AVIATION INDUSTRY IN INDIA

Submitted to

DR. AJAY RATHORE
Professor (Dean), TIAS

Submitted by
MUHAMMAD SALIM SUNIL KUMAR GUPTA ( 07217003909 ) ( 07417003909 )

MBA - 1ST SEMESTER

CONTENTS
• Overview • Recent development

Current low cost carriers operations

• Classification of the aviation sector • Regulatory environment

Major policy reforms in aviation sector

• Major players in Indian aviation sector • Road ahead….

OVERVIEW
The history of civil aviation in India started with its first commercial flight on February 18, 1911. It was a journey from Allahabad to Naini made by a French pilot Monseigneur Piguet covering a distance of about 10 km. Since then efforts were on to improve the health of India's Civil Aviation Industry. The first domestic air route between Karachi and Delhi was opened in December 1912 by the Indian State Air Services in collaboration with the Imperial Airways, UK as an extension of London-Karachi flight of the Imperial Airways. The aviation industry in India gathered momentum after three years with the opening of a regular airmail service between Karachi and Madras by the first Indian airline, Tata Sons Ltd. However this service failed to receive any backing from the Indian Government. In 1932, J.R.D. Tata founded Tata Airline, the first Indian airline. At the time of independence nine Air Transport Companies were operational in the Indian Territory. Later the number reduced to eight when the Orient Airways shifted its base to Pakistan. The then operational airlines were Tata Airlines, Indian National Airways, and Air service of India, Deccan Airways, Ambica Airways, Bharat Airways and Mistry Airways. With an attempt to further strengthen the base of the aviation sector in India, the Government of India together with Air India (earlier Tata Airline) set up a joint sector company, Air India International, in early 1948. With an initial investment of Rs. 2 crore and a fleet of three Lockheed constellation aircrafts, Air India started its journey in the Indian aviation sector on June 8, 1948 in Mumbai (Bombay)- London air route. For many years since its inception the Indian Aviation Industry was plagued by inappropriate regulatory and operational procedures resulting in either excessive or no competition. Nationalization of Indian Airlines (IA) in 1953 brought the domestic civil aviation sector under the purview of Indian Government. Government's intervention in this sector was meant for removing the operational limitations arising out of excess competition. Air transportation in India now comes under the direct control of the Department of Civil Aviation, a part of the Ministry of Civil Aviation and Tourism of Government of India. Aviation by its very nature constitutes the elitist part of our country's infrastructure. This sector has substantial contribution towards the development of country's trade and tourism, providing easier access to the areas full of

natural beauty. It therefore acts as a stimulus for country's growth and economic prosperity.

RECENT DEVELOPMENTS 1)Modernization of Airports
The Airports Authority of India (AAI) is undertaking the development and modernization of all 35 non-metro airports in the country simultaneously and work is due to be completed by March 2010. Wholly owned subsidiaries of AAI are being created for the development and operation of these airports. According to the AAI, it has already awarded work orders for terminal buildings at 13 airports, and for airside development, including runway, taxiway, apron, fire station, control tower and isolation bay, at 19 airports. Two greenfield airports at Bangalore and Hyderabad are being developed under PPP format. The first phase is planned to be finished by end-2008. The other two metro airports - Chennai, Kolkata -- may soon be on the modernization path. At least 10 non-metro airports are being developed as strategic airports serving the region or respective states, and at least a few more non-metro airports are being positioned strategically as regional hub airports or nodes providing better connectivity to overall airport network and feeding international network through hub/metro airports. With these developments in aviation infrastructure, we may also see some airports making money not purely on passenger traffic, but also by means of cargo, logistics, SEZs and real estate projects being developed adjacent to airports. As per estimates, domestic passenger movement across airports is likely to grow at a rate of 20-25 per cent till 2010, and passenger traffic is expected to increase to around 120 million by 2010. Hence modernization, privatization and development of airports in the form of greenfield and/or brownfield airports is the need of the hour.

2)Policy On Merchant Airports
In a step that could allow 100 per cent foreign direct investment (FDI) in the development of airport infrastructure, the Government is fast moving towards finalizing a policy on merchant airports. Under this new concept, merchant airports will be built entirely by private parties with their own resources, without any government funding. Under the proposed policy, the Government

would allow entrepreneurs to set up and operate airports on the basis of commercial viability. However, these airports would function subject to safety and security oversight of the Government. As such a project would require huge investments, the Government might adopt a more liberal and licence-based approval procedure, besides allowing 100 per cent FDI in such airports. Merchant airports would also be beneficial in developing new cargo hubs, thereby providing a thrust to cargo and freight handling.

3)Airport Security Policy
The main objective of civil aviation security continues to be safeguarding of civil aviation operations against unlawful interference and to avoid causing inconvenience to passengers. The Ministry has taken a number of steps to strengthen sense of security among the air-passengers making Indian aviation sector one of the safest in the world. More emphasis is given on passenger security. Systems like integrated registered baggage screening system, which facilitates the process of registered baggage handling in a safe and secure way, intrusion detection alarm system, biometric based integrated passenger profiling system (BIPPS), which will ensure identity of the passengers, have been introduced. The Bureau of Civil Aviation security provides continuous training on aviation security for airports security staff, police officers of the rank of SIs and above, airlines staff, air taxi operators and airport management.

4)Augmentation Of Fleet by Various Airlines
With both full-service and low- cost airlines now pursuing fleet-expansion plans, the world's aircraft manufacturers are focusing on India as a lucrative market. Alongside Boeing and Airbus, regional jet makers Bombardier and Embraer, as well as European turboprop maker ATR, have all benefited from the boom in the country's civil aviation sector. Alliance Air, the fully-owned subsidiary of Indian, is expanding its fleet of regional aircraft in a bid to revamp its operations as a no-frills carrier. The ageing Boeing 737 fleet of the airline is being phased out and one aircraft has already been dropped from the fleet for conversion into a freighter. The revised business strategy is in line with Indian's plan to induct two wide-bodied Airbus A330 aircraft and the impending merger with Air India. Besides this, Kingfisher has also ordered five Airbus A380 aircraft. India is expecting to add aircraft worth about US$80 billion by 2020.

5)Foreign Equity Participation in Air Transport Services

The Domestic Air Transport Policy approved by the government provides for foreign equity participation up to 49% and investment by Non-Resident Indians (NRIs) up to 100% in the domestic air transport services. Foreign airlines are, however, not permitted to pick up equity directly or indirectly. Moreover, the flow of foreign investment into aviation is likely to get smoother as the government is planning to fix a higher foreign direct investment (FDI) ceiling for five sub-sectors of the industry. The FDI ceiling for the sectors would be higher than the 49% allowed in airlines now. The five categories proposed in the Cabinet note for FDI review include maintenance, training facilities, cargo handling, passenger handling and chartered services.

6)Boom in Indian Aviation Sector is Likely to Generate More Jobs
According to a recent study by Associated Chambers of Commerce and Industry (Assocham), the boom in the aviation sector is likely to generate nearly 2.5 lakh jobs by the year 2010. The study says that the civil aviation sector is also set to become a Rs 35,000-crore industry by the same time. These jobs will rise on account of the modernization of Delhi and Mumbai international airports and the revamping of 35 non-metro airports. With the sudden increase in the number of airlines and other consolidations and expansion plans, pilots are in tremendous demand. India would require approximately 7,500-8,000 pilots and an equal number or more air cabin crew by 2010. Aviation sector in India is growing at a whopping 25% per annum, creating a large number of jobs. There is presently a shortage of trained pilots. The industry is expected to add 130 airliners to its current fleet of 270 airliners, which would, in turn, increase manpower demand. The job opportunities include that of flight dispatchers, cabin crew, airline managers, airport managers and ground handling personnel. The industry would create 2,00,000 jobs by 2017. There is already a shortage of pilots in the sector and so is that of commanders and captains. Currently, 2,500 pilots are working with airlines in India, of which 475 are expat pilots. The doors of the cockpit are now open to the women as well. The number of women joining aviation sector is on the rise. From one or two women in a batch of 100 students, the number has now increased to 10 or 12. Indian currently has 76 women pilots, and the number is rising with every new batch. As per the statistics, forty of Air Deccan's 496 pilots are women. Kingfisher, which has 26 women from a total of 390 pilots, also got its first woman captain just recently. Even though more and more women are opting for this career, the shortage still continues. Due to this paucity of pilots, airlines in India are largely dependent on expatriate pilots.

CURRENT LCC OPERATIONS IN INDIA
India's first low-cost airline, Air Deccan started service on August 25, 2003. The airline's fares for the Delhi-Bangalore route were 30% less than those offered by its rivals such as Indian Airlines, Air Sahara and Jet Airways on the same route. The success of Air Deccan has spurred the entry of more than a dozen low-cost airlines in India. Air Deccan now faces stiff competition from other low-cost Indian carriers such as Jetlite, SpiceJet, GoAir and Paramount Airways. IndiGo Airlines recently placed an order for 100 Airbus A320s worth 6 billion USD during the Paris Air Show, the highest by any India domestic carrier. After a year of operation, in 2006, Kingfisher Airlines changed its business model from low-cost to value airlines. Deccan was acquired by Kingfisher and renamed. The LCC boom in India started with Low Price Tags, Apex Fares, Internet Auctions, Bulk Purchases and Last Day Fares. The factors that contributed to enormous growth of LCCs are: (i) Low Entry barrier; (ii) Attraction of Foreign Shores; (iii) Increased permitted Foreign Equity; and (iv) Rising income levels and demographic profile, have contributed significantly to the unprecedented growth of LCC’s in India. India has a population of 1.1 billion of which the middle income group constitutes around 400 million, which is more than the population of USA and that of EU countries. 15million people travel by train of which around 700,000 people travel in air condition (AC) coaches. There does not exist much price difference between travel by AC and travel by LCC. Within 3 years of operations in India, LCC’s have taken the domestic market share of 49% and the factors contributing for such unprecedented market capitalization are: (i) Highest load efficiency; (ii) Flies to destinations in the Hinterland; (iii) A Lean-and-Mean approach to staffing; (iv) Expansion of operations to Sri Lanka; (v) Successfully targeted the increasing middle class population of India. The growth of LCCs in India could be attributed to the recent reforms in Indian aviation industry and also the instantaneous acceptance of air travel when it was provided at rail travel rates.

CLASSIFICATION OF THE AVIATION SECTOR
The Indian aviation sector can be broadly divided into the following main categories:

1: Scheduled air transport service: It is an air transport service undertaken
between two or more places & operated according to a published timetable. It includes: Domestic & International Airlines.  Air Deccan,  Spice Jet,  Kingfisher Airline &  Indigo

2: Non-scheduled air transport service: It is an air transport service other
than the scheduled one & may be on charter basis. The operator is not permitted to publish time schedule & issue tickets to passengers.

3. Air cargo services: It is an air transportation of cargo & mail. It may be on
scheduled or non-scheduled 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. Apart from this, the players in aviation industry can be categorized in three groups:  Public players : Air India, Indian Airlines  Private players : Jet Airways, Air Sahara, Kingfisher Airlines, Spice Jet, Air Deccan

Start up players : Omega Air, Magic Air, Premier Star Air & MDLR Airlines.

REGULATORY ENVIRONMENT 1) Federation of Indian Airlines (FIA)-FIA is a body formed by the schedules
carriers in India. FIA, as the voice of India's airline industry, works to identify & take up issues on behalf of the industry, with various regulatory authorities, government departments & other key stake-holders. The functioning of the FIA is guided by an Executive Council, comprising chiefs of each of the member airlines.

2) Directorate General of Civil Aviation (DGCA)- The Directorate General
of Civil Aviation (DGCA) is a principal regulatory body for the aviation industry in India. DGCA is headquartered in Delhi & has various directorates

3) Ministry of Civil Aviation (MCA)- The Ministry of Civil Aviation in India is
located at New Delhi. The ministry formulates national policies & programs for development & regulation of civil aviation & also prepares schemes for the growth & expansion of Civil Aviation in India. The ministry also monitors airport facilities, air traffic services & the carriage of passengers & goods by air.

4) Airport Authority of India (AAI)- The Airports Authority of India (AAI) is an
organization working under the Ministry of Civil Aviation that manages all the airports in India. The AAI manages and operates 126 airports including 12 international airports, 89 domestic airports and 26 civil enclaves. The corporate headquarters are at Rajiv Gandhi Bhawan, Safdarjung Airport, New Delhi.

5) Civil Aviation Policy- It’s mission to maintain a competitive civil aviation
environment which ensures safety and security in accordance with international standards, promotes efficient, cost-effective and orderly growth of air transport and contributes to social and economic development of the country.

6) Open Skies Agreement- India & the United States signed a landmark
agreement, permitting any number of airlines to operate any number of flights to any point in each other's territory. The agreement will enhance passenger & cargo services between the countries, decrease airfares & accompany innovations & new partnerships in the aviation industry.

MAJOR POLICY REFORMS

1953

Nationalization of aircraft industry Assets of 9 existing companies transferred to two entities in the aviation sector controlled by the Government in  Indian Airlines, primarily serving domestic sectors

Air India, primarily serving the international sectors

1986 1994

Private Sector Players permitted as Air taxi operators. Jet, Air Sahara, NEPC, East West, Modiluft, etc started service. Private Carriers permitted to operate scheduled services. Six operators granted license, however only Jet and Air Sahara able to service. Entry of low cost carriers. Air Deccan, Spice Jet, Go Air, Indigo.

2003

MAJOR 3 PLAYERS IN INDIAN AVIATION SECTOR
1)Kingfisher  Dr. Vijay Mallya is the Chairman and CEO of
 Kingfisher Airlines.  Kingfisher launched its airline services in May 2005.

2)Air India  Facing financial crunch.  Incurred a loss of Rs.4,000 crore last fiscal year.  Delayed payment of employees.  Seek Bailout package of Rs.14000 crore from Govt.

 Delay the salaries of its over 31,000 employees for 15 days Rs.3,000 crore annually. 3)Jet Airways  Naresh Goyal is the founder & chairman  Started Indian commercial airline operations in May 1993.  In April 2007, they acquired Air Sahara.

MARKET SHARE OF MAJOR PLAYERS

ROAD AHEAD….
 The boom in the aviation sector is likely to generate nearly 2.5 lakh jobs by the year 2010.  The study says that the civil aviation sector is also set to become a Rs 35,000-crore industry by the same time.  The industry would create 2,00,000 jobs by 2017.
 Scheduled Aircraft - The total aircraft fleet is likely to reach 1000 by 2020,

including replacement of the current fleet of 312 aircraft, with an estimated value of US$80bn +  The growth of India’s aviation sector has the potential to absorb up to US$120 billion of investment by 2020.
 Air Traffic - CAPA research projects that domestic passenger traffic will

reach 150-180 million by 2020, with international traffic in excess of 50 million.
 General Aviation - Market for 500 + aircraft in the Non-Scheduled Category

by 2020 and 300 aircraft in the private category use. Estimated Investment of US$ 4 billion.
 Airports – US$ 30 billion plus investment requirement by 2020(Included 9

billion already committed).

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