AVIATION INDUSTRY

ECONOMICS

SUBMITTED TO: SUBMITTED BY:

Dr. C S ADHIKARI Abhishek Tripathy 57

Sur bhi Upadhay athi. S 471 Asw 714

TABLE OF CONTENTS SERIAL NUMBER 1. 2. 3. 4. 5. 6. 7. TOPIC INTRODUCTION OF AVIATION SECTOR CATEGORIES OF AIRLINE INDUSTRY. CHALLENGES FACED BY AIRLINE INDUSTRY. MAJOR PLAYERS IN AIRLINE INDUSTRY. ROLE OF AVIATION IN INDIAN GDP. SWOT ANALYSIS CONCLUSION. PAGE NUMBER 3 5 6 7 10 11 15

INTRODUCTION OF AVIATION SECTOR

Indian Aviation Industry has been one of the fastest-growing aviation industries in the world with private airlines accounting for more than 75 % of the sector of the domestic aviation market. With a compound annual growth rate (CAGR) of 18 % and 454 airports and airstrips in place in the country, of which 16 are designated as international airports, it has been stated that the aviation sector will witness revival by 2011.

Origin of Indian Aviation Sector

The origin of the Indian aviation industry dates back to 1912 when the 1st flight from Karachi to Delhi commenced in collaboration with the Indian State Air Services and Imperial Airways. However, the industry got its real start by JRD Tata through his launch of Tata Airline, in the year 1932. JRD Tata was the 1st Indian, who got an A-Licence. In the year 1946, Tata Airlines was converted into Air India. Soon after the independence, India was having 9 airline companies providing passenger and cargo services. These airline companies were Tata Airlines, Air service of India, Deccan Airways, Indian National Airways, Ambica Airways, Orient Airways, Bharat Airways and Mistry Airways. In the first half of 1948, a joint sector company was set up by the Indian Government, in collaboration with the Air India International Ltd and Air India. Through the Air Corporations Act, 1953, 9 airlines were nationalized. Indian Airlines Corporation (IAC) was set up for serving the domestic passengers while Air India International (AI) was set up to cater for the international passengers. In 1990, open-sky policy was adopted by the government whereby air taxi- operators were allowed to operate their flights from any of the airports, decide their fares for cargo and passenger services and the flight schedules. In 1994, the monopoly enjoyed by AI and IA were stopped by the Government and private operators started providing air transport facilities and services. By the year 1995 many airlines have already started providing services, such as NEPC Airlines, East West Airlines, Jet Airways Sahara, Jagsons Airlines, ModiLuft Airlines, Continental Aviation, and Damania Airways. Aviation industry in India saw an important change in the year 2003, when budget flying was introduced by Air Deccan through the lowering down of fares to about 17% in comparison to what the other airlines charged. Air Deccan was joined in this process by Go Airways, Spice Jet, and Kingfisher Air. Thus new trends were introduced in the aviation market, by these budget airlines. Growth of Indian Air Network Continued growth has been shown by the aviation industry in India, in recent years. In the year 2008, it grew at a CAGR of about 18% that accounts for US$ 5.6. In August 2007, 3.67 million

passengers availed the services of domestic airlines, which was about 26% more in comparison to the previous year. It is estimated by the Centre for Asia Pacific Aviation (CAPA) that the domestic traffic will grow up by almost 25% to 30% by the year 2010 while the international traffic is supposed to go up by 15%. By 2010, 100 million passengers will avail the air network service in India. In the year 2010, an investment of US$ 9 billion has been incurred by the Aviation Ministry with the aim to modernize the existing airports. In June, 2010, the market leader was the Jet Airways with a share of 26.5 %. Next in line is Kingfisher Airlines with 21%, and Air India with 16.9%. Hyderabad International Airport ranks among the top 5 as per the annual survey of the Airport Service Quality (ASQ) passengers. New airports and terminals are being developed. The economic slowdown witnessed by the aviation sector in 2008 owing to fall in number of passengers coupled with high fuel cost and severe competition from numerous other airlines, assumed a gradual growth from 2009. At present the growth rate of international and domestic travel has exceeded 25%, which is the worlds highest. Recent Developments in Aviation Sector Modernization of the airports Growth and development in the MRO segment Policy on Airport security Policy on the merchant airports Augmentation of fleet Foreign equity involvement

Categories of Indian aviation sector:

The Indian aviation sector can be broadly divided into the following main categories: 1. Scheduled air transport service includes domestic and international airlines. 2. Non-scheduled air transport service consists of charter operators and air taxi operators. 3. Air cargo service, which includes air transportation of cargo and mail. Scheduled air transport service: It is an air transport service undertaken between two or more places and operated according to a published timetable. It includes: 1. Domestic airlines, which provide scheduled flights within India and to select international destinations. Air Deccan, Spice Jet, Kingfisher Airline and IndiGo are some of the domestic players in the industry. 2. International airlines operate from scheduled international air services to and from India. Non-scheduled air transport service: It is an air transport service other than the scheduled one and may be on charter basis and/or non-scheduled basis. The operator is not permitted to publish time schedule and issue tickets to passengers. Air cargo services: It is an air transportation of cargo and mail. It may be on scheduled or nonscheduled basis. These operations are to destinations within India. For operation outside India, the operator has to take specific permission of Directorate General of Civil Aviation demonstrating his capacity for conducting such an operation.

Challenges Faced by Airline Industry

After a period of drastic growth, Indian Airlines is now gripped with challenges that are also impacting the industry across the globe, including high Aviation Turbine Fuel (ATF) prices, rising labor costs, shortage of skilled labor, excess capacity, huge debt burden and intense price competition. High Aviation Turbine Fuel (ATF) Prices ATF prices now form around 80% of the total operating costs of Airline Industry. The industry across the world continues to be plagued with high ATF prices which have demonstrated the inverse relationship between airline stock prices and fuel prices. ATF prices have almost doubled over the last year. Almost all Indian carriers are also feeling the heat and are desperately resorting to measures like cutting routes, increasing fuel surcharge, promoting the use of etickets and charging for food items to reduce their losses. Skyrocketing ATF prices, depreciating rupee coupled with global recession has directly impacted the Indian Airline Industry. The industry reported a $10.4 billion loss in the last year. Increasing air fares have worked against the logic of increasing profits, as it has resulted in decreased air traffic. Besides focusing on designing fuel efficient engines, aircraft manufacturers like Boeing and Airbus, along with OEMs are developing sustainable bio-fuels which will give them some relief from the vulnerability of profits due to consistently rising fuel prices. Excess Capacity Driven by the drastically increasing passenger traffic over the last 3 years, almost all Indian airlines build their capacity assuming the growth would continue over the next few years. Several new aircraft were bought within a short span of time which resulted in excess capacity of around 15% to 20%. Aircrafts ordered during good times are being delivered during recession. According to industry experts, around 17% of the current fleet (around 4,000 aircraft) are scheduled for delivery during the next 3 years. Even though the industry grew above 40%, almost half of the growth was primarily stimulated due to low fares. Maintaining such low levels of fares will be difficult due to excess capacity, especially during the ongoing global slowdown. Consolidation therefore seems to be the next logical step to get rid of this excess capacity problem. Hugh Debt Burden Healthy profits and increasing passenger traffic saw airlines raising significant amount of capital from Financial Institutions and Banks to fund their aggressive expansion plans. Banks also were liberal in lending airlines. The top three airlines including Air India, Kingfisher Airlines and Jet Airways are now carrying a cumulative debt burden of approximately $8 billion. Incidentally, this is almost equivalent to the losses of $8.5 billion posted by all global carriers. Restructuring this huge amount of leverage will be a challenge as resorting to equity capital will also be equally difficult during economic slowdown. Poor Infrastructure Infrastructure continues to be a major constraint for Indian Airline Industry today, which has been aggravated further due to excess capacity created during good times. Maintenance and Air

Traffic Control (ATC) infrastructure are grossly inadequate if the industry expects to grow any further. While steps are being taken on this front to upgrade major airports in Mumbai, Delhi and Hyderabad, security concerns still remain to be addressed. Attracting investments from private sector will go a long way to develop and maintain the infrastructure which is crumbing due to the built-up excess capacity. Regional Connectivity Even though the industry is weighed down with excess capacity, regional connectivity continues to be poor, primarily due to the lack of infrastructure. Industry experts suggest that increasing regional connectivity instead of concentrating in metros and redeploying current fleet to routes where there is demand will help airlines in managing their excess capacity

MAJOR PLAYERS IN AIRLINE INDUSTRY:

Players in Indian aviation industry classified into three groups: 1. Private players. 2. Public players. 3. Start up players. There are three public players: Air India, Indian Airlines and Alliance Air. The private players include Jet Airways, Air Sahara, Paramount airways, Go Air Airlines, Kingfisher Airlines, Spice Jet, Air Deccan and many more. The start up players is those which are planning to enter into the markets. Some of them are Omega Air, Magic Air, Premier Star Air and MDLR.

MARKET SHARE OF PLAYERS IN AIRLINE INDUSTRY:

Employment opportunities:
Today India Aviation Industry requires approximately 7,500-8,000 pilots and an equal number or more air cabin crew by 2010. Heavy pay packages are awaiting pilots with a commercial pilot license (CPL). An amateur pilot can start his career with a salary of Rs 2.5-3 lakh a month with a commercial airline. With the sudden increase in the number of airlines, pilots are in great demand

Latest developments:
Toward modernization of non-metro airports the Airports Authority of India (AAI) is planning to spend over US$ 1.02 billion in 2010. There are even plans of the city-side development of 24 airports, including airports at Ahmedabad and Amritsar. There are even additionally, 11 new Greenfield airports which are in pipeline which have been identified to reduce passenger load on existing airports. The government has formed National Aviation Company Ltd (NACIL) by merging national carriers Air India and Indian Airlines into a single entity. The blue print was prepared by the civil aviation ministry to convert Delhi airport into an international hub for passenger airlines and has been done so recently.

Role of Aviation Industry in Indian GDP:

The Role of Aviation Industry in India GDP in the past few years has been phenomenal in all respects. The Aviation Industry in India is the most rapidly growing aviation sector of the world. With the rise in the economy of the country and followed by the liberalization in the aviation sector, the Aviation Industry in India went through a complete transformation in the recent period.

With the entry of the private operators in this sector and the huge cut in air prices, air travel in India were popularized On February 18, 1911, the first commercial flight was made from Allahabad to Naini by a French pilot named Monseigneur Piguet The growth in the Indian economy has increased the Gross Domestic Product above 8% and this high growth rate will be sustained for a good number of years Air traffic has grown enormously and expected to have a growth which would be above 25% in the travel segment In the present scenario around 12 domestic airlines and above 60 international airlines are operating in India With the growth in the economy and stability of the country India has become one of the preferred locations for the trade and commerce activities The growth of airlines traffic in Aviation Industry in India is almost four times above international average Aviation Industry in India have placed the biggest order for aircrafts globally Aviation Industry in India holds around 69% of the total share of the airlines traffic in the region of South Asia

SWOT ANALYSIS OF AILRLINE INDUSTRY:

Strengths
Liberal Environment: India's airlines operate in a liberal environment in both the domestic and international spheres. With three major airline groups and four smaller carriers all operating domestic routes, there is no shortage of competition, although this factor combined with excess capacity has tended to depress yields. Nevertheless, carriers are free to operate any domestic routes without seeking permission from the government, and without restriction on pricing. One condition that airlines find onerous however, is the requirement to operate a proportion of ASKs to remote and underdeveloped regions of the country. On the international front, the Indian government has pursued an increasingly liberal approach to bilateral air services agreements with key overseas markets, resulting in greater access for foreign carriers. Emirates for example, the largest foreign carrier by capacity into India, will operate 185 weekly frequencies to ten cities across the country by the end of 2009. India's carriers have a combined international capacity share of just over 36% but face strong competition from foreign carriers, both full service and low cost. Modern Fleet: In light of the fact that much of the growth in Indian aviation has occurred in the last five years, the country's airlines operate a relatively young and modern fleet, ensuring a high quality passenger experience, improved safety and good operational reliability. High Quality: India's airlines offer a good quality product in each of the operating models in existence. Jet Airways and Kingfisher Airlines are competitive in terms of their inflight service against the leading carriers in the world. Kingfisher for example is one just half a dozen global carriers such as Singapore Airlines and Cathay Pacific, with a Skytrax 5 star rating. In fact it could be argued that the full service product on domestic routes is excessive for the sector lengths involved and results in a higher cost structure, which the passenger does not necessarily see value in paying for. The LCCs too, by and large, offer a comfortable, efficient and reliable service. Until a couple of years ago, Air Deccan was one carrier that had developed a reputation for poor on-time performance, flight cancellations and overbooking, however since being acquired by Kingfisher, most of these operational issues appear to have been resolved. Economic Growth: Economic growth has historically been the primary driver of air traffic, and the relationship has generally been even stronger in developing countries. Between 2004 and 2007, India enjoyed four years averaging 9% per annum GDP growth. This slowed to 6.5% in 2008, however against the background of a global economic recession, this was a creditable performance. The increased business confidence following the general election result in May 2009 has eased concerns that growth may slow further. The stock market has soared 25% in the last month and the outlook for growth and consumption has improved, which is a positive for the aviation industry. Political Stability: The re-election of the Congress Party, with a stronger majority is expected to

allow the new administration to push ahead with further economic reforms, which had to date been blocked by coalition partners. The prospect of a government which has the ability to last its full term and pursue its agenda is extremely encouraging. In addition, Minister Praful Patel, who was the architect of the dramatic transformation of the aviation sector, has retained the portfolio, which brings experience and stability to the aviation industry.

Weaknesses
Airport Infrastructure: The rapid growth in air traffic over the last few years exposed the deficiencies of airport infrastructure across the country. After decades of neglect, many of India's airports were forced to operate well above design capacity. The resulting congestion in the terminals and on the runways delivered a poor experience for the passenger and a costly, inefficient operating environment for the airlines. However, although a weakness today, it is also fair to say that it is becoming less so, as the airport modernisation program starts to deliver results, with new airports in Bangalore and Hyderabad, and improving facilities at Delhi and Mumbai. The upgrade of non-metro airports remains behind schedule so it may be another 3-4 years before we see good quality facilities across the country, but there are tangible signs of improvement. Airways Infrastructure: Although congestion on the ground is relatively visible, another current area of weakness is the limited investment that has taken place in improving infrastructure for air traffic management. This too results in expensive aircraft holding patterns, indirect flight paths and sub-optimal use of runways. National Carrier: The state-owned carrier, Air India, is in a dire situation. The carrier is estimated to have posted losses of close to USD1 billion in 2008/09, and morale within the bloated workforce is at a low. With no clear direction, management instability at the top and continuing issues with the integration of Air India and Indian Airlines, the carrier is in need of radical restructuring. It is imperative that the government develops a turnaround strategy for Air India as an urgent priority. Deep Pockets: Over the last three years, India's carriers have accumulated billions of dollars in losses and debt. Ironically, a characteristic that would normally be considered a strength namely deep pockets - has resulted in carriers remaining afloat that would perhaps in other circumstances have failed. With the backing of either the government or large corporations, several carriers have been able to access funding that they might have been denied on a strictly commercial basis as standalone airlines. As a result of the intense competition which has been perpetuated, airlines have struggled to raise fares to break even levels. High Cost Structure: India's airlines operate in a relatively high cost environment, primarily due to the punitive taxation structure. The greatest impact is felt in the area of sales taxation on fuel, which can increase the cost to 60% above the international benchmark. The limitations of airport infrastructure also increase costs due to the fact that carriers are unable to schedule fast turnarounds, resulting in reduced aircraft utilisation. In addition, the fact that high quality

ancillary services such as MRO and training are not currently available in India, means that aircraft and personnel have to be sent overseas. Skilled Resources: Domestic air traffic in India tripled in the five years to 2008, while international passengers doubled. This rate of growth far outstripped the capacity to develop skilled technical and management personnel. The gap was partly addressed by employing expatriates, particularly as pilots, and by learning on the fly. This means there is a lack of indepth experience and knowledge at all levels. Furthermore, there is an absence of high quality training infrastructure in-country to deliver the resources to support future growth. This lack of personnel affects the government as well and the FAA has expressed its concern at the shortage of qualified safety inspectors within the Directorate General of Civil Aviation (DGCA). India has been put on notice that unless this issue is addressed, it may be relegated to a Category II nation, which would mean that Indian carriers would not be permitted to increase services to the US.

Opportunities
Market Growth: Despite the rapid expansion of recent years, India has only just scratched the surface of the potential for the aviation sector. Trips per capita remain low even by the standards of other developing countries. China's domestic market is more than four times the size of India's 40 million passengers. Even, Australia, a country with a population of just 21 million, compared with India's 1.1 billion, has a market 25% larger. Similarly on the international front, less than 1% of Indians travel overseas each year. Inbound visitor nunbers at 5.4 million in 2008 for the entire country, were less than for Dubai or Singapore. It is not difficult to see the expansion potential from such a low base as economic growth continues apace. Geographic Location: India is ideally positioned as a major aviation hub at the crossroads between Europe, the Middle East and Asia Pacific. The fact that aviation was a neglected sector for so long has allowed airports such as Dubai and Singapore to effectively establish themselves as offshore hubs for Indian passengers, and they now have a significant head start. However, as India's airports improve, and its airlines receive international awards for their service, there may be an opportunity to leverage its huge home market to compete with these longer established hubs. Lower Costs, Higher Quality: India has already managed to develop a dynamic aviation sector despite, and not because of, its environment. The improvements in airport and airspace infrastructure, the development of indigenous training and maintenance facilities and the potential for fiscal reform, all point to the potential for Indian aviation to increasingly operate in a lower cost, higher quality and more efficient manner. This could in due course lead to an opportunity for India to develop as a global outsourcing hub in areas such as aerospace manufacturing, MRO and training.

Threats
Middle East Aviation: The carriers of the Gulf are aggressively expanding in India, with high

frequencies from multiple destinations to their hubs, from where passengers can access extensive global networks. The ability for a passenger for example to travel one-stop fromAhmedabad to Hamburg, or multiple daily frequencies from Mumbai to London, connecting at an attractive hub, is a strength which Indian carriers simply cannot match at present. It will take time and the question is how far ahead will the Middle East carriers be by that stage. Terrorism: India has seen frequent terrorist activity in recent years. The country has shown great resilience in bouncing back after each attack, however inbound international traffic in particular is sensitive to such events. Similarly the potential for India to develop as a global traffic and services hub is contingent upon it being seen as a safe and attractive destination.

Conclusion:
Given the primary objective of a democratic government to focus on inclusive growth, the government needs to invest more on the mass transit systems. While government should positively respond to the demands of airlines players by rationalizing its policies, it should not consider any bail-out package to the ailing players. Instead the money it might consider for a bailout should be spent on building and upgrading the rural and urban mass transit systems. The airlines players should also think of increasing their efficiency and by that mean they should find ways to minimize their cost. While government should keep focused on the mass transit systems in the country, it is also obliged to back the growth of the aviation sector that is a major indicator of countrys growing economic status. The government should definitely look into problems of the industry and consider measures like rationalizing taxes and lowering duties on jet fuel prices to help the ailing industry. India's aviation industry presents some considerable opportunity, but has been dragged down by red tape and, more recently, excessive airline capacities amid the downturn in the global economy. Steps are being taken to address the shortcomings, but the industry does face a considerable test over the next 12-18 months.