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From an over-regulated and under-managed sector, the aviation industry in India has
now changed to a more open, liberal and investment-friendly sector, especially after
2004. The civil aviation sector in India has moved into a new era of expansion. Some
major factors contributing to this are:
Higher household incomes
Strong economic growth
Entry of low cost carriers (LCC)
Increased FDI inflows in domestic airlines
Increased tourist inflow
Surging cargo movement
Cutting edge information technology (IT) interventions
Focus on regional connectivity
Modern airports
Sustained business growth and
Supporting Government policies
Key Drivers of Growth of Indian Aviation:
Growth rate of the economy has been steadily rising. For instance,
in the period 1990-91 to 2003-04, the CAGR of India’s GDP works out to
5.7 per cent which then rose to 8.6 per cent during 2004-05 to 2010-11.
The growing economic activity resulted in greater business travel by
professionals and greater leisure travel by individuals. These income
groups drive the consumption pattern in India and are primarily
concentrated in urban areas. NCAER analysis reveals that the middle
income group population in 2010 stood at 160 million individuals i.e. 13.3
per cent of the total population, which is expected to rise to 547 million in
2025 (i.e. 37.2 per cent of the total population).
About 62 per cent of the population is in the working age group of
15-60 years and this proportion is set to increase in future indicating a
larger employee base, greater business travel and greater economic
activity. Mckinsey Global Institute’s projections state that India’s urban
population will be 590 million by 2030 i.e. about 40 percent of the total
population of India. The number of million plus cities will increase to 68 by
2030 of which 13 cities will have more than 4 million and six cities will
have more than 10 million persons.
Low Cost Carrier (LCC) model which made air travel affordable for
common man got established firmly in the domestic market since 2004.
This stimulated the pent up demand for air travel. LCCs along with the
LCC brand of Full Service Carriers (FSCs) constituted 63.3 per cent of the
market share in 2009. The domestic traffic is rapidly shifting towards the
LCC model. Market sources suggest that this has crossed 67 per cent
during 2011-12. Also, the LCCs are reported to have displayed strong
operational performance immediately after the recovery witnessed in
2010. This leads us to believe that Low Cost Operations in a price
sensitive market like India appear to be a more sustainable business
model.
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Opening up of the airport infrastructure to private sector participation
fuelled the growth of the air traffic in India. Total investment made by
private airport operators in the last five years was to the tune of Rs 30,000
crores spread across Greenfield development of Hyderabad and
Bengaluru international airports and modernization of Delhi and Mumbai
international airports. Airports Authority of India (AAI) continued its
unparalleled role in creating air connectivity across the nation, incurring an
expenditure of around Rs 12,500 crores during the 11th Plan period.
Rapidly expanding air transport network aided by massive investments in
the airport infrastructure could be cited as one of the key reasons for the
surge in air passenger traffic in India.
In line with the trend observed in growth of India’s GDP, the tourism
sector has displayed stellar performance during the last decade. During
the period from 2001 to 2010, the average annual growth rate of foreign
tourist arrivals in to India and Indian national departures from India grew
by 9.2 per cent and 11.5 per cent respectively. Domestic tourism was not
to be left behind. Domestic Tourist Visits within India stood at 740.2 million
for the year 2010. In fact the average annual growth rate of Domestic
Tourist visits within India for the decade ending 2010 is estimated to be
13.5 per cent. The number of foreign tourist arrivals in India stood at 5.6
million in the year 2010 as against 3.46 million in 2004 and 2.54 million in
2001. Similarly, the number of Indian National departures from India stood
at 12.1 million in 2010 as against 6.21 million in 2004 and 4.56 million in
2001. In areas with difficult terrain, air transport offers the fastest mode of
connectivity to remote and inaccessible regions. Given the thrust of the
Government of India to enhance connectivity in remote and inaccessible
regions of the country and concerted efforts of some State governments in
this respect, there is a strong likelihood of demand emanating from these
areas in future.
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The air traffic density can be measured by linking urban per capita
income with air passengers. Taking 1000 passengers per million urban
capita, a recent study has arrived at a comparative picture. Air traffic
density in India using this measure is very low at 72 as compared to China
(282), which is 4 times higher; Brazil (231), which is 3 times higher;
Malaysia (1225) is 17 times higher, U.S.A. (2896) is 40 times higher and
Sri Lanka (530), which is 7 times higher. This indicates the untapped
market potential given the projected burgeoning young population and
rising disposable income levels in future.
Greater economic activity and the consequent greater integration of
businesses globally would mean greater business travelers across
national boundaries. Also, the growing trend of outbound Mergers and
Acquisitions (M & A) i.e. Indian firms acquiring International firms in order
to capture markets and resources abroad, where the M & A transaction
value for the year 2010 touched almost $ 50 billion and is set to grow
further in future implies greater business related travel.
Global air traffic is seen shifting to Asia Pacific region during the last
few years. This is on account of the slowdown in Europe and North
America. Within the Asia Pacific region China and India are the two fastest
growing economies and they are becoming the epicenter of supply and
distribution. Global air traffic Forecasts for 2030 in this context also point
to that direction. Traffic share of Asia- Pacific in the global traffic are likely
to move up and on the contrary traffic share of North America and Europe
are set to decline correspondingly.
Open Sky Agreements between nations forge greater competition in
the International air travel segment. Increasingly it is recognized that
Nation States need to evolve viable mechanism by which they all stand to
achieve trade gains and efficiency in international market access in as far
as Air traffic rights are concerned. That is yet to happen. Five Indian
Carriers out of six have now started international operations. It is therefore
expected that such reforms in market access arrangements as and
when it
happens will potentially enhance traffic to and from India. Further,
deregulation of the international air traffic markets would enable the LCCs
to capitalize the opportunities of newer markets first and enhance growth
of international traffic.
India’s impressive growth in international and domestic trade over
past few years has augured well for the air-cargo industry in India. The
entry of leading private air-cargo companies has brought in a wave of
increasing automation, mechanization and process improvement initiatives
at major air-cargo terminals in the country. Such investments in air-cargo
handling at key airports such as Delhi, Mumbai, Bengaluru, Hyderabad,
etc. are expected to yield higher air-cargo throughput and improved
service levels. The current share of air-cargo compared to other modes of
cargo-transportation is fairly low in India. The potential for air-cargo growth
in India can be gauged from the fact that some of the global airports such
as Hong Kong, Dubai and Incheon (Seoul) handle more cargo volume
than all Indian airports put together. Trans-shipment at Indian airports is
currently negligible. Major bottlenecks are absence of dedicated
transshipment infrastructure at airports and lack of clarity on the
transshipment Customs procedures.
HISTORY OF AVIATION SECTOR
History of Indian Civil Aviation:
Over 100 years old, the Indian aviation sector has earned the
distinction of being the ninth largest in the world. Today’s giant leaps
though have come from a small step taken by Henry Piquet on February
18,1911, when he flew his Humber bi-plane six miles from Allahabad to
Naini junction carrying only mail and introduced the concept of air travel in
India. For the next 21 years, the country witnessed such flights that flew
off and on without any timetable.
They began making way for schedule air travel- that operate as per
a timetable-when 25 year old Jehangir Ratanji Dadabhoy Tata got the first
pilot license issued in India on February 10,1929. In July 1932, business
tycoon J.R.D., who would go on to be hailed as the Father of Indian Civil
Aviation, established the aviation department in Tata Sons. Soon to be
called Tata Airlines, it planned the first schedule flight in India- a mail
service on the Karachi-Ahmadabad-Bombay-Bellary-Madras, route to be
the India connection to Imperial Airways’ London-Karachi flight.
AirAsia India and Vistara, still in their initial years of operations, were however loss-making, as
was the national carrier, Air India. Although Air India reported its first operating profit in a
decade.
CAPA estimates that India’s airlines reported a combined profit of USD122 million in
FY2016, the first black ink in a decade. But this era of industry profitability is likely to be
short-lived. Traffic growth is being stimulated above its underlying demand as a result of
excess capacity and competitive fares. The downward pressure on yields, combined
with cost creep, is expected to push the consolidated industry result back into the red
for the 12 months ending 31-Mar-2017.
IndiGo, Jet Airways, SpiceJet, GoAir and Air India Express are all expected to remain
profitable, but at levels lower than in FY2016. Jet Airways will be the only profitable full
service carrier in FY2017. While losses are projected to increase at Air India, AirAsia
India and Vistara. At a total industry level losses could reach USD250-300 million.
With expected cost creep of 10%, a 5-7% decline in yields, oil at USD55-60 per barrel
and an exchange rate of USD1=INR73-75, industry losses could widen further to
USD380-450 million in FY2018, although most LCCs are expected to remain profitable.
Yields could potentially decline further than assumed given the capacity induction
planned.
As the industry faces the prospect of transitioning to a phase of profitless growth, the
risk for India’s carriers is that if they continue to expand without sufficient capitalisation
they could face significant challenges when the next external shock hits.
When the fuel price spike and global economic slowdown hit the industry in 2008/09,
what followed was a period of widespread red ink with billions of dollars of losses which
led to the failure of airlines such as Kingfisher Airlines and Paramount Airways and
almost brought SpiceJet to the verge of closure. Should history repeat itself, this time
the industry has much further to fall.