When it comes to EXIM trade in India, the commentary is almost always about sea ports and issues related to them. Air cargo, unfortunately, despite being THE preferred mode when it comes to urgency, has taken a backseat. And this has affected the sector’s performance resulting in zero-growth for the last four years. Can India’s air cargo sector come out of the slump? If yes, what will help it take off? The Dollar Business presents an exclusive analysis.
Sisir Pradhan | July 2015 Issue | The Dollar Business
The legacy of civil aviation sector in India dates back to 18th of February, 1911, with the first commercial flight from Allahabad to Naini, located just a few kilometres away. Interestingly, that flight is still considered to be the world’s first airmail service. Later, in 1915, the Tata Group introduced regular airmail services between Karachi and Madras – the first attempt to tap the air cargo sector in the country.
The take off
After independence, India’s airspace was mostly dominated by two public sector entities – Air India and Indian Airlines. But after deregulation of the civil aviation sector in 1991, two private airlines got the permission to operate charter and non-scheduled services under the Air Taxi Scheme. Both operators were given freedom to decide their flight schedules, as well as cargo and passenger fares. Later, following the abolition of the Air Corporation Act in 1994, private airlines got the permission to operate scheduled services. This saw a flood of private airlines like Jet Airways, Air Sahara, ModiLuft, Damania Airways, NEPC Airlines and East West Airlines commencing domestic operations. The real turning point in the Indian civil aviation sector, however, was the launch of low-cost carrier – Air Deccan – in 2003. Around the same time, India’s aviation sector got another major boost – privatisation of airports. In no time, private investment was flowing into airports, both directly, as well as through the PPP mode as is the case with Mumbai, New Delhi and Bengaluru airports. Today, PPP airports handle around 70% of India’s air cargo traffic. For, of the 2.28 MMT air cargo traffic in India in FY2014, while Chhatrapati Shivaji International Airport in Mumbai handled 0.64 MMT, Indira Gandhi International Airport in New Delhi handled 0.6 MMT, and Kempegowda International Airport in Bengaluru handled 0.24 MMT of cargo.
It might be a surprise to many but in India outbound air cargo traffic is, at times, more than inbound air cargo traffic!
Clogged engines
In the early 1990s, the Indian government adopted an Open Sky Policy, more due to compulsion than out of choice. For, liberalisation of economy in 1991 saw a surge in cargo traffic. But while India had 10 major sea ports, in case of air cargo, the onus was mostly on just Delhi and Mumbai airports, which didn’t have the capacity to handle the burgeoning traffic. Moreover, since air cargo is mostly used for only high-value or time-sensitive cargo, the capacity constraints at both Mumbai and Delhi turned out to be nightmares for exporters and importers. Hence, in 1992, the government permanently adopted the Air Cargo Open Sky Policy, which allowed all domestic and foreign carriers that met operational and safety requirements, to operate scheduled and non-scheduled cargo services to/from any airport in India that had Customs facilities. In addition, a regulated regime for cargo rate was abolished and carriers were allowed to fix their tariff. The opening up of the sector saw a spike in international cargo traffic, primarily due to a rise in scheduled services by foreign airlines as carriers like Lufthansa, Air France and KLM doubled their capacity in the country. However, though the initial years post-liberalisation saw strong growth and the promise of a rosier future, soon, infrastructure bottlenecks, shortage of warehousing facilities and other support services started playing spoilsport. In fact, the health of India’s air cargo sector can be gauged from the fact that while the country’s total trade has risen by 22.4% since FY2011, its total air cargo traffic has actually fallen 3% during these four years!
Infrastructure bottlenecks and shortage of warehousing facilities are playing spoilsport for Indian air cargo industry
From under the nose
A Working Group Report by Ministry of Civil Aviation, published in 2012, says, “Evidence from the 2007 and 2010 Logistics Performance Index (LPI) indicates that, for countries at the same level of per capita income, those with the best logistics performance experience an additional growth of 1% in GDP and 2% in trade.” Similarly, according to International Civil Aviation Organisation (ICAO) the output and employment multiplier of the aviation sector are 3.25 and 6.1 respectively. This means every Rs.100 spent in the sector results in an addition of Rs.325 to GDP and every 100 direct jobs created in the sector results in 610 jobs in the larger economy. Given these facts, the stagnation of air cargo traffic in India is a big cause of concern. But what exactly has caused this slowdown? And is the slowdown just specific to India, or is it a problem with air cargo all over the world?
Grounded.
In a written response to The Dollar Business, ICAO says, “Today, air cargo is faced with a range of challenges. Although aircrafts move well over $5 trillion worth of goods by air each year, the significant growth being projected for this sector, not to mention its role as a critical enabler of trade and prosperity, require that its processes, procedures and the international standards supporting its global effectiveness become better aligned with modern demands and capabilities.” Brandon Fried, Executive Director, The Airforwarders Association, is also of similar views. “Harmonisation of Customs and security regulations is essential. Here in US, air cargo advance screening is being introduced, wherein shipment data before departure will be screened based on the seven data elements that the World Customs Organisation has established under its Safe Framework doctrine. We hope India also does the same thing,” he tells The Dollar Business. While synchronisation, harmonisation and alignment with global processes and procedures are important, if India’s air cargo sector really wants to take off again, it is also saddled with a structural challenge – trade imbalance. For example, Keshav Tanna, VP, FIATA (International Federation of Freight Forwarders Associations), says, “The last three years have been, perhaps, the toughest as far as international freight in India is concerned. A complete breakdown of government EXIM policies causing huge trade imbalances, resulting in airlines shying away from the Indian market and in fact pulling out capacities has been the main reason for this.” While not as critical as Tanna, Tulasi D. Prasad, Chairman (Hyderabad Sub Region), The Air Cargo Agents Association of India, also thinks trade imbalance is a major headache for the sector. “The overdependence on just one category (pharma drugs exports) is a concern. We had a lot of hope from the solar industry, but it hasn’t taken off the way we expected. In India, major export commodities that use air transport are textiles, readymade garments and cotton made-ups. Engineering products are also being exported through air, both by PSUs and PSEs. There is great potential in agri products, fresh fruits and meat. If these commodity exports grow, air cargo volumes will grow by 2x to 3x,” he tells The Dollar Business, trying to sound optimistic.
In India, airports built and operated under the PPP model, like the ones in Mumbai, New Delhi and Bengaluru, account for almost 70% of the total air cargo traffic.
For busier skies
A peculiar aspect of India’s trade is that despite the country’s massive deficits in value terms, when it comes to volumes (ex. oil), outbound traffic is, at times, much higher than that of inbound traffic! And this shows in the composition of the country’s air cargo traffic as well. For example, the mentioned Working Group Report reveals that in FY2011, while the volume of inbound air cargo traffic was 6.6 lakh MT, the same for outbound traffic was 8.4 lakh MT. Such imbalances mess up an airlines’ ability to provide competitive quotes because many-a-time, their aircrafts are forced to fly empty. And while this has been a perennial issue with India’s air cargo sector, factors like volatile ATF prices and high taxes at airports have also played a significant role in ruining the prospects of India’s air cargo sector. Moreover, when it comes to airlines and airports, the debate has almost always focussed on the passenger side of the business, thereby never really giving the air cargo sector its due. Validating this, Tanna adds, “Somehow, we in the cargo sector always feel that we get a step-motherly treatment as compared to our passenger colleagues. There is no doubt that the aviation industry is more passenger-centric and cargo gets a clear backseat.” It’s shocking that a sector that is responsible for transporting materials like life-saving drugs, is languishing for almost half-a-decade. While it is playing its role in savings others’ lives, no one is ready to provide it with the life-support it needs. Are the sky gods listening?
“In United States, airlines that deal with only cargo are doing well” - Brandon Fried, Executive Director, The Airforwarders Association
Brandon Fried, Executive Director, The Airforwarders Association
TDB: How have factors like volatile ATF prices, terror attacks, tighter environment norms etc. affected the air cargo sector in recent years?
Brandon Fried (BF): These are the three major factors that have a direct influence on the aviation sector. First is security. In the past 10 years, although security threats have been minimised, the implementation of several mechanisms to ensure it has led to additional cost, not only on the passenger side, but on the cargo side as well. In United States, 100% of the cargo is screened, which has inherent costs associated with it. Although the industry and freight forwarders have joined hands in a programme, where they screen the cargo away from the airport, it too adds to cost due to transportation, constant audit and validation processes. Then there are requirements for compliance and security staff etc. The second major influence on the air cargo sector is fuel. Although crude oil prices have come down in the last few months, it will rise again. Many global airlines were not making money until the recent fall in fuel prices. Now, let’s talk about environmental concerns. Airlines have to purchase aircraft that are not only noise compliant, but also emission compliant. One has to understand that the airlines sector is inherently dirty as aircraft emit a lot of carbon. Although aircraft engines are becoming more efficient, both in terms of fuel and emission, they come at a high price.
TDB: How does the air freight industry add value to the entire supply chain?
BF: Air freight is a necessary link in the cargo supply chain. It might represent a small percentage of international trade by volume (less than 3-4%), but it’s certainly a big chunk in value terms (30-40% of the total cargo moved globally). It could be about 10 times more expensive than other modes of transport, but it is the only possible mode if one has to transport an essential part or machinery to a factory or assembly line or transport a vital organ to a patient.
TDB: How has technology contributed to the growth of this sector?
BF: Aircraft technology has been playing a major role in the growth of the air cargo industry. And it is expected to remain an important component for the future success of the sector. However, it can’t be considered the sole factor. Shippers want transparency in the entire cargo delivery process, right from the immediate location to the actual time of delivery. Here too, technology plays a vital role.
TDB: Aircrafts are getting bigger by the day. Do you think they are the way forward?
BF: It is no secret that freighter aircraft are losing popularity as bigger passenger planes, which have plenty of cargo space, are making inroads. Boeing 777 and Airbus A350 are some of the larger passenger carriers, which can fit in a lot of cargo. The Asian carriers are buying them and minimising the emphasis on freighter airlines. In United States, there are not many wide-bodied aircraft flying within the country. So, a lot of cargo gets transported either through trucks or by integrated carriers like FedEx and UPS.
TDB: How economically viable is it to move cargo by air within a country, particularly in those that are spread over a large area like US, China and India?
BF: In places like China, road transport is less expensive. But over vast distances, when time is short, air cargo is the only viable choice. India, though, has separate challenges altogether, including its legendary road infrastructure issues that have been a factor in obstructing the country’s commercial development. I wouldn’t say India is not addressing these issues, but it must certainly look at China as an example.
TDB: How has the financial health of the air cargo sector been in recent years?
BF: In United States, airlines that deal with only cargo or integrated carrier operators, like FedEx and UPS, are doing well, since they control everything in the entire delivery process. On the other hand, there are small freighter operators, who use smaller aircraft, flying between city pairs such as Detroit to the Mexican border. Then there are combination carriers that carry both passenger and freight. Presently, they are doing much better than what they were doing a few years ago. Although cargo volumes have increased, most of their revenue still comes from passenger operations.
TDB: What kind of policy changes would you like to see in the sector?
BF: Globally, several regulatory changes are going to happen in the coming years. For example, harmonisation of Customs regulation and security regulations are essential. Here in United States, air cargo advance screening is being introduced, wherein shipment data before departure is going to be screened based on the seven data elements that World Customs Organisation has established under its Safe Framework doctrine. We hope India also does the same thing.
“E-commerce companies will drive demand for air cargo in the future” - Areef Patel, Vice-Chairman, Patel Integrated Logistics
Areef Patel, Vice-Chairman, Patel Integrated Logistics
TDB: What’s your take on the air cargo sector in India?
Areef Patel (AP): Like any other sector, air cargo segment too has its share of aspirations and apprehensions. The gains of a booming economy are expected to have a direct bearing on the air cargo sector. Besides, on the policy side, the government is also taking a number of steps, like creating new air freight stations. Overall, the outlook seems enthusiastic and I hope, we will be able to surpass the expected CAGR of 5.5%. May be, we need to redraw our strategies to catch up with China’s growth projections of 6.7%.
TDB: What are the main deterrents for India’s air cargo sector?
AP: One of the most discouraging factors for the industry is the cost of capital. No fleet operator in the world is in a position to earn good returns. It is such a volatile business that profitability is minimal. We have seen the plight of our own aviation companies. Existing rules and regulations, mainly those regarding service tax on ATF, is a major problem, particularly since ATF accounts for almost 60% of our operating cost. Insufficient infrastructure, connectivity, technology and warehousing are also pulling down India’s growth potential in the sector.
TDB: What kind of cargo airplanes are in demand in India?
AP: India is a very different market as compared to the Gulf, US and Europe. In India, almost 75% of the freight is still being carried in passenger aircraft. However, this scenario will change in the coming years. There will be rise in domestic demand, primarily due to rising business opportunities in tier II and tier III cities. And this will be largely driven by e-commerce companies. If air cargo operators want to stand out, they need to have a better fleet, with bigger space and better technology. For the time being, Canadian Bombardier planes have more liking in the country. But in days to come, Airbus and Boeing will definitely be preferred.
TDB: How organised is the Indian air cargo sector?
AP: Like the rest of the logistics sector, the air cargo industry is also highly unorganised. There are only a few organised players operating in the sky. Limitations in terms of technology, accuracy, speed and network are explicit in the unorganised sector, which accounts for 80% of the market. Reverse logistics is a huge market in US and Europe, mainly due to recycling and green projects. In India, it is minimal.
TDB: What is the capacity utilisation at Indian airports and how prepared are they to handle future growth?
AP: India’s international freight traffic grew by 2% to close to 12.52 lakh MT in FY2015 and is expected to grow by 3.5-4% in FY2016. There are 30-35 airports in India, which are not operational due to inadequate infrastructure and accessibility. Considering the size of runways and other maintenance costs, there is dearth of investment. It would be good if an expert panel can be set up to ascertain the problems and possibilities of terminals in the country.
TDB: Is there any specific issue related to the air cargo sector that you would like to highlight?
AP: I am looking forward to the new aviation policy that’s been in the pipeline for long. It promises a lot with respect to upgradation of airports and eliminating old laws, which do not facilitate good governance. Relaxation in taxes and some visionary reforms will definitely set a good agenda for private players and foreign investment for robust and healthy growth of the Indian aviation sector. Air Freight Stations (AFS) should be an area of immediate attention for the authorities.
“The over-dependence on the pharmaceutical sector is a big concern” - Tulasi D. Prasad, Chairman (Hyderabad Sub Region), The Air Cargo Agents Association of India
Tulasi D. Prasad, Chairman (Hyderabad Sub Region), The Air Cargo Agents Association of India
TDB: What’s the current state of affairs in the Indian air cargo industry?
Tulasi D. Prasad (TDP): Air cargo volumes in India are rising. In the future, air freight is going to gain momentum in Asia, mainly in China and India. The tonnage trend is looking good. However, in the last two months, there’s a bit of a slowdown since overall exports are down by 16-20%.
TDB: Why has air cargo traffic been stagnant in India in the last few years?
TDP: Though there’s not been much growth in India as a whole, cargo traffic has increased at the Hyderabad airport. The reason for this is the pharmaceutical industry. Due to the growth of the pharmaceutical and biotechnology industries in the Hyderabad region, air cargo traffic has seen an upward trend.
TDB: Other than pharmaceutical freight, which other sectors, if any, do you expect to add to air cargo traffic in the future?
TDP: This over-dependence on just one category is a concern. We had a lot of hope from the solar industry, but it hasn’t taken off the way we expected. However, there are some new businesses, which are showing interest in air transport. In India, major export commodities that use air transport are textiles, readymade garments and cotton made-ups. Engineering products are also being exported through air freight, both by PSUs and PSEs. There is great potential in agricultural products, fresh fruits and meat. If these commodity exports grow, air cargo volumes will grow by two to three times.
TDB: How would you rate the infrastructure at Indian airports? Do they meet the needs of the sector?
TDP: In recent times, many airports in India have gone for infrastructure upgradation. Airports at all the metros, and some tier I and tier II cities, are capable of handling aircrafts of all sizes. Although the airport at the metros are equipped to handle all kinds of cargo, India’s negative balance of trade is hurting us. There is also a need to create proper cold storages and climate-controlled rooms. Cargo stations at airports need to be well-equipped as well.
TDB: Tell us about the pricing mechanism in the air cargo sector.
TDP: Shippers use air transport only if there is an urgency like in the case of life-saving drugs. It is not the mode of transport for bulk and heavy freight. In terms of price, though air and marine tariffs are not comparable, since they have different purposes, but on an average, air cargo costs 5x more than marine transport for moving the same volume of cargo.
TDB: In the early 1990s, the government started its Open Sky Policy. How has it changed things?
TDP: After the adoption of the Open Sky Policy, Middle Eastern and European carriers have increased the frequency of flights to India. 18 international airlines fly into Hyderabad alone, while 30 international airlines fly to Chennai. Both New Delhi and Mumbai are being touched by 47 international airlines each. Due to these international airlines, we have been able to move cargo from various parts of India to other countries.
TDB: In India, both passenger and cargo aircraft are used to haul cargo. Is there any difference in their pricing or service?
TDP: There isn’t much difference in sending cargo by either a passenger plane or a dedicated freight aircraft, though at times, sending cargo by a freight carrier can be cheaper. Cargo carriers have lesser stopovers, except for refuelling, hence they can deliver in less time.
TDB: What are the main concerns of the Indian air cargo sector? Is there any issue that you would like the government to address immediately?
TDP: The government needs to reduce taxes on ATF, air carriers and those imposed by AAI. Due to high fuel cost, several airlines are in deep losses. Unless crude oil prices come down to $20-25 per barrel and taxes are reduced, air freight prices will not come down.
