High taxes and poor infrastructure take toll on business jets in India
MUMBAI: Business jets seem to be losing shine as corporate trophies, largely because they are costly headaches to maintain. India's fleet of such aircraft shrank 2% in 2015 — the first contraction in 25 years, said operators and industry experts.
The market is set to contract further — as much as 40% of the planes are up for sale, they said. High taxes and poor infrastructure are the bane of business jets, they said. The Tata Group, GMR, GVK and Jindal Steel & Power are among those that have dropped plans of adding more business jets or deferred orders indefinitely, said three people aware of the matter. Others have resold planes in the secondary market immediately after taking delivery.
Charter businesses have been hit as well. Tata Sons-owned Business Jets India returned all four planes — three Hawker Beechcraft and one Cessna Citation — to lease companies earlier this year, said two of those cited above. The company is in the process of shutting operations in India, they added.
"It's a combination of high costs and poor infrastructure. For instance, a business jet can only park for 48 hours at Mumbai airport, post which there is a penalty," said Atiesh Mishra, director of operations Taj Air, also controlled by Tata Sons. "So, an operator has to park the plane in Ahmedabad or some other neighbouring airport. This burns extra fuel and makes business unviable." Club One Air, one of the country's biggest charter operators, has a negative net worth, according to documents filed with the Registrar of Companies.
It's a "gloomy story" because of the high cost structure and not enough government incentives for business jet operators, said Bhupesh Joshi, CEO of Club One Air. Spokespersons at GVK and Jindal Steel & Power said they haven't sold private jets or deferred any purchases in recent years. GMR declined to comment while a Tata Group spokesperson didn't reply to emailed queries.
India's private jet fleet grew at double-digit rates until 2008, when it surged 26%, according to industry figures. After that, there was a sharp slowdown owing to the global financial crisis. High taxes ensured that the numbers didn't climbed back up by much. Since 2007, the government has been levying an import duty of 21% on private jets. That compares to a tax of just 2% if the plane is imported for charter operations under a non-scheduled operators (NSOP) licence. Enforcement of the rules means that business models such as fractional ownership cannot be used in India, said Jayant Nadkarni, president of the Business Aircraft Operators Association lobby group. "Globally, there are two popular models," he said. The operator can be an aircraft management company or a fractional ownership one. In the first, an aircraft has only one owner. In the second, one aircraft has several owners. These concepts help to lower capital costs and optimise use, he said. "In India, however, because of our differential import duty regime, and because the operator and Indian owners are separate in these two concepts, they have not taken root and any endeavour to start them is construed as a case of potential duty evasion," Nadkarni said.
"Basically, DGCA (Directorate General of Civil Aviation, the regulator) does not accept any applications with separate operator and 'Indian owners.' This is a clear case where the government doesn't realise the ill effects of its duty regime, which was slapped on without much thought on consequences." There are said to be have been instances in which companies have taken an NSOP licence only to lessen the tax burden. Those wanting a jet are forced to set up their own operator company as an NSOP. Since their requirements are met with one or two planes, further fleet expansion doesn't make sense. That's led to a large number of small operators, which means no economies of scale, unlike most scheduled airlines.
"The result is a high-cost structure for the small operators," said Nadkarni. Intermittent demand and lack of infrastructure are part of the problem, said Jonathan McDonald, senior analyst at International Bureau of Aviation, a UKbased consultant. "There is a business jet market in India but it is sporadic in terms of demand. Few are actually owned by ultra high net worth individuals, more by corporations," he said. "In terms of size-category, there is no set trend either - everything from Mustangs to Boeing Business Jets - unlike say Brazil where you have a lot of very light jets... or Russia where they love super mid-size / heavy such as the Legacy, Falcon BSE -3.81 % 900, Challenger 604 / 605 etc." Airport infrastructure is another constraint.
"India has gone berserk building airports to support growing numbers of Boeing 737s and Airbus A320s operated by Indian carriers for the passenger sector - to fuel the growing middle class - but they haven't really gone to town in building up business jet facilities to the same degree that they have for commercial aircraft," he said. To an extent, India mirrors a global downturn in the private jet industry. In a recent report, Honeywell predicted a global demand outlook of 9,200 jets worth $270 billion for the next decade, down from 9,450 jets worth $280 billion estimated last year.
To be sure, there is still interest in business jets in India. Bombardier has "seen interest and discussions surrounding private aviation increase in the past 12 months", said spokesperson Anna Cristofaro. She also said operators are working with the DGCA to resolve issues that are stifling growth. "Business aircraft are extremely important tools for the inclusive and regionally diverse growth we are looking for in India," she said.
"This connectivity brings about investment to the region - everywhere a business jet is parked, business is being conducted and jobs are being created." If the argument sparks a change, business jets could stage a recovery. But until then, more of them are going to be grounded. With inputs from Megha Mandavia