Up, up airline capacity & be away

India's freeze on bilateral flying rights is coming under strain as airfares mount on international routes. The freeze caps the seat capacity on vital corridors like those to the Gulf-West Asia, as Indian airlines await aircraft deliveries to bulk up their fleets. Surging jet fuel prices due to the ongoing conflict in West Asia have added to the pressure on airfares, while airlines in India remain disadvantaged by high central and state taxes. Since jet fuel lies outside GST's ambit, it will take a broader political consensus for any effective reduction in levies. Additional airport capacity coming on stream offers another reason to raise airline capacity on principal routes.

These arguments are not persuasive enough. India is expected to drive the growth in international aviation over the next two decades, and it would be difficult to justify that growth occurring on overseas airlines. Indian carriers have to work around fuel cost disadvantages to compete effectively with airlines in the Gulf whose owners also own oil wells. The way out is for Indian aircraft refuelling cheap in West Asia, which requires them to fly more to the region. Protection offered by frozen capacity levels the field for Indian airlines while their orders for jets are fulfilled. New airport capacity in the country also benefits if Indian carriers move sufficiently large numbers of passengers to be able to create domestic transit hubs.

Aircraft delivery schedules are not the sole capacity constraint confronting Indian aviation. The sector needs to scale up in terms of manpower and maintenance as well. Scaling up in ancillary segments of the aviation ecosystem benefits from quantitative protection to Indian airlines through frozen bilaterals. Premature withdrawal of capped capacity could expose Indian aviation to intensive price competition from entrenched players who enjoy location and fuel cost advantages. These, however, do not add up to the power of originating traffic. A policy that has served Indian airlines well over the past decade should not be reversed prematurely.