Airfares to remain low; but brace for clogged airports, says KPMG’s Amber Dubey

In a relief to frequent and even occasional flyers, airfares may remain low despite the 14 per cent increase in prices of air turbine fuel in the past one year. “Given the level of competition, it looks like airfares may continue to remain low,” says Amber Dubey, partner and India head of aerospace and defence, KPMG.

But that doesn’t mean that flying will get any smoother in the short term. Dubey, who was instrumental in drafting the National Civil Aviation Policy, points out that capacity addition in airports, biometrics-based verification and reforms in immigration are imperative to develop the industry.

In an interview with Moneycontrol, Dubey said that despite the challenges, India had the potential to surprise the top two aviation powers, US and China, by 2030. 

Edited excerpts from the interview:

Competition and capacity addition have kept fare hikes in check. But fuel costs have gone up for the airlines. How long do you think the trend of low fares will continue?

The ATF price per litre in Delhi in March 2018 is around Rs 61.7, a 14 per cent increase over Rs 54.3 in March 2017.  The average international price of ATF in March 2018 has also risen by 22 per cent to $79.1 per barrel over a 12-month period.  The ATF price shock in India is cushioned since it is, and thankfully so, not directly linked to the international price movements.  The government has the ability to soften the crude oil price shocks by adjusting the high taxes imposed on ATF at the central and state level.

Many experts feel the ATF price will remain range bound and is not likely to show any dramatic upward spike, especially beyond the Rs 70 per litre mark that we last saw in August 2014.  Given the level of competition, it looks like airfares may continue to remain low.  On certain routes where airport capacities have become constrained or where there are lesser number of airlines operating, we are seeing high last minute fares especially in the peak hours and high demand days like festivals and long weekends.

Will rising fuel prices undermine the UDAN scheme, especially with states already struggling to contribute their part of the VGF (viability gap funding)?

UDAN scheme is well covered by contributions from passengers on trunk routes and dividends from Airports Authority of India (AAI).  It has brought in a mini-revolution by bringing many unconnected cities of India onto the national air grid. UDAN is too big to be allowed to fail, even in states that may have some short-term funding challenges.

What is your view on the Air India divestment? The way things stand, will global players be interested? What more does the government need to do to make this a success?

India is one of the fastest-growing and grossly under-served aviation market. Air India has 17% and 13% share in the international and domestic routes respectively.  It has significant untapped value in terms of fleet, slots, pilots and other assets.  It (the divestment) is likely to elicit interest from Indian carriers and some leading international carriers in collaboration with their Indian partners.

From the government to private players, there seem to be increasing interest in sea planes. But the past record hasn't been good. Do you think circumstances have changed, and seaplanes have a better future now?

India has over 7,500 km of coastline and 1,200 islands.  In addition there are hundreds of navigable waterbodies – rives, canals, lakes and dams.  All these are grossly under-utilized from a tourism, manufacturing and transportation perspective.  Countries in our neighbourhood have leveraged their much smaller coastline and islands in a far superior way to generate jobs, economic growth and government revenue.

Seaplanes offer an inexpensive alternative wherein one doesn’t need costly airport infrastructure.  Seaplanes have been tried in the past but faced problems due to lack of government support, low public awareness and opposition from local communities.  All this is likely to change now.

Seaplanes have a prominent mention in the future-oriented National Civil Aviation Policy (NCAP 2016).  One airline has already done demonstration flights.  One hopes that the seaplane regulations are framed quickly and we start flights at 10-15 locations in the next 12 months.

How do you see the year panning out for the aviation industry? Boeing's Dinesh Keskar said growth rate of the sector might come down to 12 per cent this year. What is your outlook?

The ten month data for April 2017 to January 2018 shows a traffic growth of 17 and 10 percent in domestic and international sectors respectively.  The total traffic growth works out to 15.3 percent.  Given the severe congestion being faced at Indian airports, many feel that the total traffic growth may taper down to 12-14 percent for the financial year 2017-18.  This is based on the assumption that the economy continues to grow at above 6.5 percent per annum, crude oil barrel price remains below the psychological $70-mark, point to point traffic especially between unconstrained airports continues to grow and fleet addition by Indian carriers continues at the same pace.  One also hopes that there would be no adverse events on the safety and security front that can send us back in time.

The next big wave in Indian aviation will come in 2022, when construction of new airports and capacity expansion at existing airports will be concluded.

If executed well, India has the potential to surprise the top two aviation powers, US and China, by the year 2030.

All the important airports in the country seem to be bursting at the seams. Do you think enough is being done to increase capacity?

The biggest bottleneck in our aviation growth story is the capacity constraint at our two megacities – Delhi and Mumbai.  Work at Navi Mumbai Airport and the bidding process for Jewar Airport near Delhi is on in full swing and is being closely monitored at the central and state government level.

Around 30 top Indian airports are likely to touch their full capacity over the next 5-10 years.  The government has to come up with a detailed roadmap for national airport capacity augmentation in consultation with state governments, airlines, travel trade, hospitality industry, funding institutions and other stakeholders.  It should be widely shared so that state governments and industry stakeholders can plan their investments, staffing and business activities well in advance.

There is a need for political consensus to amend the land acquisition act, LARR 2013. It has made land acquisition extremely cumbersome, especially for economic growth drivers like aviation and tourism.

Airlines are introducing wide body aircraft in the domestic sector to address rising demand and constrained slots.  Airports are developing rapid exit taxiways to enable lower runway occupancy time and hence higher number of flight movements per hour.  Air Navigation Services (ANS) need to expand capacity in terms of equipment and manpower.  The shift to satellite based navigation system, called GAGAN, in Jan 2019 will lead to better traffic flow management, shorter flights and lower fuel consumption.

There is a need to introduce biometrics based verification quickly, so that passengers can have a paperless movement move from cab to aircraft.  This will enhance speed of processing and better monitoring of suspicious passengers.  The enhanced passenger experience may lead to higher consumer spends at the airport resulting in more jobs, lower airport tariffs and higher tax revenues for the government.

Our immigration processes need significant analysis, global benchmarking and reforms.  The government has done well by doing away with the archaic forms.  Intelligence agencies have access to data on all passengers and can run data analytics tools to ferret out suspicious characters.  Immigration should shift to automatic e-gates like in many developed countries wherein most people who have no reason to be questioned simply walk through.