India has to seriously explore transshipment opportunity: S Vasudevan

Airlines and airports showed the world both the inevitability and extreme reliability of air transport in dealing with a crisis of unprecedented magnitude (the pandemic and the disruption it caused to global supply chains) by moving people, food, daily essentials and life-saving drugs to populations across geographies, says S Vasudevan, Partner and Head - Aviation in India. He is also the Global Sector Lead for KPMG's Airports business and advises governments, airport owners, operators and aviation stakeholders on policy, strategy, finance, operations and transaction-related solutions. Edited excerpts from an e-mail interaction:

With Indian airports reporting 3 million tonnes cargo handling in FY22 and having a target of 10 million tonnes by 2030, what are the regulatory changes you would like to see to achieve the target?
Vasudevan: There are many tactical decisions that can make this possible in the next decade. First , the industry needs to be truly "connected" across the value-chain right from the production plant to the belly of an aircraft. Notwithstanding the rapid digitalisation of processes and businesses in the last few years, the weak links on intermodal transfers, inter-state logistics and regulatory documentation are still constraining speedy and efficient handling of air cargo.

Second, the costs payable for land lease, royalty and sovereign services like customs for handling and processing of air cargo in smaller airports needs to be rationalised to help them compete fairly with other airports and modes of transport.

Third, it is time to consider the need for enforceable service level agreements between airlines, terminal operators and consignees (a departure from current industry norm that ensures privity only between the shipper and the consignee). It will help trigger efficiencies in costs, time and use of infrastructure. For instance, should demurrage still be a source of budgeted revenue for airports with state-of-the-art infrastructure, increasing terminal capacity, more carriers and growing international connections? Or should cargo be sitting in an air cargo terminal for more than 24 hours, making it a warehouse, especially when speed determines the choice in the first place? All of these require smart decisions on policy and regulatory frameworks and have a material impact on growth and profitability of the air cargo business.

What, according to you, worked for Indian air cargo over the last 2-3 years? What do you think was the contribution of airports/administration/regulations in the changes?
Vasudevan: The pandemic and the disruption it caused to global supply chains opened up many new markets for the air cargo industry. Airlines and airports showed the world both the inevitability and extreme reliability of air transport in dealing with a crisis of unprecedented magnitude by moving people, food, daily essentials and life-saving drugs to populations across geographies, a challenge that seemed impossible at the peak of the pandemic.

Indian carriers and service providers also benefited from the steep margins that business commanded globally because of constrained capacity and logistic challenges over this period. But, tariffs are likely to level out with international traffic opening up and capacity coming back globally. We saw a sharp increase in exports in FY22, with the air cargo industry becoming a key beneficiary.

Brownfield and greenfield airports are now building new capacity for handling air freight driven by the global demand for perishables, pharma, cold-cargo and e-commerce in general, reflecting the optimism of airport operators. One of the biggest asks of the aviation industry has been a reduction in value added tax (VAT) on aviation turbine fuel (ATF) to 5 percent or less, which remains unfulfilled yet. Doing that could become a game-changer not just for the cargo business but for the health of the airline industry as a whole because of the significant multiplier benefits it could generate.

Are you seeing growth in any specific geography in India? Are you seeing airports/authorities stepping up focus there?
A three-fold increase in air cargo throughput will require many airports to create capacity and support the development of seamless value chains. We are seeing that happen across airports. Airport owners in Bangalore, Pune, Jewar, Mopa are setting up new cargo terminals and/or expanding current infrastructure to handle expected growth in cargo volumes.

There is an interesting proposal to set up a logistics hub in Jewar as well, reflecting the optimism and strength of the catchment. A new cargo terminal was also commissioned in Ahmedabad airport last month.

The next big challenge will be to create capacity and cost-efficient logistics solutions at tier-2 and tier 3 airports that could feed cargo to domestic hubs or fly their cargo directly to other regional and international destinations.

Airport operators, state governments and 3PL service providers will have to come together to find innovative solutions to address this challenge.

Costs have increased for air freight due to multiple reasons including reduced capacity and geopolitical worries. Your views.
Vasudevan: The current crisis in the shipping industry and the fallout of the geopolitical situation has certainly increased the costs of sea freight. It has also provided the opportunity for the aviation industry to augment its cargo business for many products across countries. While air freight continues to be higher in costs by a factor of 5-6 despite the increase in sea freight charges, the growing preference for express cargo and opportunity costs of time still provides a reasonable incentive for shippers to shift to air, particularly for high- value cargo with sustained demand.

India also has to seriously explore the transshipment opportunity and create the right incentives for global carriers to shift a part of their growing transshipment business to airports in India. Technology, infrastructure, skilled manpower, geo-politics, China plus one policy, free-trade agreements, ease of doing business and economic growth should all facilitate this, eventually.