infrastructure limitations as “the weakest link in the chain” and indicates that only 45 per cent of the major city pairs in India have direct connectivity by air. The situation is even worse for the many ‘Tier II’ and ‘Tier III’ cities which have adjacent populations numbering into the hundreds of millions. The problem of un-served or under-served smaller cities has drawn attention at the highest level of the Central Government. Prime Minister Manmohan Singh, in late September, pledged that India would have 100 airports in small towns by 2020. The strategy to achieve this goal will be to privatize more of the larger airports so that the Government can focus on smaller facilities.

There has been considerable public discussion, in recent months, over new airport initiatives, as would be led by the AAI. Various strategies have been promoted, including privatizing more airports and promoting more private-public partnerships for airport modernization and new airport development. Earlier this summer, the ‘Mayaram Committee’ recommended 100 per cent FDI in existing airport projects. Also under consideration are reduced landing, route navigation and security charges for air services to Tier II and III cities.

A critical problem is in the limited availability of land, except where unused land can be found and dedicated for ‘Greenfield’ projects. The process to acquire land is rendered daunting under the present legal regime, though the newly enacted Land Acquisition Bill may help to abate the problem. Another problem is that the national and state governments have imposed sizable fees and concession demands upon private airport operators, raising a question as to whether a business case for investment can succeed. It remains to be determined whether the private sector will answer calls for new airport privatization initiatives without comprehensive reform in the way in which the national and state governments regulate and tax airport operations and economics. There is no doubt, however, that the private sector remains very much interested in opportunities to invest in the modernization of India’s airports. Eleven companies, including several industry leaders, recently responded to a call for expressions of interest in projects to modernize airports at Chennai, Lucknow, Kolkata, Ahmedabad, Guwahati and Jaipur.

Regional and General Aviation

Apart from the challenge to provide the necessary airports, air traffic management and security infrastructure, today the fleets of India’s civil carriers are optimized for high density passenger transport between primary city pairs. Although regional aircraft, especially turboprops, offer advantages in operating efficiently with short runways and from relatively less improved facilities, India’s carriers today have relatively few regional aircraft whether jets or turboprop. With uncertain demand and doubtful basic infrastructure, Indian carriers have been reluctant to purchase aircraft optimized for regional service. However, Government officials have spoken of intentions to conduct a trial to subsidize airlines to increase regional service. Air India has announced intent to lease turboprop aircraft to enhance connectivity to non-metro cities.

India has not clearly articulated policies to promote business and general aviation and various DGCA actions impose frustrating operational and regulatory barriers. India’s use of rotary-winged aircraft is surprisingly small, considering the utility of helicopters and their ability to serve areas lacking airports suitable for conventional, fixed-wing aircraft. Pawan Hans Helicopters Limited, a PSU, is reported to have less than 50 helicopters in its fleet. In 2012, the fleet size of helicopters operated by private concerns actually fell from 293 to just 266, according to a report published in September 2013. The root causes are said to include high import duties and the regulatory environment, where complex rules frustrate helicopter operation and add costs. The Central Government has said it recognizes the need for more heliports, in part to aid in disaster response and has expressed intent to improve the quality of training of helicopter pilots. Until these changes are accomplished, the rate of induction into private service of new private sector helicopters likely will remain very low.

Indigenous Civil Aerospace Industry

In recent months, the Prime Minister’s office announced plans for India to develop indigenously, a 70-90 seat medium range turboprop aircraft, ostensibly to answer presently underserved demand and to assist the Indian military in tactical airlift. The project also is intended to build up a domestic airframe and support industry. This is a commendable goal but its commercial viability and technical realism are open to question. The notional turboprop transport would face tough competition from ATR and Bombardier that already have products in this space and are working on larger capacity, even more efficient aircraft. Moreover, the Indian medium range civil aircraft could face aggressive competition from regional jets newly available from Russia and models soon to come from Japan, Canada, Brazil and China.

Realism should temper national aspirations. India’s track record in the domestic development of civil or military aircraft is not distinguished. There is no established private sector resource with the necessary competencies or technology to lead a new aircraft development program, much less to produce a civil aircraft in quantity that meets world-class safety and reliability standards. Unless the Indian Government agrees to underwrite the development program, there is not likely to be sufficient assured demand to justify the risk and expense of private development.

Indian leadership would benefit from assessment of the experience of other ‘BRIC’ nations in the development of national civil aerospace programs. Embraer in Brazil, of course, stands out as a shining example of how much can be accomplished. That experience took decades to achieve and may not be replicable. China’s experience is instructive and should serve to caution India. Creation of a domestic air transport industry has been a matter of high national policy, priority and investment. But China, despite the expenditure of billions of dollars and years of effort, has experienced continuing frustration and delays in three new civil aircraft that its state-supported enterprises have sought to bring to market – the XIAN MA60 turboprop, the Comac ARJ21 regional jet and the new Comac C919 single-aisle airliner.

There should be no question that India has the capacity to develop and sustain a civil aviation industry. The nation’s world-class accomplishments in many technology-driven areas speak to its inherent abilities and the potential of its highly educated workforce. India has announced it will open an aviation university in September 2014. But India should not underestimate the difficulty of “going it alone” to achieve the desired result. India should actively promote aeronautics in the private sector and encourage foreign investment. So long as India limits FDI and presents an opaque maze of regulations and approvals, it denies itself the opportunity to form successful ventures with accomplished Western companies to plan, design, develop and sustain a capable Indian civil aviation industry.

To foster a successful civil aviation industry will take decades. A coherent and consistent national policy is needed. India should welcome rather than frustrate foreign partnerships; its domestic industry will succeed only if it has access to technology and technical assistance from accomplished foreign partners. Those foreign partners will not put at risk their enterprise-critical technology without a high degree of assurance of return on their investment and without confidence they can do business in India without threat to their intellectual property or compromise to their business integrity. Continuing vigilance to eradicate routine governmental corruption is essential to attract ethical global partners.

If development of new aircraft is a long-term objective, India can focus with higher confidence of near-term success on creation of an aviation supply chain e.g. specialized service and manufacturing. India should harness its prodigious information technology and software development capabilities to contribute to the design, development, manufacturing and sustainment objectives of the major players in the global aviation industry. Certainly, India should facilitate and promote national resources for Maintenance, Repair and Overhaul (MRO) of civil aircraft. All of these areas today are subject to rules, regulations, policies, taxes and levies that frustrate accomplishment. For example, very high tariffs now inhibit original equipment manufacturers from importing into India the parts that are needed for MRO operation. These barriers should be removed and replaced with a responsible, businesslike, predictable administration of civil aviation matters. Senior government officials recognize the huge opportunity for MRO operations in India to service Indian aircraft but coordination of the necessary actions among involved ministries will be difficult particularly when the Finance Ministry may be asked to reduce taxes and tariffs to promote the long term opportunity.

Moreover, and most important, India needs to give national attention to civil aviation and establish a holistic national policy to promote both the industry and infrastructure needed. There exists a correlation between the effectiveness of civil aviation, both passenger transport and cargo and growth of the national economy. Stronger civil air carriers and a better aviation infrastructure will contribute to GDP growth. Successful nurturing of a civil aviation industry will add manufacturing jobs for India’s enormous population of skilled, younger workers.

Over the longer term, a credible aerospace supply chain will enable India’s airlines to buy aviation supplies and services from domestic sources, and this will help to reduce the pressure on currency accounts by reducing outflows to foreign sources. Aircraft that are operated in India should receive MRO within India. Indeed, the devaluation of the rupee increases the appeal of Indian-sourced supplies and services where costs are in rupees and receipts are in US dollars.

For several years, much attention has been paid to refinement to the Defence Procurement Policies and the accompanying ‘offset’ obligation that foreign sellers must buy from or invest in Indian sources in an amount equal to 30 per cent of the equipment sale value. India has been disappointed with the results from the offset program, as growth of indigenous capability has been slower than hoped. Better results would be obtained if India opens up its offset program to permit discharge by more transactions in the civil aviation sectors, including ‘dual use’ projects where a product or service could be used either for military or commercial purposes. Credit against offset obligations should be granted for work done by India-based aerospace companies with more than 26 per cent foreign ownership.

A fundamental restraint upon the willingness of India’s domestic companies to invest in military aerospace is that the size of the market is limited and the certainty of purchases is inherently in doubt. In contrast, the market for civil aviation is larger by orders of magnitude and its duration is essentially indefinite. The national Government would be well-counseled to devote more of its attention and energies to promotion of a civil aviation industry and infrastructure in India. Benefits to India’s national defence will follow.

Indo-US Partnership

The US and India are natural partners in the promotion of civil aviation in India. Since 2007, the US-India Aviation Cooperation Program (ACP) has operated as a private-public partnership to promote the growth of the civil aerospace sector in India. In July 2011, the countries signed a Bilateral Aviation Safety Agreement (BASA) in July 2011, to facilitate reciprocal safety and certification activities, and explicitly to promote an indigenous aircraft and aeronautical products industry with US cooperation and technical aid. Through the ACP, the US Government and leading American companies are cooperating and assisting Indian counterparts for the advancement of civil aviation across a broad spectrum. Several key opportunities are on the horizon for coordination of public and private sector initiatives between the countries.

A US-India Aviation Summit, sponsored by the US Trade and Development Agency and the Government of India, was held from October 29 to 31, 2013 in Washington, DC. Planning now is underway for the 4th International Exhibition and Conference on Civil Aviation to be held from March 12 to 16, 2014, in Hyderabad.

Note: Originally published in India Law News, Volume 4, Issue 3, Fall 2013 © 2013 by the American Bar Association.