Indian Aviation: a roller coaster journey

Several world class airports, including Bengaluru seen here, have already been developed in India using the Public Private Partnership model. (GVK)

Inderjit Singh former Airport Director of New Delhi’s Indira Gandhi Airport and Executive Director of the Airports Authority of India, now Associate Director & Head, Aviation; URS Scott Wilson India, looks analytically at how the Indian aviation industry can maintain its competitive edge in an environment increasingly conscious of sustainability, customer service and more significantly, the profitability in this volatile global business climate.

Several world class airports, including Bengaluru seen here, have already been developed in India using the Public Private Partnership model. (GVK)

In the summer of 1991 India flew out 67 tonnes of gold to Europe to get US$600 million to tide over a dire import payment crisis.  Fast forward and, 20 years later, India said that it was ready to help Europe to crawl out of a debt crisis as it stared at the prospect of sovereign default by Greece, the cradle from which western civilisation flourished for thousands of years.  The symbolism is inescapable.  Two decades later, however, historians are unlikely to describe 2011 as the ‘coming of age’ year in which India offered to play as one of the lenders of last resort for a financially-sputtering West.  The Indian economy is projected to grow at 7.5% this year, down from earlier estimates of 9% as a decelerating world economy and faltering domestic demand erode growth across many sectors.
Indian aviation is currently celebrating 100 years of existence and has reasons to rejoice on its track record; even though, during this period, it has witnessed several ups and downs, yo-yoing between extremes of commanding and not-so-commanding heights.  With an expanding consumer base, India presents one of the fastest growing aviation markets in the world with potentially enormous opportunities for investment.
 
Crisis Situation: but no panic
Like any other sector of the economy, the global aviation industry is presently passing through a turbulent phase – and India is no exception.  After a recent boom period for India, airlines and airports worldwide are facing escalating operational costs, revenue growth constraints, investment crunch, and an increasingly dissatisfied customer base.  However, given the time-tested built-in resilience and tenacity in the system; Indian aviation, supported by the ongoing industry reforms and initiatives to streamline and further enhance the system towards efficiency and profitability would bounce back with a vengeance, as it has in the past, whenever it encountered setbacks.  Despite the inevitable challenges of the recession, the Indian aviation market will carry forward and upwards.
In this article, I have made an attempt to take stock of the situation, chronicling the meteoric rise and steep fall, outline the reforms and initiatives in the pipeline, flag concerns and envision possible solutions for sustained growth of the industry.
 
Indian Aviation: past performance
The aviation market in India has witnessed phenomenal growth in the recent past – the current ‘hiccups’ due to the global economic meltdown process notwithstanding.  It has come a long way since private players were first given permission to enter the sector in 2004, in the post-liberalisation regime.  The pace of growth has been especially spectacular during the last decade as the country has emerged as the ninth largest civil aviation market in the world. It is set to become one of the top four markets by 2020.  Realisation has dawned that aviation plays a crucial role in the economic development process through its virtue of rapid global connectivity leading to a surge in trade, tourism and commerce.  As the economy grows, disposable incomes rise and the value of time becomes more precious, resulting in growth in propensity to travel by air.  Flying thus remains no longer the prerogative of a few privileged, but an option for an increasingly broader section of society – and India has a massive population base to support.  At 0.04 air trips per capita per annum, India stands far behind the developed countries with more than two trips per capita per annum, indicative of a substantial growth potential (See Figure 1).
The impact of the civil aviation sector on the economic growth and development of a nation’s economy is a well-established fact.  As per ICAO estimates, US $100 spent on air transport produces benefits worth US$325 for the economy, and 100 additional jobs in air transport result in 610 new jobs across the wider economy.  It further postulates that the air transport component of civil aviation contributes for over 4.5% of global GDP.  The Indian Government has committed itself to several initiatives, policies and regulations to encourage private participation and investments in the various infrastructure sectors.  An investment of US$500billion is envisaged to upgrade roads, highways, ports, power, airports, and telecom infrastructure in the country in the next five years – more than ten times the present level of investment in the sectors.  The investment in infrastructure, government and private sector combined, is pegged at 9% of the GDP in the next five years vis-à-vis the current 4.5% of GDP.  Of the US$130 billion in the 2011-12 contributed towards the transportation sector, US$14 billion is budgeted for the development of Greenfield airports and the upgrade of existing airports – a major portion of which would be from the private sector, financial institutions and foreign direct investment (FDI).
 

Figure 1: Trips per capita: 2010
Source: Airbus Industry*
Passengers originating from respective country
 
 
Opening up the Indian skies:
The boom in the Indian civil aviation industry, which is now acknowledged to be one of the key drivers of the country’s economic growth, began in 2003.  Picture this: 52 million domestic air travellers in 2011 compared with 14 million in 2001; international traffic more than tripled to 38 million in ten years; an increase from 130 aircraft operating domestic services in 2001 to 500 today as apposed to an estimated 1,320 aircraft in the next 20 years and, more importantly, a projected 2.5 million people likely to be directly employed by the Indian aviation industry in 2020.
As per industry estimates, by 2020 India’s airports will handle more than 460 million passengers per annum.  In terms of airports’ passenger handling capacity, it has grown from 66 million in 2001 to 235 million in 2011 and is expected to touch 450 million by 2020.  Several world class airports have already been developed in India using the Public Private Partnership (PPP) model and this seems likely to continue.  During the period from 2005-2010, US$10 billion was invested in Indian airport development and the private sector played a predominant role in the process.  Around 60% of the air traffic is presently being handled at the four airports developed under the PPP and the remaining 40% of traffic uses the airports operated by the state-owned Airports Authority of India (AAI).
The signing of the Open Skies Agreement between India and the USA in 2005 was a positive step in the building of the Indo-US partnership in the aviation segment leading to a rapid increase of traffic between the two nations, strengthening economic engagement and fostering contacts between the respective aviation authorities.  In 2007, the US Trade and Development Agency (USTDA) partnered with the Indian Government, the US Federal Aviation Administration (FAA) and US aviation companies to launch the US-India Aviation Cooperation Programme (ACP) which is a public-private partnership model designed to enhance the long-term strategic and commercial relationship between the US and the Indian civil aviation industry.  The ACP provides the mechanism through which Indian Government representatives can work with the US public and private sector entities to identify opportunities and work out priorities for bilateral technical cooperation.  Through the aegis of ACP, India and the USA are currently finalising a Bilateral Aviation Safety Agreement (BASA), which would – among several other initiatives – lead to mutual acceptance of aeronautical products/parts developed in either country.  Since aeronautical products are now being designed and manufactured in India, a need was felt for international acceptance of such products.  The matter was actively pursued in the third edition of the biennial US-India Aviation Summit held in New Delhi in November 2011.  An agreement would significantly boost the production of aircraft ancillary components and establishment of allied aviation industries in India.
 
A Growing Sector
India was the fastest growing domestic aviation market in the world during the August-September 2011 period with 18.4% year-on-year growth (see Figure 2).  Traffic growth in the Indian market exceeded the growth rate seen in China 9.7% (perceived in India as a benchmark for comparisons in every aspect), and was considerably more robust than the global growth rate of 3.8%.  A strong growth driver contributing to the Indian domestic traffic volume has been the low-cost carriers (LCCs).  From a level of about 1% in 2003-2004, the LCC market share today exceeds 70% of the total domestic traffic.  According to IATA, India’s domestic aviation market expansion has been the strongest in the world and is pitched to become the world’s third largest aviation market from its current fourth position after the US, China and Japan.
 

Figure 2: Domestic passenger growth by country: Aug-2011 to Sep-2011
Source: IATA Air Transport Market Analysis
 
Given the strong market fundamentals, the robust rate of growth is expected to continue.  IATA forecasts that the Indian civil aviation market will register a compound annual growth rate of more than 16% during the period 2011-2013.  Looking further ahead, the Indian Ministry of Civil Aviation Vision 2020 statement envisages a compound annual growth rate of around 15% in the next five years.  Investment opportunities of US$130 billion are envisaged up to 2020 with US$80 billion on new aircraft.  India has bilateral air services agreements with 108 countries and 72 foreign airlines are currently operating to/from various destinations in India.  Three Indian carriers are operating to 35 destinations in 25 countries.

 
Reforms and Initiatives: change is in the air:
The civil aviation ministry has recently agreed to the proposal of allowing foreign carriers to buy a 26% stake in private airlines.  This happened against a backdrop of some private carriers slipping into a severe debt crisis, while several others are facing a resource crunch.  At present, India allows FDI of up to 49% in its airlines, but foreign carriers are banned from investing in its domestic airline industry.  The three arguments put forward against FDI by foreign airlines are security issues, potential price wars and hostile takeovers, but the present FDI proposals by foreign carriers could prove to be a lifeline for the currently ailing airline industry.
Private airlines in India have lost an estimated US$700 million in the six months ended September 2011, more than the US$580 million they lost in all of 2010-11.  India’s airlines have approximately US$16 billion in debt, including outstanding payments to suppliers, of which US$6-7 billion is for aircraft-related loans.  With recent bailout requests from some cash-strapped private airlines being summarily rejected by the government, the only recourse would perhaps be equity infusion by foreign carriers.  The national carrier Air India’s debt will increase by a further US$4 billion if it proceeds with plans to purchase its order for 27 Boeing 787s, generating an annual interest burden of US$1.25-1.50 billion.  A combination of low fares and continued high costs, thus make sustainability unlikely.  Several expenses have been out of airlines’ control.  Fuel, for example, has been at elevated levels for almost a year and India’s inflation rate has been hovering at close to double digit figures.  Airport and ground handling charges have also increased and a shortage of skilled technicians means wage pressures are mounting.  With this in mind, the government’s Working Group on Civil Aviation (WGCA) has now proposed raising the FDI limit to 49% in terms of foreign airline investment in Indian carriers, which would appear to be significantly more attractive to foreign carriers than the current 26% cap.
The Indian Government has lodged a formal complaint with the European Union (EU) against its proposal of placing a carbon tax on European flights.  Three Indian carriers currently fly to Europe and, at today’s volume of flights; the new levy would cost them an additional US$1 billion a year.  The Indian Government has stated that the imposition is an “unfair” trade practice and is reportedly considering asking Indian carriers to withhold their emissions data as part of its opposition to the European Union Emissions Trading Scheme (EUETS) on non-EU airlines.  It could even impose a retaliatory tax on European airlines, if the EU actually applies its EUETS taxes on Indian carriers.
 
Outlook for the Indian aviation Market:
In the wake of current industry setbacks IATA has recently asked the Indian government to set the aviation industry free by reducing taxes.  “The service tax on tickets, the high jet fuel prices due to high taxation, which account for 45% of the Indian aviation industry’s cost in comparison with 30% for airlines in other parts, should be reduced or eliminated,” said IATA’s Director General and CEO, Tony Tyler.
With the potential of India to become the fifth-largest market in the world in terms of overall traffic growth in the next ten years; I believe the following key challenges need urgent attention.
In the recent past, private sector investment in the development of some airports through the PPP route has been about US$6billion.  The country will require some US$130 billion worth of further investment over the next ten to 15 years, with a substantial portion being from the private sector.  The government has to evolve an attractive mechanism and package to ensure a guaranteed return on investment to institutional investors.  It may not be out of place to note that expenditure by Foreign Institutional Investors (FIIs) has lately been at a three-year low because of uncertainty in the global economy and a recent slowdown in Indian economy.  The net investment in January to October 2011 has been US$4.14 billion compared with US$33.2 billion in the corresponding 2010 period; equivalent to just an eighth.
PPPs would have to be undoubtedly the vehicle for India’s rapidly growing aviation market.  The success achieved in India’s so-called Metro (biggest) airports needs to be replicated in Tier II and Tier III cities.
In Metro cities where the existing airport cannot accommodate future growth, a second airport should be expeditiously developed.  The inordinate delay in developing Navi Mumbai is a case in point.
The success achieved in India’s Metro airports, such as Hyderabad seen here, needs to be replicated in Tier II and Tier III cities. (GMR)

The development of Indian airports will remain a mirage, unless air traffic control systems are modernised and greater emphasis given to increased staffing and training levels.  The implementation of advanced air traffic flow management is crucial towards alleviating problems of air traffic congestion.
Airlines and airports must prioritise collaboration in at least four areas to address the major challenges they share: security processes, common-use self-service technology, new pricing models and airport capacity constraints.
In addition, instead of the current Director General of Civil Aviation office, a Civil Aviation Authority (CAA) of India should be formed to take on the regulatory challenges anticipated to arise in the wake of the rapid growth in the aviation industry likely in the future.
Asia is now the leader in business aircraft purchases with India and China at the top of the list.  The Business Aircraft Operators Association (BAOA) estimates that over the next decade, the business aviation fleet will expand from the current total of 680 aircraft to around 2,000, involving an estimated expenditure of US$12 billion.
As for the development of human resources, the task ahead is seemingly colossal. Adequate and timely investment is required in aviation education, refresher courses and training infrastructure to address the problem of delivering manpower with knowledge of the world’s best practices in aviation development, operations & management.  The process would, to quite an extent, encourage the use of better infrastructure by streamlining procedures and adding efficiencies rather than the normal tendency of enlarging aviation infrastructure at exorbitant costs.  It is estimated that over the next decade, the Indian aviation industry will require around 350,000 additional personnel.
The recent growth in the Indian aviation market is also creating significant infrastructure and investment requirements, not only for fleet expansion, but in airport development, communication, navigation and surveillance/air traffic management (CNS/ATM) technology investment and the development of support sectors such as the maintenance, repair and overhaul business, which is estimated to absorb up to US$120 billion in investment by 2020.
According to Boeing, the Indian commercial aerospace market is estimated to absorb around 1,300 commercial jets worth US$130 billion over the next 20 years, making it one of the most lucrative markets for the aircraft manufacturers.
 
Conclusion:
Indian aviation enters 2012 facing its most critical challenges since the advent of the 2004 industry reforms.  The paradox of India’s aviation sector is that it serves one of the world’s fastest growing economies and is posting double-digit traffic growth, yet Indian carriers combined are expected to lose US$2.5 billion in the 12 months ending March 31, 2012.
In the longer term, the focus needs to be on creating a well-structured policy and regulatory framework and on enhancing the efficiency of the nation’s aviation infrastructure, particularly that for airports and airspace.  The fundamental drivers of aviation growth in India remain strong and it should emerge as the third largest market in the world within ten years.  It is incumbent on the Indian policymakers to quickly realign the Indian aviation industry with the global standards especially in respect of regulatory framework and non-restrictive business-friendly policies conducive to growth. But this will require important decisions in 2012 by government and operators alike to position Indian aviation as a safe, efficient and a viable sector.

The Indian Government has lodged a formal complaint with the European Union (EU) against its proposal to place a carbon tax on all flights operating within European airspace. The Indian Government has stated that the imposition is an “unfair” trade practice and is reportedly considering asking Indian carriers to withhold their emissions data as part of its opposition to the European Union Emissions Trading Scheme (EUETS) on non-EU airlines. It could even impose a retaliatory tax on European airlines, if the EU actually applies its EUETS taxes on Indian carriers. (KEY-Tom Allett)

 

The chief of India’s Directorate General of Civil Aviation, Mr E Bharat Bhushan.


The DGCA’s View

Inderjit Singh, aviation analyst and International Correspondent of Airports International magazine spoke to the India’s Director General of Civil Aviation, Mr E K Bharat Bhushan on December 23, 2011.
 
IS: India’s aviation market has experienced phenomenal growth.  No other country has witnessed such an expansion in a relatively short span of time.  What reasons do you attribute to this phenomenon?
 
EBB:  Yes.  There has been an unprecedented growth in the traffic volumes.  There are several contributing factors.  Firstly, the Indian Government’s policies have been conducive to growth in this sector; the economic liberalisation, open skies policy, etc.  Secondly, the realisation and acknowledgement of the fact that aviation, in all its manifestations, is central and a catalyst for the growth of tourism, trade and commerce.  Thirdly, by seeking the participation of private ‘players’ and involving entrepreneurs in supplementing the government’s efforts to expand aviation infrastructure through the PPP route has accelerated the process.
 
IS: Is the Indian aviation sector geared up to meet the future growth requirements at this pace?
 

EBB: Once the pace has been set and the past accumulated demand on infrastructure has been adequately met, any further demand can be catered for progressively, in a phased manner, with timely intervention.  One word of caution though!  The future growth may not be as rapid as that in the past.  There is something of a threshold level growth vis-à-vis saturation – the kind we find in developing economies compared to developed nations.  The rate of growth varies considerably.  Hence, the future infrastructure development should be commensurate with the growth.
 
IS: Has India been able to meet with the requirement of its aviation market to date?
 
EBB: In India we have tackled the issue by meeting with the overall requirements by concurrently enlarging the airlines fleet, expanding airports, building ‘Greenfield’ airports and improving on the air traffic control functions.  Aviation is a wholesome word comprising several ingredients; airports, airlines, ATC, and aircraft manufacturing.  A balanced growth of each segment through the appropriate mechanism and control of their respective regulatory organisations is the hallmark of achieving an efficient system.
 
IS: Could you please elaborate on the “balance” you refer to in its global context?
 
EBB: What I mean is that we ought to look at the ‘big picture’ for a balanced growth of the sector.  For example, as we acquire aircraft, we should simultaneously develop ground-based facilities at airports with appropriately sized passenger terminal buildings, cargo terminals adequate apron parking space and requirements in the air traffic control domain.
As per the universal ‘rule of thumb’, for every dollar spent in aircraft acquisition, 50 cents should be earmarked for related infrastructure ie, airports, ATC, etc, but that is always not the case.  More often than not the focus is only on one of the aspects leading to a mismatch, resulting in demand-capacity syndrome.
 
IS: I liked your qualifying terminal buildings with the words ‘appropriately sized’.  My general impression is that the airport developers worldwide are vying with one another to build large, larger and the largest airports with size sometimes taking precedence over passengers’ convenience of the users.
It appears to me that some private operators have, at times, gone overboard in creating large and lavish passenger terminal building infrastructure.  This is in context of the ever-increasing UDF/ADF charges sought by the airport operators worldwide; much to the annoyance of the travelling public, airlines and IATA.
 
EBB: The size of the terminal buildings should be need-based and capable of expansion in a phased manner, keeping in mind that the centre-of-gravity of global air traffic shifts across the world regions depending on the economic status and consequently the propensity of the people in the region to travel by air.
The focus should, in the first instance, be on optimising the existing space by improving systems, redefining procedures, adding efficiencies and eliminating redundancies, resorting to expansion of the existing facility or putting up a new facility or a Greenfield airport only after a thorough scientific study of the traffic forecast and an assessment of the sustainable economic environment.
 
IS: India is being looked upon by aircraft manufacturers and allied aviation industries, as an important destination for doing business.  What is your take on this matter?
 
EBB: We could look forward to a major breakthrough in that direction.  India and the USA are currently working on a Bilateral Aviation Safety Agreement, which, amongst other provisions, would lead to mutual acceptance of aeronautical products/parts developed in either country.  Since aeronautical products are now being designed and manufactured in India, a need was felt for international acceptance of such products.  The matter was actively pursued in the third edition of the biennial event of US-India Aviation Summit held at New Delhi in November 2011.
 
IS: Despite the traffic growth, some well established private airlines are having a tough time.  Some of them have slipped into a severe debt crisis and some are facing a resource ‘crunch’.  Do you foresee any relief?
 
EBB: Yes.  The civil aviation ministry has recently agreed to the proposal of allowing foreign carriers to buy a 26% stake in private airlines.  Earlier Foreign Direct Investment by foreign carriers was not allowed in the domestic airline industry.  But, then, at the end of the day it is a matter of the survival of the fittest.
 
IS: A related question please.  Would the sudden large fleet expansion on the part of some airline operators, with perhaps inadequate maintenance facilities and, in a worst-case scenario, lack of funds, affect the airworthiness of the air-transport operations?

EBB: Airworthiness and consequently safety are primary to any air transportation activity and are non-negotiable.  We have stringent rules and regulations in place and are also armed with competent staff to perform such functions diligently.  Further, we can at any time call for an immediate time-bound audit to check the state of compliance.
 
IS: As the chief of the aviation regulatory authority in the country, the Directorate General of Civil Aviation, what is your message for achieving the high standards set in the aviation sector in a timely and an efficient manner?
 
EBB: Multiple stakeholders have clearly defined roles and responsibilities in the process, but I would categorically say that …success hinges on promoting cooperation, sustained efforts, integrated thinking and above all, teamwork.

 
The Author will be pleased to interact with readers via inderjit.singh@aviationanalyst.net and/or debate the issue in an aviation forum.