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Indian Avaition Industry Analysis

Indian Avaition Industry Analysis

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12/18/2012

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REPORT ON INDIAN AVIATION INDUSTRY

SUBMITTED BY: ALANKRIT GUPTA ANJUM SUDHANSHU DANIELS GAURAV MATHUR PRIYASHA GUPTA UMA JALAN

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HISTORY The origin of Indian civil aviation industry can be traced back to 1912, when the first air flight between Karachi and Delhi was started by the Indian State Air Services in collaboration with the UK based Imperial Airways. It was an extension of London-Karachi flight of the Imperial Airways. In 1932, JRD Tata founded Tata Airline, the first Indian airline. At the time of independence, nine air transport companies were carrying both air cargo and passengers. These were Tata Airlines, Indian National Airways, Air service of India, Deccan Airways, Ambica Airways, Bharat Airways, Orient Airways and Mistry Airways. The Government nationalized nine airline companies vide the Air Corporations Act, 1953. Accordingly it established the Indian Airlines Corporation (IAC) to cater to domestic air travel passengers and Air India International (AI) for international air travel passengers. The assets of the existing airline companies were transferred to these two corporations. This Act ensured that IAC and AI had a monopoly over the Indian skies. These government-owned airlines dominated Indian aviation industry till the mid-1990s.

FACTORS AFFECTING DEMAND FOR AIR TRAVEL 1. In April 1990, the Government adopted open-sky policy and allowed air taxi- operators to operate flights from any airport, both on a charter and a non charter basis and to decide their own flight schedules, cargo and passenger fares. Changes in investment policies in aviation industry also helped in launching of new airlines. By 1995, several private airlines had ventured into the aviation business. With the operations of these players taking off, the erstwhile monopoly Indian airlines¶ share begun to plummet. 2. Tourism promotion played an important part in increasing air traffic. With the incoming tourist traffic on the rise (as a result of Open Skies Policy), domestic and international airlines found new sources of revenues. 3. Lower airfares played a major role in increasing air traffic. With dropping fares, air travel has become more and more affordable for the common people. 4. Growth in expendable income of Indians has led them to take to air travel rather than spending 2 days in train for long distance travel.
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MARKET STRUCTURE
Post independence, Tata Air was the leader in Indian aviation industry. In 1953, 11 domestic airlines were merged together to form Indian Airlines and Tata Airlines was nationalized to form Air India. Thus the industry was suddenly shrunk to just two players, one domestic and the other catering to international flights. The government, in effect, created a monopoly. Being sole suppliers of air travel services, Indian Airlines and Air India were price setters. Things changed in early nineties when India thought of opening up its skies in an attempt to boost tourism in country. In 1989, private players were allowed to enter aviation sector as taxioperators and for cargo delivery. With the implementation of Open Skies Policy, private participation took an upward swing. Many players like Airways, Air Sahara, East-West Airlines and ModiLuft entered the fray. But the policies still protected the national airlines. Only Jet Airways and Sahara could survive the initial competition and restrictions. The period between 1995 till 2003 was a period of inaction for aviation industry. No attention was paid towards developing infrastructure and expansion of fleet. Creation of new routes wasn¶t followed aggressively and players faced shortage of capital. There was a clear lack of intent among the players and government. The decisions that were to be taken during Ninth Five Year Plan (1997-2002) were delayed for several reasons. The turning point in Indian Aviation came with the launch of Air Deccan. The new entrant changed the rules of the game and introduced the concept of Low Cost Carriers and flying with no frills to India. With tickets being sold for Re.1, Air Deccan soon became the most talked about airline among the Indian masses. In tow came other such airlines, launched within 2-3 years after Air Deccan¶s entry. These included IndiGo, SpiceJet, GoAir, Kingfisher Airlines and Paramount Airways among others. The air traffic in terms of passenger and cargo movement have increased by an impressive CAGR of 19.14% and 9.91% during the period from 2003-04 to 2007-08. The market structure was changing from monopoly to oligopoly. An Oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Aviation industry in India has only 11 players and only 6 major players in the market currently. These are broadly categorized into Budget Airlines (Jet Airways, Kingfisher Airlines and Indian) and Low Cost Carriers (Kingfisher Red, IndiGo, GoAir, SpiceJet
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etc). Airlines in LCC category constantly undercut each other¶s prices to capture/re-capture the lost market share. The oligopolistic market also is characterized by the fact that the changes in the price of one will affect the profits of the other so also the other strategies. The main features of an oligopolistic market are: 1. Only a few firms supply the market with products that may be homogeneous or differentiated. 2. Firms sell products which are close substitutes of each other. 3. Entry barriers are high owing to presence of rules/regulations, ownership of patents or scarce resources. 4. Firms take decisions on the basis of decisions taken by rivals. Interdependence exists. 5. There is high degree of market concentration; very few players own a major portion of market. Indian skies are controlled by a few players. The top four players (Jet Airways+JetLite, Kingfisher Airlines, Air India and IndiGo) control over 80% of domestic air traffic in India.

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Another interesting aspect of the current scenario is the price war. If one airline reduced its price, others invariably followed. So much so that tickets are sold for Re.1. This resulted in increasing losses for the airlines. The players were in a Bertrand trap. The trap was broken by Kingfisher Airlines after acquisition of Air Deccan in April 2008 when it announced that Air Deccan will no longer be selling tickets at throwaway prices.

CHALLENGES FACED After a period of drastic growth, Indian aviation industry is now gripped with challenges that include high Aviation Turbine Fuel (ATF) prices, rising labor costs, shortage of skilled labor, excess capacity, huge debt burden and intense price competition. This has forced all players rethink there business models. Mergers, acquisitions and consolidation of the industry seem to be in order. Also, technological advances like Fly-By-Wire technology and CAT III will positively affect the Indian industry.

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Letter to World Bank

Robert B Zoellick President, World Bank Geneva 08/09/2009 Aviation Association of India Hyderabad, India Sir, Sub: Case for presenting Indian Aviation Industry as the leading indicator of Indian economy With reference to announcement by International Bank for Reconstruction and Development (IBRD) on 23/06/2009, the Aviation Association of India would like to apply for the mentioned aid. The following facts and figures substantiate Aviation Industry¶s claim to become the representing industry in driving India¶s economic growth. With a growth rate of 18 per cent per annum, the Indian aviation industry is one of the fastest growing aviation industries in the world and was worth US$ 14 billion in August 2009. The Centre for Asia Pacific Aviation (CAPA) forecasted that domestic traffic will increase by 25 per cent to 30 per cent till 2010 and international traffic growth by 15 per cent, taking the total market to more than 100 million passengers by 2010. By 2020, Indian airports are expected to handle more than 100 million passengers including 60 million domestic passengers and around 3.4 million tonnes of cargo per annum. Moreover, significant measures to propel growth in the civil aviation sector are on the anvil. The government plans to invest US$ 9 billion to modernize existing airports by 2010. The

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government is also planning to develop around 300 unused airstrips. Plans are on to develop airport infrastructure which include:
y

Mumbai and Delhi airports have already been privatized and are being upgraded at an estimated investment of US$ 4 billion over 2006-16.Greenfield airports are operational at Bangalore and Hyderabad. These are built by private consortia at a total investment of over US$ 800 million.

y

A second Greenfield airport being planned at Navi Mumbai is going to be developed using public-private partnership (PPP) mode at an estimated cost of US$ 2.5 billion.

y

35 other city airports are proposed to be upgraded. The city side development will be undertaken through PPP mode.

y

Over the next five years, AAI has planned a massive investment of US$ 3.07 billion²43 per cent of which will be for the three metro airports in Kolkata, Chennai and Trivandrum, and the rest will go into upgrading other non-metro airports and modernizing the existing aeronautical facilities.

Aviation policies are also being reformed to support this development.
y y

100 per cent FDI under automatic route is permissible for Greenfield airports. For existing airports, FDI up to 74 per cent is permitted through automatic approvals and up to 100 per cent through special permission.

y

Private developers allowed to setup captive airstrips and general airports 150 km away from an existing airport.

y y

100 per cent tax exemption for airport projects for a period of 10 years. 49 per cent FDI is permissible in domestic airlines under the automatic route, but not by foreign airline companies. 100 per cent equity ownership by Non-Resident Indians (NRIs) is permitted.

y

74 per cent FDI is permissible in cargo and non-scheduled airlines.

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y

The Indian government plans to set up an Airport Economic Regulatory Authority to provide a level playing field to all players.

y

Indian government is mooting the Hub and Spoke model for Indian aviation industry keeping in mind streamlining it increasing efficiency. It will lead to route rationalization and other benefits.

Further, the fleet size of the scheduled domestic airlines increased from 305 aircrafts in 2006-07 to 381aircrafts in 2007-08, which indicated a total increase of 24.9 % in the fleet size. Scheduled Domestic Aircraft departures per day increased from 1153 in 2006-07 to 1367 during the year 2007-08. The following charts show the result of following the Open Skies Policy and the potential that it holds.

Passenger traffic to and from India

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Cargo traffic to and from India

The following are the social benefits achieved by expanding Aviation Industry in India: y EMPLOYMENT: The number of pilots engaged by all the domestic Indian carriers increased from 3302 during 2006-07 to 3997 in 2007-08.The number of technical employees engaged by all the domestic Indian carriers decreased from 13343 during 2006-07 to 13308 in 2007-08.The number of cabin crew employees eng aged by all the domestic Indian carriers increased from 9774 during 2006-07 to 11696 in 2007-08. With the increase in operational complexity, the strength of ground force has also swelled up providing new employment opportunities. y INFRASTRUCTURE: India has jumped to 9th position in the world aviation market in 2007 from 12th in 2006. The airlines business is growing at 27 per cent per annum in India. Development of related physical infrastructure will not only contribute to growing economy but will also provide employment. y EFFECT ON OTHER INDUSTRIES: With the increase in number of incoming foreign (and domestic) tourists, it is also providing stimulus for growth in hospitality industry and tourism. Many domestic airlines have tied up with state tourism boards which has

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resulted in increased growth in other sectors too. E.g. GoAir has tied up with Goa Tourism and Jet Airways has tied up with Kerala Tourism board. y INTERNATIONAL FLIGHTS: The scheduled international traffic passengers witnessed a growth rate of 20.5% during 2007-08. The corresponding figure for the year 2006 -07 was 15.5 %.The scheduled international cargo grew by 15.5% during the year 2007-08. The corresponding figure for the year 2006-07 was 10.3 %. This augurs well for tourism industry and also projects a more open and welcoming India. We hope that these facts and figures are in accordance with the required parameters set for granting of aid. Sincerely, Howard Hughes, Aviation Association of India

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