The fourth tranche of the Rs 20-lakh crore economic stimulus package announced by finance minister Nirmala Sitharaman has come in the form of reforms. Even as the aviation sector was hoping for easing of liquidity and direct injection of funds, Sitharaman chose an indirect path to provide relief. She touched upon three areas: freeing up of more airspace for civil use, privatisation of six more airports (in addition to existing 12 airports which have been awarded or identified), and making India an MRO (maintenance, repair and overhaul) hub.
Although the government has been making efforts across all these three areas for some years, it has ignited a fresh hope among the sector players in the middle of coronavirus pandemic. For instance, the FM has said that the government has plans to make India as a MRO hub so that the domestic aircraft don't fly outside of the country for their maintenance work. She said that efforts will be made to push engine and aircraft OEMs (original equipment makers) to set up shops in the country, and the aircraft component repairs and airframe maintenance will increase from Rs 800 crore to Rs 2,000 crore in three years.
At the moment, nearly 90 per cent of the (civil) aircraft maintenance work goes out of the country, primarily to Hong Kong, Singapore and Sri Lanka. That's largely due to high taxation, and the reluctance of foreign component OEMs to set up base in the country. Though starting April, the GST on the total MRO work has been reduced from 18 per cent to 5 per cent which should result in more business going to local MRO. "That's a huge benefit. To encourage OEMs to come to India requires liberal FDI policy. Government has large land bank to facilitate these OEMs to set up large infrastructure in the country," says Pulak Sen, founder secretary general, MRO Association of India, adding that the decision to converge defence and civil MRO would need more clarification because of the requirement of a separate set of certifications to repair defence aircraft.
In India, there are over 300 MROs but most of them are small entities. Even the large private players like AirWorks and GMR have their hands full due to limited capacities. Though Air India has major capabilities to do all kinds of maintenance work here - structural (mainframe), landing gear, component repairs and engine - it has started doing third-party work (for other airlines like GoAir) just two years ago.
The other big announcement on creating six more world-class airports through PPP (public private partnership) model is essentially an extension of the existing privatisation progamme that's being carried out by the nodal agency AAI (Airports Authority of India). By adding six more airports, government would give a total of 18 airports under the PPP model. These 18 airports would be on top of the eight airports awarded under PPP model over the years, including airports in Delhi, Mumbai, Bengaluru, Hyderabad, and others.
These 18 airports are in non-metro cities. In general, the air traffic from non-metro cities have been rising over the past few years, and given that point-to-point air connectivity is going to be the mantra for airlines in the post-Covid era, the development of non-metro airports have become a critical piece of the government's infrastructure development programme.
Last February, the Gautam Adani-controlled Adani Enterprises won the rights to operate, manage and develop six airports - Ahmedabad, Jaipur, Lucknow, Trivandrum, Guwahati and Mangaluru - for a period of 50 years. As per today's announcement, the annual revenues from these airports is likely to be Rs 1,000 crore annually (up from Rs 540 crore at the moment). AAI will also get a down payment of Rs 2,300 crore for these airports.
But that's not all. In addition to the six airports won by Adani Enterprises, the AAI has identified six airports that will be put up for bids shortly. Though FM Sitharaman didn't divulge the names of these six airports, they are likely to be Varanasi, Amritsar, Bhubaneswar, Trichy, Indore and Raipur. In total, these 12 airports (in round one and round two) would result in investments of Rs 13,000 crore from the private entities.
Experts say that bidding for the second round, which is going to happen soon, is not timed well. How? The bidding would hugely rely on historical data (passengers, etc) which under the current circumstances have no relevance. Investors need to take a long term view while bidding for such projects that have tenures of 30-50 years.
The changes in travel patterns in the post-Covid world (selective travel by individuals, cost-cutting by corporates) would impact demand for air travel, and investors would have little confidence in bidding at this stage.
Peeyush Naidu, Partner at Deloitte India, however, says that between the first round where a number of players had participated for the development of six airports, and the just-announced second and third rounds, a lot has changed in terms of impact on passenger traffic and the aviation sector.
"For this initiative to be successful, it would be critical to go back to the drawing board on a number of aspects, and tailor the structure and timing with respect to the potential 'new normal' in the sector as well as private sector interest and appetite at this time."
As far as domestic airlines are concerned, a relief has come in the form of freeing up of more airspace for the civilian aircraft by the defence forces. While the relaxations of airspace have been going on for more than a decade, there's still just 60 per cent of the airspace available for civil aircraft to fly. That's because military services use the rest of the airspace for their training and sorties. The move, as the minister outlined, would benefit the civil aviation companies by Rs 1,000 crore per year as there will be reduction in detours, and consumption of aircraft fuel.
Experts say that Rs 1,000 crore is nothing in front of the damage caused by the pandemic. As per ratings agency ICRA, domestic airlines are losing Rs 75-90 crore per day due to flight restrictions during the lockdown period. The airlines still have no clarity as to when they will be allowed to resume operations. In the absence of direct benefits to the airlines, their existence, particularly the smaller carriers, remains questionable. "I would have also liked to hear more relief measures for the civil aviation sector to keep it alive post-Covid-19," said Vishesh Chandiok, CEO at Grant Thornton India.
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