India Considers Revising Frozen Air Bilateral Agreements to Tackle Soaring International Airfares
The Indian government is actively contemplating a significant policy shift regarding its longstanding stance on bilateral air service agreements. In response to the relentless surge in international airfares, authorities may review the unstated policy of not enhancing flying rights for foreign airlines. This potential move aims to provide much-needed relief to the traveling public, who have been grappling with exorbitant ticket prices.
Factors Driving the Skyrocketing Airfare Crisis
Multiple economic and geopolitical factors have converged to create a perfect storm in the aviation sector. Indian carriers are facing unprecedented operating cost pressures due to a sharp spike in aviation turbine fuel (ATF) prices. Compounding this issue is the Indian rupee's continuous depreciation against major currencies, reaching new lows on a daily basis. Additionally, the supply of seats offered by Gulf carriers has decreased, further constraining capacity.
Industry sources indicate that international airfares are likely to remain elevated in the foreseeable future. The ongoing Israel-Iran conflict has introduced further volatility, with Iran threatening to target oil and energy infrastructure, while former US President Donald Trump has urged nations to deploy warships to the Strait of Hormuz. These developments have exacerbated market uncertainties.
Potential Revision of Bilateral Agreements
Against this challenging backdrop, there is growing momentum for a revision of bilateral air service agreements with several countries. These agreements have remained largely frozen for nearly a decade. Key destinations seeking an upward revision include Dubai, Qatar, and Abu Dhabi. The proposed enhancement would increase seat capacity to and from India, potentially helping to douse the fire of escalating fares.
Since 2014, the Narendra Modi government has focused on strengthening domestic carriers through a virtual freeze on bilaterals. This strategy has yielded positive results, with IndiGo emerging as an aviation giant, the Air India group returning to founder Tata Sons with substantial funds and fleet orders, and new carriers like Akasa, Star Air, and Fly91 entering the market. Last year alone, Indian carriers added 80 additional aircraft to their fleets.
Industry Perspectives and Government Actions
An industry executive highlighted the evolving thinking: "While we continue to advocate for rationalizing both the base pricing of ATF and the state (VAT) and central (excise) levies on it, there is now consideration to review bilaterals that haven't been revised for a long time despite increased demand. Indian carriers have received support over the past decade. Now may be the time to help lower fares by considering enhancement of foreign airlines' capacity and increasing supply."
With new airport infrastructure coming online, including the Navi Mumbai airport and the anticipated opening of the Noida airport this summer, airport operators like the Adani Group have been advocating for bilateral revisions. The current freeze means new capacity cannot be added to high-demand destinations like Dubai, which was the top international destination for Indian travelers before the Israel-Iran conflict. For instance, Akasa Air has been unable to launch flights to Dubai due to fully utilized bilateral rights.
Cost Pressures and Government Interventions
Indian airlines benefit from cheaper ATF and higher yields on international flights compared to domestic routes. However, domestic airfares have been capped since the IndiGo crisis in December, while operating costs have skyrocketed. An airline official emphasized: "To cap fares, cap costs too. This is what we have told the government."
The aviation ministry is actively engaging with the oil ministry to ensure rational ATF pricing as part of the crack spread—the difference between crude oil prices and refined products like petrol, diesel, and ATF. Globally, ATF accounts for 20%-25% of airlines' operating costs, but in India, this percentage ranges from 40% to 45%. The ministry has persistently requested states like Delhi and Maharashtra to lower VAT on ATF for nearly two decades and has also sought a revision of the 11% excise duty.
The potential policy shift represents a balancing act between supporting domestic airline growth and addressing the urgent need to make international travel more affordable for the public. As the situation evolves, stakeholders across the aviation ecosystem await decisive government action to stabilize the turbulent skies.
