To say the Indian aviation industry is a sleeping giant is an understatement akin to saying the Dreamliner is a fairly big aircraft. With its leading airlines posting record losses and only about 5 per cent of its population able to buy tickets, the sector requires thoughtful handling.
But that should change. With AirAsia India entering the hyper-competitive low-cost carrier (LCC) sector, which comprises more than 70 per cent of India’s annual domestic capacity, and the Ministry of Civil Aviation (MoCA) recently overturning a stringent licence-granting policy, there will likely be a price war as companies seek to capture a slice of the lucrative sector. Furthermore, with Air India joining the Star Alliance network last month, the scene is set for India to become a battleground for foreign carriers looking to optimise its hub connecting potential.
But before India’s hub status can even be conceived, its airports desperately require major overhauls.
Amber Dubey, Partner and Head, Aerospace and Defence, KPMG, a global consultancy, says, “India [has] just touched the tip of the aviation iceberg. Our challenges are primarily related to policies, procedures, regulations and taxes. These are all man-made problems and hence surmountable.”
So what comprises the need-to-know facets of India’s rising aerospace market?
Making way
The Indian market is currently the ninth biggest in the world, with an annual turnover of $16 billion (about Dh58.7 billion) and handling about 121 million domestic and 41 million international passengers.
Further still, as former Civil Aviation Minister Ajit Singh revealed in March this year, India is set to become the third-largest aviation market in the world by 2020, handling 337 million domestic and 84 million international passengers. By 2030, it is predicted that it will be the world’s largest, eclipsing China and the US.
It’s no surprise then that the sector is undergoing major changes. More airlines are looking for a way in, while established carriers are reportedly looking to increase their fleets to more than 800 aircraft by 2020.
But the biggest change to come about in the Indian aviation sector — perhaps in its entire history — was the formation of AirAsia India. With 49 per cent owned by Singapore franchise AirAsia, and 51 per cent split between Indian conglomerates Tata Sons (30 per cent) and Telestra Tradeplace (21 per cent), it’s the first joint venture involving a foreign carrier to launch services in India.
After waiting 14 months for the MoCA to approve its Air Operator’s Permit (a process that usually takes three months), AirAsia India’s first flight took off in June. It has stated that it will offer 30 per cent lower fares than its competitors.
Moreover, the ministry scrapped a policy that limited the amount of licences available for new airlines, allowing as many as eight new airlines to take to Indian skies, possibly by the end of the fiscal year.
Domestic clamour
But for those eyeing India’s LCC market for potential investment, a report by the Centre for Aviation (Capa) warns that the delays in granting AirAsia India’s permit highlights “the unpredictability and lack of transparency in India’s regulatory framework, which continues to be the greatest strategic challenge in the market”.
Binit Somaia, Director, India & Middle East, Capa, says a fare war is expected. “Competitors will greet AirAsia India’s entry with tactical fares intended to erode any price advantage that it may offer and with the intention of presenting the 30 per cent differential as a myth,” he says.
With the industry expected to report a full-year loss of approximately $1.5 billion, flirting with low margins is not a pretty prospect and reinforces the sentiment that national carriers are teetering on a precipice.
“Indian carriers have a track record of engaging in unsustainable fare discounting and an unusual willingness to bear losses. AirAsia may have underestimated the capacity of Indian carriers to pursue irrational pricing,” says Somaia.
Foreign footprint
Since the previous government relaxed foreign direct investment (FDI) regulations two years ago, India has fast become the new battleground for the major legacy carriers, most notably for Etihad Airways and Emirates Airline. And with Air India joining Star Alliance, German powerhouse Lufthansa has been thrust into the picture as well.
Etihad is swiftly capitalising on the legislature that allows a foreign carrier to invest up to 49 per cent in an Indian airline. It had been tussling with Indian authorities ever since it announced a 24 per cent minority equity stake in Jet Airways last year. Last month, it carrier became the first foreign airline to have its code printed on internal Indian flights, further enhancing its network reach. Last year, more than 885,000 people flew on Etihad’s Indian services — an increase of 20 per cent on the previous year.
Naresh Goyal, Chairman, Jet Airways, said in a statement: “The coming together of Jet Airways and Etihad Airways will bring significant benefits to the Indian economy in terms of growth, job creation, trade and tourism.
“Our international operations are already profitable and contribute 45 per cent to our total revenue. We will continue to build on this strong foundation as part of our three-year turnaround plan and increase the contribution to 63 per cent by 2015.
“At the same time, we will address challenges in the domestic market with a model that removes complexity in our fleet, product and brand. This is not a short-term strategy, but we are optimistic about the future.”
Moreover, the decision of the MoCA to allow the A380 in its airspace is great news for Emirates, Lufthansa and Singapore Airlines. The move will further sting Indian airlines that cannot compete with the fares offered on the jetliner by these brands.
Lufthansa doesn’t just benefit from India’s jettisoning of the superjumbo ban. Air India’s inclusion in Star Alliance offers it a vital platform for tapping the >
market it has been so keen to invest in for years. It could also be the leverage the German carrier needs to fight back against the might of the Gulf’s big three — Emirates, Etihad and Qatar Airways — in its quest for global market presence.
After the budget
Tony Fernandes, CEO, AirAsia, wrote in a column published in The Economic Times, an Indian newspaper, “I have always been a huge believer in India’s potential and even more so now with the anticipation of reforms and growth under the new Prime Minister Narendra Modi. The key to unlocking India’s huge growth potential is simply less bureaucracy, more facilitation.”
The budget did offer some hope to stakeholders in Indian aviation. In the new budget, Modi’s government increased the financial allowance for the civil aviation sector by 11.4 per cent to Rs94.7 billion (about Dh5.7 billion), up from the Rs85 billion allocated last year.
Ankur Bhatia, Executive Director, Bird Group, and a member of the CII National Committee on Civil Aviation, tells GN Focus, “The budget announcement is better than expected from the perspective of the travel and tourism industry, although the finance minister has kept the focus on infrastructure funding, health and education.”
Moreover, despite Civil Aviation Minister Gajapathi Raju soliciting Modi at length on the crucial need to slash state taxes on aviation fuel there was no giving in in the budget review. It is undoubtedly an opportunity missed to liberate vital capital.
In fact, unlike aviation rules in the US and Europe, India’s regulation on fuel taxation has stood still over the past decade, and Capt. G.R Gopinath, Founder, Air Deccan, India’s first-ever LCC has gone as far as to say, “India is choking on high taxes.”
Research has shown that if the Indian government categorised jet fuel as a declared good, sales taxation on fuel could be reduced to 4 per cent from an average of 24 per cent. It would have been the biggest boost the government could have provided the industry.
Some estimates state that such a move would have delivered immediate reductions of 10-12 per cent in airline operating costs — a huge saving for such a low-margin industry.
Infrastructure woes
India has the potential to become a hub connecting Asia and Australasia with Europe, and despite some voices suggesting that Bengaluru is the prime location for a Dubai-like hub, Mumbai is most likely to become the convenient stopover spot between Sydney and London with links to Asia and Africa.
But while major aviation cities such as New York and London have four and five airports each, India has been in the habit of shutting down low-level airports. If the country expects to welcome more than 400 million passengers by 2020, this needs to change.
To put that in perspective, between 2013 and 2014, 169 million passengers filtered through India’s airports that are currently considered outdated.
Unsurprisingly, airports were a central focus in the budget, and look to be the place most likely to offer financial rewards for investors looking towards Indian aviation.
“Despite increase [sic] in air connectivity, air travel is still out of reach for a large number of Indians. The scheme for development [sic] of new airports in Tier I and II cities will be launched for implementation through the Airports Authority of India and PPPs,” Finance Minister Arun Jaitely said in his budget speech.
Bhatia says, “The decision by the government to develop new airports in Tier I and II cities is definitely a positive move for the sector, as I believe that growth in the country’s aviation sector will come from regional travel, which will add a much needed dimension to the industry.”
However, the stunted modernisation of six airports, including those in Chennai and Kolkata, which were initiated and then halted by the previous government, is an issue that needs to be addressed before the 400-million-people mark can be realised.
Work on the development of 50 no-frills airports by the Airports Authority of India in several states, and greenfield airports slated for development in Navi Mumbai, Juhu, Goa, Kannur, Pune, Sriperumbudur, Bellary and Raigarh, initiated under the previous government, has also been stopped. n
