Economic Liberalisation and Civil Aviation Industry

Author(s): S. C. Bansal, M. N. Khan and V. R. Dutt

Source: Economic and Political Weekly , Aug. 23 - 29, 2008, Vol. 43, No. 34 (Aug. 23 - 29,
2008), pp. 71-76
Published by: Economic and Political Weekly

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Economie Liberalisation and air navigation services covering more than
2.8 million square nautical miles of airspace.
aai, during 2006-07, handled about 1.08
Civil Aviation Industry million aircraft movements (0.86 million
domestic and 0.22 million international);
96.4 million passengers (70.6 million
S C BANSAL, M N KHAN, V R PUTT
domestic and 25.8 million international)
and 1.5 million tonnes of cargo (0.5 million
This article examines
article discusses the current the
domestic and 1.0 million international).

structurestatus
of of the civil
theaviation industry
Domestic
civil scheduled air transport
aviatiservices
in India. It also discusses various are offered by the National Aviation Com-
industry in India and the
challenges and opportunities emergingpany of India (erstwhile Indian Airlines),
concomitant challenges.
due to economic liberalisation in the coun- its wholly-owned subsidiary Alliance Air It

highlights
try. The article developments
is primarily based on the
and other private transport operators such th
developments that have taken place overas Jet Airways, JetLite (erstwhile Sahara
have radically changed the
Airlines), Kingfisher Airlines, Deccan
the last few years. The civil aviation sector
of the aviation industry, ge
has significantly changed during this(Simplifly Deccan or Air Deccan), Spice-
economic conditions that
Jet, IndiGo, Paramount and Go Air. Pres-
period, making earlier projections totally
h
had a obsolete for the current economic
bearing on scenario.ently,the
Indian Airlines, Jet Airways and
sector
The article has been organised as follows:Kingfisher are the full service carriers
process of liberalisation,
Section l gives the structure of civil avia-(fscs), whereas JetLite, Deccan, SpiceJet,
entrepreneurial interest an
tion industry in India. The growth of theParamount, IndiGo and Go Air fall in
growth civil
of new
aviation industry airlines,
in India has beenthe category of low cost carriers (lccs). allo
of discussed in Section
capacity at2. Sectionairports,
3 high-Table 1 (p 72) gives the profile of domestic
and
other lights some of the important
related challengesairlines operating in Furthe
issues. India.
posed by the liberalised economy. Section 4
it examines emerging regul
2 Growth of Civil Aviation Sector
focuses on the opportunities that can be
issuesand imperatives
exploited by the The civil aviation sector in the country has
domestic civil aviation
carriers. Finally, Section
confronting 5 draws main
the witnessed a boom as domestic passenger
stakeholde
conclusions and presents future prospects.carriage, cargo movement and international
air traffic have registered exponential
1 Civil Aviation in India growth in recent years. 'This change has
The domestic civil aviation activities in been largely due to the open sky pMicy of
India can be broadly classified into threethe government in the domestic and inter-
categories - regulatory-cum-developmental,national sectors. The year 2007 especially
infrastructural and air transport services. witnessed remarkable growth in air pas-
The ministry of civil aviation (moca) andsenger traffic. Domestic airlines carried a
its bodies, namely, the directorate general oftotal of 43.2 million passengers during
civil aviation (dgca) and bureau of civil2007 compared to 32.7 million in the
aviation security (bcas) look after thepreceding year, resulting in growth of
regulatory and developmental aspects of about 33 per cent [Sinha 2008]. Figure 1
civil aviation in India while the Airports(p 72) details the growth of domestic
Authority of India (aai) provides infra-passenger traffic during 1996-2007. The
structural facilities, moca is the nodal scheduled domestic air services are now
agency responsible for the formulation ofavailable at about 82 airports as against 75
national policies, schemes and pro- in 2006 [moca 2007].
grammes for development and regulation With less than 1 per cent of its popula-
of the civil aviation sector. Its functionstion currently travelling by air, India's
extend to overseeing airport facilities, air growth potential in this sector appears to
S C Bansal {bansal@iiml.ac. in) is at t
traffic services and carriage of both pas-be phenomenal. Within a period of 15
Indian Institute of Management, Luck
M N Khan sengers and goods by air. aai manages 126years, the number of carriers has grown
(mohdnavedkhan@gmail.c
the Aligarhairports,
Muslimwhich include 11 international from two to more than 10. Over and
University, 135 air- V
(yrdutt@airindia.in) is
airports, 89 domestic airports and 26 civil crafts
at havethe
been added in the past two
National
Company of
enclavesIndia.
at defence airfields. It provides years [capa 2007a].

Economic & Political weekly BBS! august 23, 2008 71

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 MOTPC

traffic to touch 20 million guests and In-

Indian return the sector to profitability
ai by 2008-09
vibrant [capa 2007b].
dia's fleet strength will range from 500 to a
world.
550 by the end of 2010. fscs have regained market Ashare from
by The Indian aviation
thedomestic market lccs since the beginning of A
2007. fscs are

Figuri 1: DomtstkPasstngtr Traffic (1996-2007, in million)

is already showing gearing up to match their product offering
signs of consolida- to different market segments. As a result
tion. In 2007, there of greater rationality in pricing, lccs will
have been three • no longer be able to seize market share from
merger and acquisi-fscs on lower prices only.
tion (m&a) deals -
Air India with 3 Challenges
Indian Airlines, Jet
Phenomenal growth of the airline sector
Airways with Air
in India throws up exciting opportunities
Sahara and ub and at the same time, poses its own chal-
v-\.'.i' ''v:\m\i a vi r;v.,:>, !u)d \r.{\ , i *\.: !',fi;^>". l» '..'.'■••! ■ .'■-'•''> l!t>
Group (Kingfisher
lenges. Aviation infrastructure in major
Asia citiesin
Airlines) acquiring majority stake is low
wil already witnessing excessive
pressure,
cost carrier Deccan. Analysts believe
with particularly
con-
an during peak hours.
solidation
and is more a strategy
the toFurthermore,
enhance there are some other issues
set growth inthat
market presence andto an need
inor-to be addressed by the
bestake-
ganic manner rather than
(8.1 per holders in
a means to im- the industry if they wish to c
1 prove financial performance [pti
ata improve the situation.
2007b].
for
It is estimated that in the futurefor
cent there
will be two or three fscs,
can be threeDeclining
or fourYields: lccs and other ex
new
Lccs and a small number ofentrants
range regionalcommand about two-fifths of the [
based Centre for Asia Pacific Aviation airlines. There has been a switch market
from share.
the During a time of escalating
volume-driven to a yield-driven costs,
(capa) estimates domestic traffic to grow legacy carriers are forced to match
approach,
at 25-30 per cent annually and inter-which in the long run signals a positive
lccs' fares.de-
More players are being attracted
national traffic at 15 per cent until 2010. owing to growth prospects, which imply
velopment for the industry. A combination
The domestic market size is expected to of slow capacity growth, focusmore
on competition
yields at lower fares. Kingfisher
cross 60 million passe/vgers, internationaland strong underlying demand may
Airlines has posted a net loss of Rs 5.77

Tablt 1 : Playtrt In Chtl Aviation Stctor

Category FSC- Public FSC- Private

Airline Name NACH (I) Jet Kingfisher JetLite Simplifly Deccan Spicejet Paramount Go Air IndiGo

Airline code

Start date

Website www.indian www.jetair www.flyking www. www. www. www.paramount www. www.

Technology partner In-house Sabre Sabre Gabriel Radixx Navitaire Amadeus Radixx Inter Globe

Current Fleet (classic/small) 82 / 11

Destinations

(Domestic/International) 62/18

Daily Flights

Pax carried in millions (2007) 8.126

Pax carried in mill

(January-May 2008)

Domestic market share (2007) 19.0

Domestic market

(January-May 2008)

Seat factor (May 2.008)

Operating r
in millions (2006-07)

Operating expenses
in millions (2006-07)

Operating result
in millions (2006-07)

Owner/business group Governm

Source: Prepared

72 august 23, 2008 DBS Economic & Political weekly

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 billion on
In fact, fuel costs in India are about a that four
[Brady 2007]. It is expected
65 per re
during
cent higher than international standards the
million aviation jobs will be created in the f
[capa 2007a]. atf cost/kilolitre
March 2007. is $ 755 in
next 10 years [pti 2007a]. SomeKin
of the
Delhi and $ 780 in Mumbai
rival, as againstemerging opportunities for different
full-serv
had recorded
$ 455 in Singapore and $ 497 in Dubai
stakeholders in the aviation industry are
Rs 280
[Trivedi 2007]. Consequently, themillion
Indian
given below.
aviation industry has
while been lobbying hard
governm
year with
all along for Large and Growing
a better deal in terms of lower a Potential Market:
Rs
beenatf prices in
matching internationalthe
levels. red
India is the fourth largest and second fastest
To make the matter worse, there is unfair
accumulated loss
growing economy in the world registering
discrimination between turboprops and
Industry analy
a GDP growth of 9.2 per cent in the third
airlines have lost around Rs 20 billion in regional jets with the latter being charged
quarter of 2006. The disposable income of
2006-07 [Padmakshan 2007]. Thus, to higher sales tax for their fuel needs. Other
India's 300 million middle class is expected
survive and grow, airlines have to build onreasons for high input costs are increased
to increase at an average of 8.5 per cent
their cost efficiencies and other economies. maintenance charges, aircraft lease rent-
per annum till 2015. The domestic tourism
The proposed entry of at least four region-als and manpower costs. Figure 2 gives
market is already 390 million strong,
al aviation start-ups - Air Dravida, Star the comparative input costs for fscs and
growing at around 13 per cent with foreign
Aviation, mdlr Airlines and Trans India -Lccs in India. tourists touching the 4.43 million mark
could cause further headaches and even
Figure 2: Comparativt Cost Structure of FSCs and LCCs
delay the break-even for existing airlines.

Gaps in Infrastructure: The unexpected

growth in the Indian airline industry has
created a huge vacuum in the infrastruc-
ture required to support the increase in
the number of passengers, aircrafts and
flights. Airport and Air Traffic Control
(atc) facilities are inadequate to support
such growth. There is an urgent need for Skilled and Qualified Personnel: There
and trends suggesting a growtrfof around
upgradation of infrastructure at Delhi,is a severe lack of skilled and qualified
13 per cent. All of these factors present a
Mumbai, Chennai, Kolkata and Bangalore personnel right across the sector, even huge
at market that can be tapped by the
airports to handle increasing passengerexisting air traffic levels! The shortage is
players in the civil aviation industry. A
load. Some other issues that need to beparticularly noticeable in case of pilots, beginning has already been made by
licensed engineers, air traffic controllers,
immediately addressed are: (a) higher fuel different airlines by offering a number of
consumption due to long holding timescabin
- attractive packages.
crew and other skilled staff required
to manage passengers, baggage and cargo.
on the ground as well as in the air; (b) lower
This will only be exacerbated by theAir Cargo: Freight carriage in India is at
utilisation of aircrafts resulting from slot
constraints and air traffic congestion;
growth in the industry. around 4,200 tonnes per day with a com-
pound annual growth rate (cagr) of 15
(c) sub-optimal route network strategies To make their voice heard, in the begin-
ning of 2007, domestic airlines haveper cent over the last two years. It has
because of insufficient night parking
formed an umbrella organisation, called
stands at major airports; and (d) lack of been fuelled by a fast growing economy
advanced navigational aids like approachFederation of India Airlines (fia). It aims
with a strong industrial base. The air cargo
lighting system at the airports. to have deeper look at common issues
demand is forecast to grow at 11.4 per cent
While a beginning has no doubt been affecting all the airlines, undertakeper annum till 2011-12. To support this
research, bring out reports and publish
made in the context of upgrading of existing growth, the moca is proposing exclusive
cargo airports, which may be privately
papers to help the government in making
infrastructure, the results, at current slug-
gish pace, may be visible after a few years.informed decisions. owned. The moca has also raised fdi from
49 per cent to 74 per cent in the cargo sector
4 Opportunities
High Input Costs: Aviation turbine fuel to facilitate building cargo airports at
There is no doubt that the future of the various business centres across the country.
(atf) prices continue to be abnormally
Indian aviation sector appears to be bright At present, Blue Dart, owned by dhl
high in India as compared to those charged
with huge potential for growth. Estimates
globally. In India, atf accounts for about Express, is the main player in this segment.
It has six aircrafts: four Boeing 737 and
suggest that every $ 100 spent on air trans-
38 per cent of the operating costs as com-
two Boeing 757 freighters, providing a
port produces benefits worth $ 325 to the
pared to the global average of about 23 per
economy and 100 additional jobs in air
cent. High basic rates are aggravated by network payload of 250 tonnes across 60
route connections each night. Air India
transport result in 610 other new jobs
heavy taxes imposed by state governments.

Economic & Political weekly DBS august 23, 2008 73

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 NOTES ===-

tap the international market as well due to At present, there are 39 flying schools
Cargo,
competitive rates for labour and other
NACiL, in India, which are authorised to impart
training
facilities. The government too has recog-
and inc for various licences such as the
nised the potential and has permitted 49
around private pilot licence and commercial pilot
per cent fdi in the mro business.
ing to licence. State governments control 28 of t
Some positive developments havethese institutions. The remaining schools
Goyal,
are operated by private entrepreneurs. a
already taken place in this segment. The
cargo
These schools produce about 150 com-
Gulf Aircraft Maintenance Company*
Infrast mercial pilots each year. The dgca has
(gamco) has signed a maintenance support
Aviatio
agreement for 10 Kingfisher Airlines
received 37 proposals to set up new flying
domestic aviation sector has necessitated Airbus A320 aircrafts. nacil has a tie-uptraining institutes in India.
the upgradation of infrastructure. Approxi- with CFM, a joint venture between Snecma Existing players in the aviation sector
have already initiated some steps to tap
mately $ 110 billion will be invested in the (safran Group) and ge Aviation to estab-
Indian civil aviation industry by 2020 - lish a joint venture mro facility in India
this potential, nacil has a central training
$ 80 billion on the acquisition of aircrafts for CFM56 engines, klm has agreements
establishment at Hyderabad and Jet Airways
and $ 30 billion on building/improvement with other airlines such as Spicejet, Jetowns a pilot training centre at Mumbai.
of infrastructure. Development of airport Airways and JetLite for mro services. Budget-carrier Deccan has tied up with
the Frankfinn Institute of Air Hostess
infrastructure is being undertaken through Kingfisher Airlines, gmr Group; Lufthansa
the public-private-partnership route in Technik ag, Germany; Jupiter Aviation (in
Training as an exclusive cabin crew partner.
major metro cities like Delhi, Mumbai, consortium with European AeronauticThe Kingfisher Training Academy is
Bangalore and Hyderabad while the Defence and Space); and nacil are alsolaunching 12 new centres by February 2008
modernisation of Kolkata and Chennai planning to set up comprehensive mro
to meet the acute shortage of manpower
facilities in India.
airports is being undertaken by the aai. in the airlines and hospitality sectors.
The aim of the government is to transform
these airports into world-class facilitiesGround Handling: Ground handling
Leveraging the Internet: An increasing
without any delay through this hybrid
work entails two basic activities: (i) pas-number of passengers are booking their
mechanism, aai has also undertaken an senger handling at landside and ramp,
tickets directly on the airlines' web sites.
ambitious project to modernise 35 non- Traditional sales channels with paper
including loading and unloading of air-
craft; and (ii) aircraft handling. India's
metro airports. It .^expected that terminal tickets cost airlines around 10 per cent of
buildings and associated side works in 24
ground handling market is estimated to be
thè ticket price. On the other hand, e-ticket
sales from its own web site costs an airline
Rs 11 billion per annum, nacil presently
airports will be completed by March 2009
enjoys a 55 per cent market share in the
whereas in the remaining 11 airports, it only 3 per cent of the ticket price. For every
would be completed by March 2010. direct booking on their web site, airlines
Indian ground handling business [Zatakia
The government is upgrading the civil
2007]. It is expected to grow at 15 per centsave an estimated $ 4 plus 5 per cent agency
CAGR till 2011-12. Significant opportunitiescommission [Trivedi 2007]. Airlines can
navigation system (cns) and air traffic
also turn their web sites into one-stop
exist for entrepreneurs in the form of
management (atm) infrastructure to ease
third party handling as well as entering
congestion at the existing airports. The shops for all travel -related services, gener-
aim is to improve management of the skyinto service contracts with private air-
ating additional revenue.
and reduce flying time, allowing more
ports/AAi to offer comprehensive ground
Access to New Markets: The existing
flights to take off and land at the airports.handling solutions. Air India and Singapore
Airport Terminal Services (sats) havecivil aviation policy allows overseas flights
Maintenance, Repair and Overhaulformed a joint venture aisats to provideonly to those Indian airlines that have at
least five years' experience in the domestic
ground handling services to domestic and
(MRO): At present, there is no large mro
centre in India. Even within a five-hour fly market. It is also necessary to have a
international carriers at Bangalore and
Hyderabad International Airports.
zone from India, this facility does not exist. minimum fleet of 20 aircrafts to be eligible

D checks1 are done overseas mainly in to fly overseas. Consequently, at present

Dubai and Singapore. Huge investment isTraining: Airlines in India will, in the nacil, Jet and JetLite have the permission
to fly abroad. Deccan is expected to join
near future, need trained pilots, engineers,
required to ensure servicing and mainte-
nance of the increasing fleet. There is acabin crew and other ground handling
this group very soon as it completes its five

growing demand for airframe, engine and years of commercial operations on August
staff. There is a projected requirement for
26, 2008. The MOCA has given its traffic
3,600 additional pilots in the near future.
component overhaul facilities. Thus, there
Entrepreneurs
exists an opportunity for entrepreneurs to can capitalise on the
rights approval to Jet Airways on the India-
emerging demand for (i) training estab- Gulf/west Asia routes with effect from
tap the mro business. India offers substan-
lishments
tially lower labour cost - 60 per cent lower for cabin crew, engineers andJanuary 1, 2008. Jet Airways has already
than western Europe and us. The mro other staff; and (ii) flight simulators launched
for flights to Kuwait, Muscat, Doha
training pilots.
facilities, once established in India, can •and Bahrain, becoming India's first private

ja august 23, 2008 CDS Economic & Political weekly

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 - -

airis bound to witness more action in the

carrier per day, respectively. SpiceJet is project-
near future.
started fl
ing a loss of up to Rs 1 billion in 2008 and
route. Jet has established Brussels as its Private airlines have changed rules of plans to raise Rs 4 billion capital by selling
European hub and is keen on making the game in the Indian civil aviation strategic stake. Even the Wadia Group's
Shanghai/Hongkong its hub to facilitate sector in recent years. The entry of budg-GoAir plans to offload a 26 per cent stake
operations in the Asia-Pacific region. Thus, et airlines like Deccan, introduction ofin the low-cost carrier.
Indian airlines will have access to a new cheap airfares by other domestic carriers, Higher atf prices are largely responsi-
rising levels of income and growing ble for the red ink on the books of airlines
revenue stream that may help to even out
aspirations of people have created a new in India, atf, which used to constitute
the seasonality factor in domestic opera-
tions. It will also spread the risk of down-
paradigm: air travel is no longer reservedaround 40 per cent of the operating cost
turn in a single market. However, the
for the elite. The guidelines that regulatefor airlines, now accounts for up to 60 per
above opportunities will pose a challengethe sector are under constant review. cent after the prices of fuel have tripled
to the some of the existing players as theGradually, the bureaucracy is being lifted
during the last three years, atf prices have
risk-cycle of increased competition, low
allowing Indian airlines to compete inter-
gone up from Rs 26,000 per kilolitre in
2005 to more than Rs 70,000 in June
yields, and growth will be transferred tonationally in flight entertainment, cuisine,
the international arena leading to more comforts and other services. These re- 2008. These prices are around 40 per cent
cut-throat competition. forms along with boom in the Indian higher than international prices due to
economy have led to the high level of higher base price and taxes. Sales tax on
5 Future Prospects growth in the industry. atf varies from 20 to 30 per cent in most
India's aviation sector is a sunrise industry Despite à growing market, airlines in In- states, while excise and customs duties on
and will require an investment of over
dia are fighting for survival in a highly the fuel are 8 per cent and 5 per cent,
$ 120 billion over the next 10 years. Two-competitive environment, capa projects respectively. Taking note, the central
thirds of this amount is likely to becombined losses of $ 400-500 million for government has announced a cut of 5 per
financial year 2008-09 [capa 2008]. A
absorbed by aircraft purchases and the cent in customs duty on atf, resulting in a
remaining funds would be used for
host of initiatives are required to tide over 4.3 per cent reduction in fuel price by
developing infrastructure. The number
the current situation. For service providers, state-run oil companies. To ease the burden,
of civilian aircrafts in the country is esti-
there is a pressing need to control costs and soon, the state governments too plan to
mated to swell from 350 to 1,000 by 2020.
improve quality of service. The government discuss the issue of reduction in sales tax
Domestic passengers for the industry are
needs to liberalise rules and regulations after getting full details of price fixation of
forecasted to rise from 35 million (cur-
governing civil aviation without compro- atf from the civil aviation ministry.
rently) to 182 million by 2020. As the mising on safety and security. It may reduce Airlines have been regularly topping the
atf prices, adjust tax rates, revise lease base fares by fuel surcharge and conges-
competition gets fiercer, fares are likely
to be further reduced and new routes rentals, and speed up development of tion fee, which have increased to Rs 2,400
would be added to the existing itinerary.
infrastructure to match growing demand. for distances below 750 km and Rs 3,150
Airfares on metro-to-metro routes are The airlines as well as entrepreneurs may for longer flights. It is likely to increase
expected to decrease, largely due to thejointly develop a large pool cf skilled/tech- further on account of increase in jet fuel
competition driven by the initial publicnical manpower and attract more profes- charges by the oil companies. As a result
offering-powered aircraft acquisitionsionals to manage the aviation industry. of the price increase, the passenger load
spree. Non-metros may not experience Overall, the current state of the Indian has fallen to an average of 55 to 60 per
significant reduction in fares. aviation industry portrays mixed shades. cent per flight from last year's peak of 70
A booming market always attracts new On the one hand, a significant enthusiasm to 75 per cent. A drop of 15 per cent is
players. Indian players have emerged as in the aviation sector is primarily attri- expected in domestic business travellers,
big buyers at the Paris air show in 2005buted to the increased number of private who constitute approximately 60 per cent
with orders for 160 aircrafts worth $ 12players and emergence of competitive of the Rs 18,000 crore domestic air travel
billion. In fact, domestic operators haveenvironment. On the other, it is also market. International monitors have re-
plans to acquire 434 new carriers. Theevident that there is a need to strengthen duced the forecast for the Indian market
MOCA has recently announced new guide-infrastructure network by speedily imple- as a result of the slowdown in the aviation
lines for airlines planning to start regionalmenting the proposed projects. sector. Signals related to cash-flow prob-
operations between smaller cities or con- lems and the capital crunch owing to ris-
necting towns and India's large citiesA Postscript ing operational costs and subsequent fall-
with small planes that can seat up to 100The civil aviation industry in India is likely ing demand are already emanating from
passengers. Four companies - mdlr Air- to end the current financial year with a the industry.
lines, Star Aviation, Trans India Aviationloss of Rs 80 billion, up from Rs 40 billion Against the backdrop of high jet fuel
and Air Dravida - have been shortlisted in 2007-08. Jet Airways and Air India are costs and excess capacity in the market,
by the ministry for awarding licences to reportedly incurring an operational loss of most of the full service carriers are signifi-
start regional services. Thus, this sector around Rs 86 million and Rs 100 million cantly cutting costs by slashing employee

Economic & Political weekly DBS august 23, 2008 75

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NOTES =====-=

of service for 15 to 30 days or more. The total

beca
allowa
cost of a D check averages between $ 1 million
and
expen
and $ 2 million.

maint
trav
proces
thes
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76 AUGUSI 23,2008 1223 Ktonoinu. & Fulitnal weekly

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