[Infrastructure] Aviation Sector: No Frills Airport, ATF-tax reforms, Predatory Pricing, Safety Rating

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Mitrapal Philosophy
  1. Prologue
  2. Economic Survey Cli1: Aviation basics
  3. Aviation Current Affairs 2014
    1. A1: US downgrades India’s aviation safety rating
    2. A2: Predatory Pricing by Airlines
    3. A3: AirIndia joints star alliance
    4. A4: No Frills Airports
    5. A5: Need for ATF tax reforms

Prologue

  • GS3 Syllabus: Infrastructure: Energy, Ports, Roads, Airports, And Railways etc. So, combining new and old topics related to aviation-sector in this one page for quicker revision.
  • Some of these topics not directly relevant to mains but have utility in bank MCQs and interviews. Readers’ discretion advised.

Economic Survey Ch11: Aviation basics

Airport Authority of IndiaDGCA
  • PSU: miniratna category
  • Sovereign Air traffic controller of India.
  • Total 125 airports and 26 civil enclaves at defence airports.
  • Manages international airports, domestic airports, and custom airports.
  • Maintenance of cargo terminals, passenger terminals, radars, runaways etc.
  • directorate general of civil aviation
  • it is the regulatory body of civil aviation
  • registers of civil aircrafts
  • gives license to pilots
  • supervises gliding clubs
  • Investigates of minor accidents (so that MEDIA can create a BIG news out of it.)
  • implements Chicago Convention
How to start new airline?FDI in Aviation
  1. first get NOC from Civil Aviation ministry
  2. Home ministry checks background of individual promoters
  3. Then flight clearance from DGCA Directorate General of Civil Aviation.
  1. Foreign investors: upto 49%
  2. NRI: 100% investment
  3. FDI in cargo operations: 100%
  4. helicopter services: 100%
New players in Indian marketGreenfield vs Brownfield
  1. AirAsia (Tata 30%+ Malasian Airline AirAsia 49% + Telestra 21%)
  2. Air Costa
  3. Etihad (Abu Dhabi) invested 24% in Jet Airways.
  4. Quickjet Cargo Airlines
  5. Ligare Aviation
  1. Greenfield= built from scratch on undeveloped land.
  2. Brownfield= rebuilt or expanded on an existing facilities.

Greenfield airport reforms

  • Current policy: Greenfield airport can’t be developed within 150 kms of existing airport.
  • Jul 2014: Civil aviation ministry says we’ll permit, IF, existing airport unable to meet traffic requirement.

Budget 2014: Aviation announcements

  • Will develop new airports in Tier I and Tier II
  • will Implement them via PPP / Airport Authority of India (AAI)

Aviation Current Affairs 2014 (Jan, to Sept.)

A1: US downgrades India’s aviation safety rating

Topic in news: Jan-Feb 2014

  • US Federal Aviation Administration (FAA)
  • They reduced India’s safety rating from Category #1 to Category #2; meaning we’re as bogus as Ghana and Bangladesh.
  • Hell, even Pakistani Airlines are safer than India!

Main reasons cited

  1. India doesn’t have sufficient number of Flight operation inspectors.
  2. India’s aviation regulator Directorate General of Civil Aviation (DGCA) does not meet the safety standards set by ICAO. [as we saw earlier this post has become retirement house for IAS.]
  3. (conspiracy theory) America intentionally downgraded the safety rating to “teach” us a lesson for the  Devyani Khobragade controversy.

Consequences:

  • When Indian flights go to USA, their officers will do more safety checking = more time will be wasted, inconvenience to Desi passengers.
  • Jet airways’ share prices fell down.
  • Domino effect: Singapore’s aviation authority also started inspecting Indian aircrafts. The aviation regulators of EU, Japan, UAE may also reduce our rating – leading to more timewaste and inconvenience to passengers.

New update in September 2014 (Week2)

  • India’s DGCA [Directorate-General of Civil Aviation] says we’ve addressed those deficiencies.
  • He is hopeful that in a month or two, we should move back from Category II to Category I

A2: Predatory Pricing by Airlines

Topic in News April 2014

Spicejet Predatory pricing

Interview questions:

  1. What is predatory pricing: how is it good/bad for business/ economy?
  2. Why is Spicejet accused of predatory pricing?
  3. What has DGCA done in this regard?

What is Predatory Pricing?

  • Means deliberately selling product below the cost price, to eliminate competition.
  • Usually predatory pricing is done by firms with deep pockets (like Walmart), because they can afford to make such temporary losses.
  • in short, it may appear good to customers- because products available @cheap rate
  • But in long term, the firm establishes monopoly and starts exploiting the same customers.
  • Sometimes the strategy misfires, company makes heavy losses (e.g. AirDeccan and Kingfisher).

Why Spicejet accused of Predatory pricing?

  • They’ve launched a scheme “Rajiv Gandhi  One Rupee Air ticket”
  • Sounds good? but there are hidden terms and conditions
  1. Offer valid only if you book tickets during April 1 to 3.
  2. Only one or two seats offered in each flight under “One rupee” scheme.
  • So this is both “predatory pricing” + misguiding customers.
  • Spicejet already making losses, and now they’ve launched this scheme=> other aviation  companies will also be forced to launch similar schemes to stay on competition => everyone starts bleeding and making losses=> ultimately some get on verge of collapse like Kingfisher= staff salary not paid, loss EMIs not paid, Bank NPA increases and so on….

What has DGCA done?

  • Directorate General of Civil Aviation (DGCA) is empowered to take action against such predatory pricing (under Aircraft rule #135)
  • He has ordered Spicejet to immediately stop this scheme.

A3: AirIndia joints star alliance

Topic in News: July 2014

  • Star Alliance, the world’s largest network of airlines. Lufthansa, Air India, Airchina….total 27 members.
  • Air India latest member to join (2014, July).
  • These members coordinate arrival and departure times with each other => passengers’ waiting time reduced.
  • Joint ticketing, check-in and baggage facilities => smoother and faster travel experience.

Benefits to AirIndia’s premium customers:

  1. Will get “frequent flyer benefits” irrespective of airline chosen.
  2. Access to more than 1,000 lounges across the global network.
  3. increased baggage allowance
  4. Priority boarding and baggage delivery.

A4: No Frills Airports

Topic in news: Septeber Week2, 2014
Q. Write a shortnote on features and significance of No-frills airports. 200 words.
No Frills Airport

No frills airport features:

  1. Government wants air connectivity to remote / backward areas. But profitability is always a challenge, hence private sector not interested.
  2. Therefore Airport authority of India (AAI) will develop No Frills airports at such places, with  only basic safety and security features.
  3. No fancy lounges with airconditoners, no aerobridges, no carousels or conveyor belts for luggage. Single storey building without any posh glass-steel elevators….hence operational costs will be low.
  4. AAI will be able finish these airports in2-3 years, with just 85-90 crore investment in each. It’ll be able to squeeze profit even with very few passengers.
  5. 2014, September Week2: Government approved no-frills airports in five cities:
Not essential to cite all places in mains:
Arunachal  Pradesh1.Tezu
Rajasthan2.Kishangarsh, near Ajmer
Odisha3.Jharsuguda
Karnataka4.Hubli  and (5) Belgaum

In future, Government may give sops / tax benefits to private airlines, if they operate flights here.

A5: Need for ATF tax reforms

Q.Discuss the need for reform in ATF tax structure 100 words.

  • Airlines spend ~50% of the revenues on Aviation turbine fuel (ATF).
  • State Governments levy VAT on ATF.
  • Rates vary across states- lowest is Andhra Pradesh (1%), while some states charge ~30-35%.
  • India’s ATF taxes are among the highest in World.
  • Wilful defaulter Totally Awesome Vijay Mallya has repeatedly blamed high ATF tax for losses in Kingfisher.
  • Topic in news because Union has urged the State governments to rationalize their respective ATF taxes to a uniform level.
  • State Governments yet to respond. West Bengal, Chhattisgarh and Jharkhand most likely to oppose this move.

Mrunal recommends

  1. (free) NCERT, NIOS, TN-Books 4 History,Geo,Sci
  2. Indian Polity M.Laxmikanth (Hindi | English)
  3. Spectrum: Modern History (Hindi | English)
  4. Maths: Quantam CAT Sarvesh Kumar
  5. Objective General English SP Bakshi
  6. Word Power made Easy -Norman Lowe
  7. Topic wise Solved Paperset by Disha

12 Comments on “[Infrastructure] Aviation Sector: No Frills Airport, ATF-tax reforms, Predatory Pricing, Safety Rating”

  1. u keeepp on rockinng mrunal ji

  2. Can anyone help me with the difference between a frugal innovation and a low cost innovation? Isn’t frugal innovation by default low cost?

    1. @Monali,
      both are similar, however, they do not imply the same thing.
      frugal innovation means getting the same quality by saving the cost. low cost, on the other hand, means just ‘fixing the things’ to work. suppose, there is a cancer diagnostic tool that cost Rs. 100, that shows the test result using printer, speaker and screen. now, a frugal innovation will provide the same tool with option to select the medium for output, like – you can take a printout, hear via speaker or see it on screen. A low cost innovation will give the result only on screen simply because it wants to cut expenses on speaker and printer.

      1. Thank you for the explanation.

  3. @Rajtanil and Shivaram

    First of all congratulations to both of you for clearing the first phase and all the best for the road ahead.

    Now to business..

    As per wikipedia
    “The Convention establishes rules of airspace, aircraft registration and safety, and details the rights of the signatories in relation to air travel. The Convention also exempts commercial air fuels from tax.”

    India is a signatory to this convention (i guess ratified before independence) … What I don’t understand what is the difference between ATF and commercial air fuel.. Shouldn’t ATF be exempt from tax.. What am I missing here??

    1. sorry forgot to mention
      it is under Chicago convention

  4. The finance ministry is considering putting the aviation turbine fuel (ATF) under the category of notified goods, a demand that has been repeatedly made by cash-strapped airlines, struggling under high taxes on the jet fuel.

    ATF comprises about 40 per cent of an airline’s costs and due to huge state levy, it is about 50 per cent higher than anywhere in the world and is among the prime reasons for losses incurred by airlines.

  5. Mrunal sir, thanks a lot. U r just awesome… :-)

  6. my parents both are West bengal govt employee group c and income exceed 6 lacs I belong to sad gope ( this cast belong to obc category in central list ) am I eligible for obc non creamy layer

  7. Thanx a lot mrunal sir ……

  8. sir , You are doing a great job ,,, you are helping many upsc aspirants all over country . thank you sir …. god bless you

  9. thanku sir.. for the info !

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