INDIAN CIVIL AVIATION - At the Cusp of Taking off - Yes Bank
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Knowledge Partner
INDIAN
CIVIL AVIATION
At the Cusp of Taking off
TITLE Indian Civil Aviation - At the Cusp of Taking off
YEAR August, 2015
Corporate Finance (CF) Group, YES BANK
AUTHORS Strategic Government Advisory (SGA), YES BANK
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YES BANK Ltd. The Associated Chambers of Commerce
and Industry of India
Sanjay Palve
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FOREWORD As India enters the next phase of economic growth, a major overhaul of our aviation sector is critical to complement the needs of our growing economy. Aviation has played a vital role in facilitating growth of business and economy in India, but there is still significant scope for improvement and penetration. Indian Aviation, the 9th largest civil aviation market valued at INR 96,000 Crore, is on a high-growth trajectory to become the world’s 3rd largest aviation market by 2020 and largest by 2030. With rising income levels and increasing affordability of the middle class, Indian Aviation is set for a quantum leap in the coming years. The Indian Civil Aviation sector has also been at the forefront of economic and regulatory transformation over the last decade. A slew of policy initiatives such as Open Skies Policy, FDI promotion in aviation and airport infrastructure amongst others have helped fuel impressive growth of the Indian Aviation sector. However, there is immense pressure on the existing infrastructure, thereby resulting in increased congestion, higher operating costs, greater environmental impact, potential safety implications and compromise on passenger experience. Undeniably, the next phase of growth of Indian Aviation is expected to be fuelled by better regional connectivity by focusing on Tier II and III cities, world-class infrastructure, a strong domestic MRO sector and building regional and no-frills airports through PPP, supported by a proactive policy framework. A new Civil Aviation Policy focused on realizing the vision of ‘Make in India’ will enhance regional air connectivity, transform key airports at existing metros into international hubs, create more airports through PPP mode, establish a strong domestic MRO sector and improve passenger facilitation. This will help in transforming the Nation’s economic landscape and significantly contribute towards India’s socio- economic development. I am pleased to present the ASSOCHAM – YES BANK Knowledge Report ‘Indian Civil Aviation - At the Cusp of Taking Off’ which highlights challenges faced by the sector, recent initiatives taken by the Government and key recommendations going forward for making Indian Civil Aviation one of the leading aviation industries in the world. I am confident that you will find the contents of this publication insightful and instrumental in fast-tracking Indian Aviation’s growth story. Thank you. Sincerely, Rana Kapoor President Managing Director & CEO
MESSAGE The new Civil Aviation Policy is expected eagerly by the Industry. Increase in the number of people travelling by air, both for business and travel, along with new trade opportunities has led the Government’s focus on infrastructure including the (No-Frills Airports), which will result in various development projects. Indian Aviation sector is likely to see investments of up to US $150 billion in the future. ASSOCHAM, India’s Apex Chamber for Commerce & Industry in India is organizing the Annual 8th International Conference on Civil Aviation & Tourism. We are confident that this Annual Conference will deliberate on the challenges and the emerging opportunities for developing the Civil Aviation Sector further in the country. The Background Paper prepared for ASSOCHAM, by YES BANK the Knowledge Partner, tries to re-examine the Civil Aviation Sector for a better understanding, which will help us in creating a road map for a robust growth in the future. I convey my very good wishes for the success of this Conference. D.S. Rawat Secretary General
Contents 1. Introduction 2 2. Key Statistics 6 2.1 Growth in Passenger Traffic 6 2.2 Relationship between Revenue Passenger per Kilometer 7 (RPK) and Real GDP Growth 2.3 Aircraft Penetration Rates 8 2.4 Trends in Tourism Industry 8 2.5 Cargo Industry 10 3. Industry Ecosystem 12 3.1 Scheduled Airlines 12 3.2 General and Business Aviation 15 3.3 Airport Infrastructure 15 3.4 MRO (Maintenance, Repair and Overhaul) 17 3.5 Air Cargo 17 4. Tourism and Civil Aviation 20 5. Key Issues and Challenges facing Indian Civil Aviation 24 6. Civil Aviation Policy – A Key Initiative 30 7. Key Recommendations 34
1. Introduction
1 Introduction “The world is focused on Indian aviation – from manufacturers, tourism boards, airlines and global businesses to individual travelers, shippers and businessmen. If we can find common purpose among all stakeholders in Indian aviation, a bright future is at hand,” said Mr. Tony Tyler, Director General and CEO, International Air Transport Association (IATA). India’s Civil Aviation industry is on a high-growth trajectory and has been at the forefront of economic and regulatory transformation over the last decade. The Civil Aviation industry has entered a new era of expansion, driven by factors such as low-cost carriers (LCCs), modern airports, Foreign Direct Investment (FDI) in domestic airlines, advanced Information Technology (IT) interventions and growing emphasis on regional connectivity. In the last ten years it has grown at a CAGR of 11.16% with passenger traffic growing from 73.4 million in FY06 to 190.1 million in FY15. Despite the impressive growth, India has one of the lowest air travel penetration rates globally. India has penetration rate of 0.08 annual domestic seats per capita which is significantly lower than other developing markets such as Brazil, Turkey, Indonesia and China, where penetration rates are between 0.35 and 0.65 which again, augurs the potential for growth in the sector. To unlock this growth, some key challenges currently besetting the Civil Aviation sector would have to be addressed. While most of the scheduled; non-scheduled airlines and MRO operators, owing to predatory fiscal regime, are facing financial strain, burgeoning population and rising middle class with higher disposable incomes have put a massive strain on existing aviation infrastructure in the country. Therefore, the exiting fiscal regime including Aviation Turbine Fuel (ATF) taxes need urgent rationalization; airport infrastructure needs efficient augmentation; general aviation needs policy reforms, regional connectivity in Tier 2 and Tier 3 cities needs additional fillip and, to achieve efficiencies and transparencies, there is a need to usher in institutional reforms in the regulatory landscape. 2 | Indian Civil Aviation - At the Cusp of Taking off
India is projected to become the 3rd largest Civil Aviation market in the world by 2020 with passenger
traffic expected to increase to 421 million from 169 million in FY14 and the largest in the world by
2030. To cater to this growth, existing challenges are required to be addressed through a meaningful
collaboration between policy makers and industry stakeholders. The need of the hour is, formulation
of a comprehensive Civil Aviation Policy currently being undertaken by the Ministry of Civil Aviation in
consultation with Industry experts which will pave the way for Indian Civil Aviation, which is at the cusp
of taking off.
Indian Civil Aviation - At the Cusp of Taking off | 34 | Indian Civil Aviation - At the Cusp of Taking off
2. Key Statistics Indian Civil Aviation - At the Cusp of Taking off | 5
2 Key Statistics
2.1 Passenger Traffic
The passenger traffic has grown by 12.47% to ~ 190 million in FY15 compared to the previous year.
In the last 10 years it has grown at a CAGR of 11.16% from FY06 to FY15, essentially backed by rising
income level (per capital income increased from USD 712 in FY10 to USD 1144 in FY14 growing at
a CAGR of 12.6%) and growth in low-cost aviation segment. Total available seat kilometers have
grown at a CAGR of 7.2% between FY10-14. According to India Brand Equity Foundation (IBEF),
domestic and international passenger traffic is expected to increase at an annual average rate of
12% and 8%, respectively, over the next five years.
Figure 1: Growth in passenger traffic from FY06-FY15
200 190.1 40%
162.3 169.0
159.4
160 30%
143.4
116.9
123.8
In USD (million)
120 108.9 20%
96.5
80 73.4 10%
40 0%
0 -10%
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Passenger Traffic Growth Rate
Source: Association of Private Airport Operator; TechSciResearch
6 | Indian Civil Aviation - At the Cusp of Taking offFigure 2: Growth in Available Seat Kilometers from FY10-FY15
Available Seat Kilometers of Domestic Scheduled Services (billion)
CAGR: 7.2%
4.9%
78.6 80.7
76.1
68.2
61.1 60.3 63.2
FY2010 FY2011 FY2012 FY2013 FY2014 9M 9M
FY2014 FY2015
Total Domestic ASKS (billion)
Source: DGCA (Directorate General of Civil Aviation)
2.2 Relationship between Revenue Passenger per Kilometer (RPK) and Real
GDP Growth
The figure below compares the relationship between real GDP growth and domestic RPK growth
in India from FY04 to FY14. On an average the RPK growth has been 2.3X real GDP growth during
this period.
Figure 3
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
-10.1%
-20.0% FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 Average
1.7x 2.6x 3.4x 4.2x 6.0x (1.2x) 1.6x 4.8x 2.4x (0.6x) 0.6x 2.3x
Domestic RPK Growth (y-o-y) Real GDP growth (y-o-y)
Source: DGCA, Economist Intelligence Unit, Company reports, YES BANK analysis
Indian Civil Aviation - At the Cusp of Taking off | 72.3 Aircraft Penetration Rates
India has one of the lowest air travel penetration rates in the world, as defined by annual domestic
carrier seats per capita, according to the CAPA Report. India’s annual domestic seats per capita
is 0.08 which is significantly low compared to other developing markets such as Brazil, Turkey,
Indonesia and China, where penetration rates are between 0.35 and 0.65 annual seats per capita.
Figure 4: Annual domestic seats per capita of India compared to other top 20 domestic air travel
markets in the world
Country Calendar Year (CY) 2014
India 0.08
Malaysia 1.03
Brazil 0.65
Turkey 0.63
Colombia 0.53
Developing Thailand 0.48
Indonesia 0.41
Russia 0.37
Mexico 0.36
China 0.35
Philippines 0.29
Norway 4.79
Australia 3.34
USA 2.59
Canada 1.58
Developed Japan 1.12
Spain 0.83
Italy 0.65
France 0.50
Germany 0.41
Source: CAPA, Industry Sources
2.4 Trends in Tourism Industry
The total contribution of travel and tourism to India’s GDP was USD 102 billion in CY2013 (6.2% of
GDP) and is forecasted to rise by 7% p.a. to USD 215 billion (6.8% of GDP) by CY2024, according
to the World Trade and Tourism Council.
According to Ministry of Tourism, India has witnessed 7.7 million foreign tourist arrivals in CY2014,
which has grown at a CAGR of 8.3% during the period from CY2009 to CY2014. As per Economist
Intelligence Unit (EIU) estimates, the number of foreign tourist arrivals is expected to rise up to
12 million by CY2019, growing at a CAGR of 9.2%.
8 | Indian Civil Aviation - At the Cusp of Taking offFigure 5: Domestic tourists travelling to and from India from CY2009 to CY2013
Domestic nationals' visits within India (million) Indian nationals' departures from India (million)
CAGR: 14.4% CAGR: 10.7%
1,145.3 16.6
1,045.1 14.9
14.0
864.5 13.0
747.7 11.1
668.8
CY2009 CY2010 CY2011 CY2012 CY2013 CY2009 CY2010 CY2011 CY2012 CY2013
Domestic tourist visits (million) Indian nationals' departures from India (million)
Source: India Tourism Statistics, Ministry of Tourism
Figure 6: Foreign tourist arrival in India and projected growth
Foreign tourist arrivals 2009-2014 (million) Forecast foreign tourist arrivals 2015-2019 (million)
CAGR: 8.3% CAGR: 9.2%
12.0
7.7 11.0
6.6 7.0 10.1
6.3 8.5 9.5
5.8
5.2
CY2009 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015 CY2016 CY2017 CY2018 CY2019
Foreign tourist arrivals (million) Foreign tourist arrivals (million)
Source: India Tourism Statistics, Ministry of Tourism Source: EIU (Economist Intelligence Unit)
Indian Civil Aviation - At the Cusp of Taking off | 9Figure 7: Travel and Tourism spending (USD billion)
100
CAGR: 10.1% 90.5
90 81.4
77.8
80
69.3 68.7
70
60.9
In USD (billion)
60
46.2 48.7 CAGR: 1.2%
50
42.1
40
30 22.1 24.4 18.6 22.3 25.5 26.4 20.8 21.5 24.4
20
10
0
2007 2008 2009 2010 2011 2012 2013 2014F 2015F
Leisure Travel & Tourism Spending Business Travel & Tourism Spending
Source: Travel and Tourism spending: Source - World Travel and Tourism Council, Aranca Research, IBEF
2.5 Cargo Industry
The adoption of Open Skies Policy for Air Cargo in 1990, initially for a period of three years and
then on a permanent basis in 1992, has enabled the growth of the Indian Air Cargo industry. Air
cargo volume in India increased from just 0.32 million metric tonnes per annum (mmtpa) in FY
1991 to a peak of 2.23 mmtpa in FY 2013, at a CAGR of ~10%. However, during the same year
airports like Hong Kong and Memphis handled over 4 mmtpa. This is considering that the Indian
economy is the third largest in the world in PPP terms and contributes to more than 1/6th of the
world’s population.
According to Air Cargo Forum India (ACFI), the Air Cargo sector has witnessed growth of 3.3% in
FY 2013-14 in terms of total cargo traffic which was led by growth of 3.4% and 2% in domestic &
international air cargo sectors respectively.
As per the global forecast of IATA, international freight volumes are expected to increase at a CAGR
of 4.1% over the next five years compared to an average growth in freight tones of 0.63% per year
since 2011. India is also projected to be amongst the top ten largest international freight markets
by 2018 registering second highest growth of 6.8% CAGR during this period. Top 10 international
freight markets by 2018 will be the United States (10,054,000 tonnes), China (5,639,000 tonnes),
UAE (4,974,000 tonnes), Germany (4,763,000 tonnes), Hong Kong (4,648,000 tonnes), Republic
of Korea (3,487,000 tonnes), Japan (3,480,000 tonnes), the United Kingdom (2,808,000 tonnes),
China Taipei (2,350,000 tonnes) and India (2,223,000 tonnes).
10 | Indian Civil Aviation - At the Cusp of Taking off3. Industry Ecosystem Indian Civil Aviation - At the Cusp of Taking off | 11
3 Industry Ecosystem
3.1 Scheduled Airlines
The Indian Air Travel Market is serviced by domestic and international Low Cost Carriers (LCC) and
full-service carriers (FSC). Domestic carriers in India include LCCs such as IndiGo, SpiceJet, GoAir,
Air India Express, and AirAsia India, and FSCs such as Jet Airways, Air India, Air Costa, Alliance
Air and Vistara. List of key carriers in the Indian airline industry along with certain key operation
parameters is presented in table below.
Carriers Launch Year Market Fleet Size and Cities Covered* Domestic
Share in % Type Cities Served*
1932 15.8% B747-400 – 5 107 69
B777-200 – 3
B787-8 – 17
B777-300 – 12
A320 family – 61
ATR42 – 4
ATR72 – 1
CRJ700
family – 4
Total – 123
A320
2006 38.4% family – 88 36 31
Total – 88
1993 21.9% B737 family – 77 72 50
ATR72 – 18
A330 – 7
B777-300 – 5
Total - 107
12 | Indian Civil Aviation - At the Cusp of Taking offCarriers Launch Year Market Fleet Size and Cities Covered* Domestic
Share in % Type Cities Served*
B737 family – 19
DHC-8Q-402 (NG)
2005 11.6% – 15 47 39
Total - 34
A320 – 19
2005 8.7% Total - 19 22 22
ERJ170 – 100LR -2
ERJ190 – 100STD
2013 0.9% –2 9 9
Total – 4
A320 – 5
2014 1.5% Total - 5 7 7
A320 – 7
2015 1.3% Total - 7 10 10
ATR72 – 2
2015 0.1% Total - 2 7 7
*As of December 2014
Source: YES BANK Analysis, DGCA, CAPA, Industry Sources, Respected Company Annual Reports as on June 2015
Indian Civil Aviation - At the Cusp of Taking off | 13Figure 8: Passenger Load Factor of Scheduled Commercial Airlines (as on June 2015)
Passenger Load Factor (%)
100 93.2
86.6
90 84 83.6
77.7 79.2
80 73.5 73.1
70
59.3
60
50
40
30
20
10
0
iGo
ia
t
ays
ia
a
st a
s
Air
Je
su
tar
Ind
Ind
Co
ga
Ind
ir w
Go
ice
Vis
Pe
Air
ia
Air
tA
Sp
As
Air
Je
Air
Passenger Load Factor (%)
Source: DGCA, Company Annual Reports
According to DGCA data, LCCs’ share of the Indian air travel market has increased from 40.5% in FY2010
to 64.2% for the nine months ended December 31, 2014. This represents an approximate 60% increase
in LCCs market share over FSCs market share between FY2010 and the nine months ended December 31,
2014.
Figure 9: Comparison of Market Share of Low cost carriers and Full service carriers
(basis passengers flown)
India Domestic Full-Service Carriers vs. Low-Cost CarriersMarket Share
39.2% 36.6% 35.8%
54.4% 50.2%
59.5%
60.8% 63.4% 64.2%
45.6% 49.8%
40.5%
FY2010 FY2011 FY2012 FY2013 FY2014 FY2015
LCC Market Share FSC Market Share
Source: DGCA
FSCs: Jet Airways, Air India, Air Costa, Alliance Air, Kingfisher, Indian Airlines, Paramount and MDLR
LCCs: IndiGo, SpiceJet, GoAir, JetLite, Air India Express, AirAsia India and Kingfisher (including
Kingfisher Red and Air Deccan)
14 | Indian Civil Aviation - At the Cusp of Taking off3.2 General and Business Aviation
General Aviation encompasses all civilian flying except, scheduled passenger airlines and includes
piston engine aircraft, turboprop aircraft, jet aircraft, helicopters, among others. Some of the
popular aircrafts used in the Indian Charter business are Beechcraft, Cessna and Falcon. The
industry is highly fragmented and witnesses many small players having three or less than three
aircrafts, in all. At present, there are a total of 122 NSOPs (non scheduled operator permit) out of
which more than 90 operators have three or less than three aircrafts. All 122 NSOPs cumulatively
have close to 365 aircrafts. This is in addition to another 180 functional aircrafts, which are owned
by private firms and individuals. Some of the major players in this sector are Air Charter Services
Pvt. Ltd., Taj Air, Span Air Ltd., Air Charters India, Jet Charter, Ligare Voyages and India Flysafe
amongst others.
3.3 Airport Infrastructure
The airport infrastructure in India is governed by the Ministry of Civil Aviation (MoCA), which is
the apex body that is responsible for forming Aviation policies. There are four regulatory bodies
that operate under the Ministry - Directorate General of Civil Aviation (DGCA), Bureau of Civil
Aviation Security (BCAS), Airports Authority of India (AAI) and Airports Economic Regulatory
Authority (AERA).
Ministry of Civil Aviation
Regulatory DGCA AAI BCAS AERA
Bodies
ATC CISF
Regulation of Creating, Regulator of Review and
air transport upgrading, civil aviation approve tariff
services maintaining and security in structure for
managing civil the country aeronautical
aviation services
Functions Enforcement infrastructure both Monitor preset
of civil air on the ground and performance
regulations, airspace in the standards
air safety and country
air worthiness
standards
According to AAI, there are 464 airports/airstrips in the country. Among these, the AAI owns and
manages 125 airports and 26 civil enclaves at defence airfields and provides air traffic services over the
entire Indian airspace and adjoining oceanic areas. However, various airlines at present are operating
only through 90 airports. The remaining airports are lying unutilized, at best handling occasional
Indian Civil Aviation - At the Cusp of Taking off | 15aircraft operation. Approximately 77.5% of India’s air traffic is handled by top ten airports at Delhi,
Mumbai, Chennai, Bangalore, Kolkata, Hyderabad, Cochin, Ahmedabad, Goa and Pune.
Table: Airport-wise % share of International, domestic and total passenger traffic for top 10
airports during 2013-14:
Share of Passenger Traffic
S.No Airport Passengers (in Nos)
International % Share Domestic % Share Total % Share
1 Delhi (DIAL) 12,681,309.0 27.2% 24,195,677.0 19.8% 36,876,986.0 21.8%
2 Mumbai (MIAL) 10,340,709.0 22.2% 21,880,686.0 17.9% 32,221,395.0 19.1%
3 Chennai 4,537,677.0 9.7% 8,358,378.0 6.8% 12,896,055.0 7.6%
4 Bangalore (BIAL) 2,634,726.0 5.7% 10,234,104.0 8.4% 12,868,830.0 7.6%
5 Kolkata 1,765,013.0 3.8% 8,335,219.0 6.8% 10,100,232.0 6.0%
Total of 05 airports 31,959,434.0 69% 73,004,064.0 60% 104,963,498.0 62.1%
6 Hyderabad (GHIAL) 2,442,980.0 5.2% 6,210,804.0 5.1% 5.1%
8,653,784.0
7 Cochin (CIAL) 3,272,350.0 7.0% 2,110,766.0 1.7% 5,383,116.0 3.2%
8 Ahmedabad 997,771.0 2.1% 3,566,454.0 2.9% 4,564,225.0 2.7%
9 Goa 736,340.0 1.6% 3,149,112.0 2.6% 3,885,452.0 2.3%
10 Pune 101,141.0 0.2% 3,495,543.0 2.9% 3,596,684.0 2.1%
Total of 10 airports 39,510,016.0 84.7% 91,536,743.0 74.9% 131,046,759.0 77.5%
PPP Models in Airport Infrastructure
99 Last couple of decades has witnessed phased de-regularization in the airport infrastructure
resulting in entry of Public Private Partnership (PPP) models. Presently India has five PPP
airports each at Mumbai, Delhi, Cochin, Hyderabad and Bengaluru, which together handle
over 60% of country’s air traffic
99 Furthermore, there are 2 ongoing greenfield airport public-private partnership tenders for
the construction of new airports in Mumbai and Goa
99 Investment made by the private sector during the Twelfth Five Year Plan (2012–17) is
expected to increase by 69.1% to USD 9.3 billion compared to the Eleventh Five Year Plan
16 | Indian Civil Aviation - At the Cusp of Taking offDetails of existing airports being operated under PPP mode is mentioned below:
Name of Airport Operator Type of Project/PPP structure Revenue Sharing
Chhatrapati Shivaji International Mumbai International 38.7% of gross revenue to
Brownfield/BOOT
Airport Airport Limited (MIAL) be shared with AAI
Indira Gandhi International Delhi International Airport 45.9% of gross revenue to
Brownfield/BOOT
Airport Limited (DIAL) be shared with AAI
GMR Hyderabad Concession fees – 4% of
Rajiv Gandhi International
International Airport Greenfield/BOOT gross revenue to be shared
Airport
Limited (GHIAL) with AAI
Concession fees – 4% of
Bengaluru International
Bengaluru International Airport Greenfield/BOOT gross revenue to be shared
Airport Limited (BIAL)
with AAI
Payment of dividend to the
Cochin International
Cochin International Airport Greenfield/BOOT Government towards their
Airport Limited (CIAL)
26% of equity capital
Source: Association of Private Airport Operators, Aranca Research, IBEF
3.4 MRO (Maintenance, Repair and Overhaul)
Aircraft MRO caters to aircraft maintenance and repair, as well as inspection and testing services.
Total market size of MRO industry in India is pegged at USD 700-800 million, out which only 5-10%
value of the work is undertaken in India with the rest outsourced to third-party service providers,
outside the country.
Air India has been recently handed over the MRO facility in Nagpur which was originally built by
Boeing. The facility will be available for undertaking MRO activities by Air India’s own fleet as well
as to third parties. It can accommodate three wide body aircrafts such as Boeing B777 or Airbus
A380 model at a time, and is also expected to decongest Mumbai airport due to lack of space for
hangars. The company is also investing in similar facilities in Hyderabad, Kolkata, Mumbai and
Delhi.
3.5 Air Cargo
Rapid growth in trade volumes aided by economic growth, has led Air Cargo to assume a critical
role in seamless transportation of goods, especially high value commodities and perishable
goods. The major advantages that air transport services offer are:
99 Reduction in delivery time leading to higher frequencies of trade
99 Reduction in high inventory carrying costs
99 Maintenance of quality of perishable goods owing to faster transfer from the production
center to the end consumer
Indian Civil Aviation - At the Cusp of Taking off | 17The domestic cargo handling facility is presently being carried out at Port Blair, Coimbatore, Lucknow and Jaipur airports besides Japanese Electronic Corporation, JVC- managed Air Cargo Complexes at Delhi, Mumbai, Bengaluru, Hyderabad, Cochin and Nagpur airports. Further, AAI manages international air cargo terminals at the Chennai, Coimbatore, Amritsar, Guwahati, Lucknow, Trichy and Mangalore airports. 18 | Indian Civil Aviation - At the Cusp of Taking off
4. Tourism and Civil Aviation
Indian Civil Aviation - At the Cusp of Taking off | 194 Tourism and Civil Aviation
India’s economic transformation coupled with large demographic dividend has led to the emergence of
an urban middle class with high spending capacity, leading to boom in India’s tourism sector. India’s
demographic dividend of a younger population compared to developed countries is leading to greater
expenditure on leisure services. The tourism sector is soaring to new heights as its domestic tourists
have grown tremendously from 270 million in 2002 to 1.14 billion in 2013. It is critical to supports
this growth of tourism industry which is such a high intensive labour industry, tourism and support
activities, thereby creating a high proportion of employment directly and indirectly.
India has significant potential to become a preferred tourist destination globally. Its rich and diverse
cultural heritage, abundant natural resources and biodiversity provides numerous attractions for both
Indian and Foreign tourists. The total tourist visits in India has grown at a steady rate of about 16% over
the past five years. The travel and Tourism Sector in India provides significant socio-economic benefits.
As per World Travel & Tourism Council (WTTC) estimate, the total contribution of Travel & Tourism to GDP
in India was USD 118 billion or 6.7% of GDP in 2014, which is expected to rise by 7.3% per annum to
USD 255.18 billion in 2025, accounting for 7.6% of GDP, and generating 45.5 million direct jobs which
account for 9% of the nation’s total workforce.
Some of the Tourism related facts available with Ministry of Tourism (MoT; As per the MoT Annual Report
FY15) are as follows:
99 Foreign Exchange Earnings from tourism were USD 18.5 billion in 2014 witnessing a growth
of 11.5% over 2013
99 Number of tourist arrival on e-visa was 1,10,657 during January-May 2015 (growth of 1024%
over January-May 2014)
The Indian Tourism and Aviation industry has emerged as one of the key drivers of growth among the
services sector in India. On one hand, Tourism is a potential game changer, rising as an employment
generator, a significant source of foreign exchange for the country and creating economic activities that
helps local/host communities. In parallel, civil aviation sector meets growing transportation needs of
20 | Indian Civil Aviation - At the Cusp of Taking offconsumers. As per a recent study conducted by the International Civil Aviation Organization (ICAO), the
output multiplier and employment multiplier of aviation industry are 3.25 and 6.10 respectively which
further implies that every INR 100 spent on air travel would result in INR 325 worth of total benefits,
and 100 direct jobs in aviation would result in 610 jobs, overall. Clearly, of these indirect jobs majority
of jobs are generated through tourism.
Tourism and aviation go in congruence with each other as air transport is pivotal to Indian tourism,
especially due to the vast and difficult geography of the country. Through its speed, convenience and
affordability, air transport has expanded the possibilities of travel for tourists and business travelers
(domestic and international) alike, allowing an ever greater number of people to experience diversity
of culture and quality services across the country.
Government Initiatives
The Ministry of Tourism has launched two new schemes (i) National Mission on Pilgrimage Rejuvenation
and Spiritual Augmentation Drive (PRASAD) and (ii) ’SWADESH DARSHAN’, to support the growing
tourism industry in India. Both the schemes are to be implemented with proactive support from the
Government and other related stakeholders. Developing world-class infrastructure in the respective
destinations and circuits is one of the objectives of the schemes. Under PRASAD, initially, twelve cities
namely Amritsar, Ajmer, Amaravati, Dwarka, Gaya, Kanchipuram, Kedarnath, Kamakhya, Mathura, Puri,
Varanasi and Vellankani have been identified for development.
Road Ahead
Considering the proactive support from Government policies, it can be envisaged that State Tourism,
especially for small and medium towns is likely to grow robustly. Given that India’s aviation industry is
largely untapped with huge growth opportunities, industry stakeholders should engage and collaborate
with policy makers to implement efficient and rational policies which will boost the sector. With the
right policies and relentless focus on quality, cost and passenger interest, India will be better placed to
achieve its vision of becoming the ‘3rd largest aviation market by 2020’ and the ‘largest aviation market
by 2030’.
Aviation is a major driver for development of tourism. Collaborations between Ministries will assist in
the development of low cost airports in tier II and tier III cities and will definitely help in improving
intra-state connectivity, if implemented. These schemes will further support schemes like PRASAD
which solely focus on tier II and tier III cities.
Privatization of airports is one such solution in expanding aviation reach to the last mile. By involving
private players on MOT basis to develop airports at strategic location can cater to India’s need of
developing intra-state aviation network.
Indian Civil Aviation - At the Cusp of Taking off | 21Some of the key recommendations to improve the Indian Tourism Industry through Civil Aviations are:
a. Intra-State Regional Air Connectivity: Though the national/private carriers target the key
catchments or city hubs effectively, there is an urgent need to have intra-state regional airlines
that provide low cost, small seater (12-18) planes connecting important cities within larger
States like – UP, Gujarat, Maharashtra, Karnataka, Tamil Nadu and Rajasthan. The subsidies and
modalities may be finalised by conducting techno-commercial feasibility studies for the States
under consideration and arriving at an incentive driven mechanism for equitable benefits to the
operators and the commuters.
b. Aerial Tours (through Helicopters or Smaller Crafts): Travel business is an economic activity for
capitalization of this economy, and can be accentuated for advancement of ‘aerial tours’ for India.
An aerial tour is the only way to fully appreciate India’s mysterious and beautiful topography.
From the majestic Himalayas to the Great Rann of Kutch, from dense forests of Arunachal to
Kanyakumari peninsular, India has many tourist spots where we can promote aerial tourism.
Presently there is a dearth of Aerial Tours options, as they are limited to certain religious circuits
or merely for commuting to harsh non-accessible zones for locals (eg. Jammu-Katra Trip, Baltal-
Amarnath, Keylong-Manali, Tawang-Guwahati).
There is immense scope to attract tourists by conducting specialized aerial tours to areas like –
Rann of Kutch, Himalayan Terrain – Leh, Sikkim, Sangla-Kinnaur, Kashmir amongst others. Aerial
tours over heritage cities such as – Agra, Lucknow, Ahmedabad, Delhi, Jaipur, amongst others
pose great potential, so do Gangetic Tours over the Ganga river, Brahmaputra–River Tours amongst
others.
c. Aviation Parks: Aviation Parks to be explored and opened through PPP in major cities or airport
hubs offering – Crafts Exhibits, Theme based restaurants, merchandising, Library and Aircraft
Simulators and other such initiatives related to Aviation sector.
d. Aviation Museums: A museum exhibiting the history and artifacts of aviation, from the past and
glimpses into the future of the sector. In addition to actual or replica aircraft, exhibits to include
photographs, maps, models, dioramas, clothing and equipment used by aviators.
There are three aviation museums in India, such as Naval, Air Force and HAL heritage Museum,
but we also suggest more Civil Aviation museums in India, where the glorious past of India’s Civil
Aviation can be showcased.
e. Aero-Sports Clubs: Flying clubs and schools provide ample opportunities for Aviation enthusiasts
to engage in extreme flying sports. Flying clubs train people to operate airplanes, helicopters and
hand-gliders and how to maneuver a parachute. Flying clubs offer extreme aero sport activities
such as sky jumping, base-jumping, paragliding, para-motoring, all of which can be explored in
progressive states under the PPP mode.
f. Resource Mapping of existing Airstrips: Evaluate unused air strips for the purpose of establishing
training schools and provisions for training of skilled Aviation workforce, under PPP mode.
22 | Indian Civil Aviation - At the Cusp of Taking off5. Key Issues and Challenges facing
Indian Civil Aviation
Indian Civil Aviation - At the Cusp of Taking off | 23Key Issues and Challenges facing
5 Indian Civil Aviation
Indian Aviation Industry has been facing tough times for the past few years due to multiple factors
including excess capacity, high input cost, intense competition and gaps in present policy and regulatory
framework, all of which is threatening the very viability of the sector.
Though airline losses have declined and passenger traffic increased in FY15 (Y-o-Y growth of 12.47%),
this change was largely due to the decrease in fuel cost and not improved operational performance of
airline companies. Total debt in the industry is now equivalent to more than 100% of airline revenues.
In order to generate cash to meet immediate payments, many companies are forced to compromise on
yields thus impairing the pricing discipline of the market.
A few key issues and challenges facing the industry which need immediate attention are presented
below:
5.1 High Fuel Cost
99 Air Turbine Fuel (ATF) accounts for approximately 40-50% of the total operating cost of
Indian carriers as jet fuel for domestic flights is costliest in India, owing to two factors — a)
high base price charged by oil PSUs to cross-subsidize their losses on other products and b)
uneven sales tax regime of up to 30% followed by State Governments
99 On account of the high charges levied by Government, domestic carriers end up paying up
to 50% more for fuel than in countries, such
Location Price/Kilolitre (USD)
as Dubai and Singapore. With fuel accounting
India 1400
for nearly half of the operating expenses of an
airline company, these taxes have a huge impact Singapore 825
on the financial viability of operations Bangkok 880
Kuala Lumpur 810
99 ATF price per kilolitre (USD) in India is
Dubai 840
significantly higher compared to its neighboring
countries as can be seen in table above Source: www.data.gov.in, Planning Commission,
Twelfth Five Year Plan Document.
24 | Indian Civil Aviation - At the Cusp of Taking off5.2 Unviable and Inadequate Domestic Maintenance, Repair and Overhaul
(MRO) Infrastructure
99 India has limited MRO infrastructure despite having the necessary skill-set and availability
of low cost labor. As a result, most airlines avail services of offshore providers for their MRO
related activities. Majority of the business is lost to neighboring Asia-Pacific countries such
as Sri Lanka, Dubai, Hong Kong, Singapore and China
99 High service tax, VAT and royalty charges (paid to the airports for usage of space for MRO
facilities) has limited the growth of domestic MRO companies, which account for merely
~10% of the total market size estimated to be ~USD 700-800 million
99 The industry with a market size of USD 0.5 billion, employs merely 6,000 people. With the
expected growth in fleet numbers, the Indian economy will bear a huge opportunity cost in
terms of employment and tax revenues if the indigenous MRO industry is not promoted with
policies and incentives at the right time. It is estimated that the industry has the potential
to grow over USD 1.5 billion by FY 2020 from USD 0.5 billion currently. This is less compared
to the present MRO business of UAE worth ~USD 1.6 billion and China at ~USD 2.0 billion
5.3 Inadequate and Inefficient Airport Infrastructure
99 Lack of defined economic and regulatory framework has led to perennial debates over
appropriate level of charges to be levied on airlines and passengers. This has led to an
unpredictable and unstable regulatory and economic environment, discouraging future
investments, especially by private players
99 Lack of long term planning with respect to creation of strategic airports infrastructure
such as, runways and airspace management has led to serious capacity constraints at major
airports including Mumbai, Pune and Delhi. Lower aircraft movements have resulted in
higher congestion, holding patterns and turnaround times at Indian airports as compared
to airports globally
99 Low efficiency of infrastructure means that available capacity is exhausted early; capex
needs to be invested in building new airports earlier than should otherwise be the case and
these costs are ultimately passed on to the airlines through increase in charges. This will
have serious systemic economic repercussions across the entire infrastructure chain
5.4 The existing 5/20 Rule
99 The present 5/20 Rule was drafted to prevent the interest of incumbent airlines, but this rule
has become irrelevant and anti – competitive, in the current scenario
99 The present rule is also against the globally allowed viable ‘start-up airlines’ model, such as
low-cost long-haul operations, making the Indian Aviation Sector unattractive for potential
entrants
Indian Civil Aviation - At the Cusp of Taking off | 255.5 Depleted State of General Aviation
99 General Aviation (GA), which has emerged as an essential part of national transportation
system around the world, has been overlooked in India despite the inherent advantages it
presents. GA sector, especially helicopters could surface as a key driver of remote & regional
area connectivity and tourism, besides offering vital solutions like corporate productivity,
surveillance or policing uses, emergency medical services, disaster management, key
infrastructure building like transmission lines, equipment haulage, mapping of mineral
resources, crop spraying, amongst others
99 GA sector has around three times the fleet size compared to commercial airlines in India
and still does not have a dedicated policy and regulatory framework. Despite having
very different dynamics, GA in India is largely governed under the shadow of scheduled
commercial airlines and riddled with issues like high duty structure for import of aircrafts,
weak air traffic planning & management, similar pilot training and licensing requirements
to scheduled commercial airlines, impractical import and custom regulations (no difference
between fixed wing aircrafts and helicopters), amongst others
99 In addition, GA sector in India does not have adequate dedicated infrastructure due to
prevalent capacity constraints at major airports. Globally, successful models like ‘heliports/
heli-hubs’ which offer dedicated and integrated infrastructure like runways, hangars, MRO
facilities, pilot training institutes have not been supported or developed. This is hampering
the financial health of operators and hence the growth of GA in India with the number of
helicopters on a decline, over the years
5.6 Inadequate growth of Remote and Regional Connectivity
99 Despite robust growth of the Civil Aviation sector in India, regional and remote connectivity
has remained grossly uneven. Several Tier II and Tier III cities have remained under-served
and unconnected despite the steady increase in the passenger traffic over the years
99 Based on the 2011 Census, India has a total of 4,041 Statutory Towns out of which presently
only 75 towns have airports with scheduled air connectivity
99 Owing to lack of policy and fiscal reforms, creation and operation of regional and remote
airports is financially unviable at present. Revenue generated from operating small and
remote airports is not sufficient to meet operational expenditure, let alone recovering
capital expenditure incurred and making profits. This forms a significant bottleneck towards
creating as well as operating regional and remotely located airports viable for private sector.
99 Stringent regulatory requirements puts many unwarranted restrictions on scheduled
regional operators including minimum number of aircrafts to be deployed, maximum
certified take-off mass, trading of capacities with other scheduled operators to meet Route
Dispersal Guidelines (RDG), all of which make it difficult to develop regional and remote
areas connectivity
26 | Indian Civil Aviation - At the Cusp of Taking off5.7 Infrastructural and Operational Bottlenecks faced by the Cargo Sector
99 As per industry experts, the aviation logistics in the country is faced with numerous
bottlenecks due to which it holds a very small share of India’s freight market, in comparison
to road and rail. It accounts for around 1% of the total cargo traffic in India (by volume) and
over 30% by value
99 Major challenges include lack of enabling infrastructure, long dwell times, missing and
damaged cargo, complicated regulatory processes and procedures, inadequate and poorly
skilled workforce deployment and lack of effective technological enablement of cargo
handling supply chain
99 India’s air traffic is currently highly concentrated at few airports, with most of the Tier II
cities ignored or having limited facilities. This impedes the movement of air cargo between
Tier II cities and gateway airports leading to lower cost efficiencies
Indian Civil Aviation - At the Cusp of Taking off | 2728 | Indian Civil Aviation - At the Cusp of Taking off
6. Civil Aviation Policy –
A Key Initiative
Indian Civil Aviation - At the Cusp of Taking off | 296 Civil Aviation Policy – A Key Initiative
Need for urgent policy and regulatory initiatives to address the current challenges facing the Indian
Civil Aviation Industry cannot be understated. Certain key initiatives undertaken by the Ministry in
the past, such as the Open Skies Policy, allowing Foreign Direct Investment in the sector and growing
airport infrastructure through Public-Private-Partnerships (PPP) has helped the sector grow to its
present accentuated level. Recognizing the requirement for further policy reforms in the Indian Civil
Aviation sector, the Ministry of Civil Aviation (MoCA) has come out with a draft Civil Aviation Policy.
What is encouraging is that, the MoCA is seeking inputs from Industry on the draft policy to further
improve, broaden and finalize the policy. Some pertinent steps, proposed in the draft policy include:
99 Development of airports under integrated ’multi-modal hubs; hub and spoke’ models in
coordination with respective State Governments and Central Agencies. It is proposed that
these airports be developed, keeping in mind, international standards with electronic
check-in facilities and automated baggage handling facilities, amongst other amenities. It
is further proposed that in the first phase, the upgradation of facilities will be done in 18
major airports that account for 86% of traffic in the country
99 To ensure cost competitiveness, more airports would be developed under the PPP model,
including the development of airports at Chennai, Kolkata, Ahmedabad and Jaipur to be
taken up in the first phase
99 Rationalizing the cost of ATF in India, which is 40-45% higher than international standards,
will be done in association with the Ministry of Finance
99 To work in cooperation with industry experts, to achieve institutional reforms like
corporatization and subsequent listing of Airports Authority of India (AAI); chart out a road
map for the future of Air India and listing of Pawan Hans Ltd.
99 Enhance regional connectivity by undertaking steps such as developing special packages for
North East, reviewing existing Route Dispersal Guidelines (RDGs), encouraging code sharing
agreements and reviewing of the 5/20 guidelines to facilitate entry of new operators
30 | Indian Civil Aviation - At the Cusp of Taking off99 Development of Cargo sector via development of the six metro airports as Regional Cargo
Hubs, integrating multimodal transport facilities, cold chains and other commodity specific
requirements. The turnaround time for cargo is proposed to be upgraded to international
standards. Also, ‘Air Freight Stations’ are under consideration, to be developed in different
parts of the country to streamline customs clearance and reduce congestion at airports
99 Development of Maintenance, Repair and Overhaul (MRO) sector by attracting investments
through incentivizing taxes & duties structure, indigenization of manufacture of parts and
components, and providing adequate land and infrastructure for MRO activities
99 Modernization of Air Navigation Services (ANS) to match international standards which will
eliminate crowding, reducing flying times and boost direct routing of aircrafts
99 Development of helicopter aviation by providing suitable incentives to operators and
development of ’heliports’ and ‘helipads’
Indian Civil Aviation - At the Cusp of Taking off | 3132 | Indian Civil Aviation - At the Cusp of Taking off
7. Key Recommendations Indian Civil Aviation - At the Cusp of Taking off | 33
7 Key Recommendations
The Ministry of Civil Aviation, through its draft Civil Aviation Policy, has demonstrated its intent on
holistically improving the landscape of Indian Civil Aviation sector. What is required now is the issuance
of a comprehensive policy covering all relevant subsectors and formulated basis specific inputs
received from key industry stakeholders. The policy should also identify and highlight clear time bound
milestones linked to a set of actionable item over the coming years which provide a much needed clarity
and vision to all relevant stakeholders.
Rationalizing the cost of ATF
99 Implementation of a reduced and uniform taxation structure on ATF across all states in
order to bring the fuel costs largely in line with the global levels will contribute immensely
to improve the financial health & competiveness of airlines, due to reduction in cost of
operations
99 Rationalization of VAT should be consensual, involving deliberations with respective State
Governments. An apex group involving industry experts should be formed to prepare and
present a different perspective to respective State Governments, highlighting the potential
economic benefits which will outweigh the fiscal loss from reduction of ATF taxes. Reduction
in ATF costs will result in increased aviation related activities, and in turn, have a multiplier
effect, both in terms of job creation and revenue generation in related industries such as
tourism, trading and manufacturing. Reductions in VAT on ATF implemented by states like
West Bengal, Chhattisgarh, Madhya Pradesh, Odisha, Jharkhand, Andhra Pradesh during
2103-14 have shown direct benefits resulting in increased airline activities, for that fiscal
year. This reduction in VAT can also be adopted by high consumption centers such as Delhi
and Mumbai
34 | Indian Civil Aviation - At the Cusp of Taking offLong Term Planning of Airport Infrastructure as Hubs
99 A more holistic and long term vision is required while planning for development of new
airport infrastructure, which is cognizant of the rate of growth of population in India. A long
term (30-40 year) master plan would be a more pragmatic approach while identifying land
and related infrastructure for development of airports
99 Regulations such as, the ‘150 km rule’ for new airport development is not in sync with
actual demand situation and hence, needs to be abolished. Burgeoning population, growing
economy and rising middle class with higher disposable incomes would put massive strain on
existing airports; Mumbai and Pune are already operating at their peak capacities, resulting
in reduction of productivity vis lower aircraft movements, congestions at airports. Hence
major cities would require development of multiple airports
99 To attract private players for developing airports under the PPP model, a more robust,
transparent and stable regulatory and economic framework is required. Clarity on regulatory
procedures and commercials (revenue sharing between AERA and developers; appropriate
development charges; 3rd party rentals) during floating of tenders would encourage developers
to participate, since it allows for better planning of investment quantum and capital raising
99 To encourage commercial airlines to use national airports as Hubs, it is critical to rationalize/
incentivize and provide stable cost/expense (such as parking charges, navigation charges),
similar to successful airports such as Dubai, Singapore
99 MoCA should endeavor to educate and encourage State Governments to support
development of airport infrastructure and aviation in respective States. A more conducive
fiscal environment (reduction in ATF taxes, provision of Viability Gap Funding for airport
development, amongst others) by the states for the aviation sector will contribute immensely
in local economic development
Institutional Reforms
99 To achieve faster decision making and implementation of policies and plans, quick disposal
and clearances of various licenses/applications, greater transparency regarding rules/
regulations and processes, and present regulatory structure, under the overall supervision
of MoCA, should be made leaner with optimal levels of independence and autonomy accorded
to various divisions
99 The two primary functions of AAI, i.e creation & maintenance of airport infrastructure and
air navigation services should be separated with the objective of de-burdening and thereby
achieving operational efficiencies and commercial viabilities in both the functions
99 Development and augmentation of skills and expertise will entail inclusion of industry
experts andprofessionals in various divisions, of the Civil Aviation sector
99 A Standing Group/body should be formed for real time monitoring of the existing policies/
regulations governing the overall sector. The Standing Group/Body should be primarily
Indian Civil Aviation - At the Cusp of Taking off | 35responsible for suggesting recommendations required to existing policies, based on
changing scenarios in aviation sector. The Standing Group/Body can be chaired by Ministry
representative(s) and industry experts
99 Corporatization of Air India should be fast tracked optimally, with the objective of stemming
the continuing losses which are eventually being drained from the public exchequer and the
making it economically viable to run in the medium term. To make Air India a feasible entity
for privatization, will require continued Government support in, writing off existing debts
and then recapitalizing the airline by retaining minority shareholding
99 MoCA in coordination with Ministry of Finance, should consider according an ’Infrastructure’
status for the Aviation Sector. This would help fuel the growth of the sector with advent of
cheaper & longer term funding sources (issuance of tax free bonds, raising of low cost ECBs,
amongst others) for industry operators. This initiative should be formalized by taking inputs
and involving industry, finance experts
99 Coordinate with the Ministry of Finance, to establish a possibility of setting up an apex
financial body for underwriting cheaper and long term funding available to the sector, akin
to India Infrastructure Finance Company Ltd (IIFCL). This could also provide exit options and
takeouts for existing operators/developers who are willing but are under constraints
Enhancing Regional Connectivity
99 Given the different dynamics, a dedicated policy and regulations with respect to regional
airlines is required to be formulated which is distinct from those governing the bigger
commercial airlines. This dedicated regional policy, under the ambit of a broader general
aviation policy, ideally taking cues from industry experts and aligned with global standards,
should be comprehensive and transparent both in terms of regulations (revised route
dispersal guidelines [RDGs]; pragmatic aircraft requirements; licensing/pilot training
requirements; safety norms / procedures ) and regulatory support offered (incentivizing
code sharing amongst regional & larger airlines; seat underwriting/subsidies auctions by
the Government for low traffic routes/remote regions
99 Development and/or improvement of the airport and ancillary infrastructure at identified Tier
2 and Tier 3 towns/cities (should be done basis studying per capita income/opportunities
in business & tourism), majorly under PPP mode and under ‘no-frills model’, to optimize
costs. To encourage airlines to open up more routes to regional destinations, basic airport
infrastructure like adequate runways; parking slots; air navigation services; fueling facilities
will have to be developed and further improved. Also, MoCA should consider incentivizing
flying to these routes by offering discounts or waivers on landing/parking charges,
navigation charges, amongst others. The objective should be to make regional airline
operations economically viable to encourage investment in the sector
99 Role of respective State Governments is critical in development and promotion of regional
connectivity. Ministry, through a specially formed team of experts, should educate
and coordinate with the State Governments for providing support to enhance regional
connectivity. State sponsored measures such as providing Viability Gap Funding (VGF; built
by levying additional 1% on ticket prices) and fiscal incentives (such as, tax holidays), for
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