The aviation industry is poised for soaring growth after flying through the current turbulence, writes Boeing counsel Akhil Prasad
The aviation industry has come a long way since the first commercial flight in India on 18 February 1911 between Prayagraj and Naini in Allahabad.
Even though the distance was only about 10km, and the flight was used for delivering mail, it was the first foray into commercial aviation for the country.
Then, on 15 October 1932, the father of civil aviation, JRD Tata, took mail from Karachi to Mumbai and formed his own airline, Tata Airways, which later became Air India. In 1953, the government decided to nationalize the aviation industry and passed the Air Corporations Act, 1953, whereby two corporations, namely Indian Airlines and Air India International, were constituted.
The iconic brand of the Maharaja is still popular and associated with Air India today. Indian Airlines was formed for domestic travel, while Air India flew international routes. All other airlines were merged into Indian Airlines and Air India.
India’s economy was liberalized in 1991 and one of the important outcomes was that the airline industry was opened to private participation, which acted as a catalyst and a boon for the growth of civil aviation in the country. Air Asiatic became the first private airline to fly across India post-liberalization.
In 1994, the Air Corporation Act was repealed, and private airlines were allowed to operate charter and non-scheduled services under the “air taxi” scheme, when carriers like Air Sahara, Modiluft, Damania Airways and NEPC Airlines, started commercial operations of civil aviation in India. As India’s travel business started to boom in 2004–05, more entrepreneurs ventured into commercial aviation and started Air Deccan, Air Sahara, Kingfisher Airlines, SpiceJet, GoAir, Paramount Airways and IndiGo.
With private operators adopting aggressive strategies, and tie-ups with international carriers, civil aviation started to look at consolidation, and accordingly, in 2007, Air Sahara and Air Deccan were acquired by Jet Airways and Kingfisher Airlines, respectively.
Due to financial difficulties, Paramount Airways ceased operations in 2010 and Kingfisher Airlines followed in 2012. The Tata Group, which had started with Tata Airways, re-entered the civil aviation business by launching two airlines, namely, AirAsia India (a joint venture between Air Asia and Tata Sons) and Vistara (a JV between Tata Sons and Singapore Airlines).
Today, the commercial aviation landscape for India comprises Air India and Air India Express, Air Asia, Blue Dart, GoAir, Indigo, SpiceJet and Vistara.
The Indian aviation industry has accordingly witnessed a typical and highly competitive phase of evolution. Until about 1991, Air India and Indian Airlines were synonymous with India’s only air travel capabilities, and with the phenomenal demand for aviation services, the private sector perfectly complemented the good work that the national carriers had been doing for a very long time.
The 1991 liberalization, privatization and globalization, and reforms thereafter of India’s aviation sector, have seen positive impacts including:
1. Liberalization. The disinvestment of Indian Airlines Corporation and Air India International was initiated, led to the opening up of the aviation sector, and a focus was put in place for ease of entry of private players into the industry. The reduced air fares by low-cost airlines increased the mobility of passengers for domestic and international travel;
2. Open sky policy. This policy permitted foreign airlines of any country or ownership to land at any port, on any number of occasions, and with unlimited seat capacity. Passengers were provided better services like well-groomed crews, better seats, easy options of ticketing, and a good overall experience of being in an aircraft; and
3. Greenfield airports. In 2007, the government initiated a policy on greenfield airports, which allowed state governments to set up airports either on their own or through any designated entity, or JV company.
However, there are challenges, including:
1. Closures. About 12 airlines shut shop in the past 21 years, the notable ones being Jet Airways and Kingfisher Airlines;
2. High taxation. The tax on fuel is very high compared to other countries and constitutes a high operating cost for the airlines; and
3. Foreign direct investment. FDI in the scheduled air transport service/domestic scheduled passenger airline sector is still at 49% under the automatic route, which may be liberalized so that airline operators have greater flexibility in their financial management.
Matching pace with growth
India’s civil aviation industry is one of the fastest growing industries, has become the third-largest domestic aviation market in the world and is expected to overtake the UK to become the third largest air passenger market by 2024.
With this growth, the government has focused on increasing the number of airports. As of March 2019, India had 103 operational airports and it is expected that by the financial year 2040 India should have about 190-200 airports in operation. India plans to privatize more airports as it seeks to accelerate efforts to boost infrastructure development and the government is looking to privatize 30-35 airports in the next five years.
Further, the rising demand in aviation has seen an increase in the number of aircraft operating in the sector, expected to reach 1,100 by 2027. As per India’s Vision 2040 roadmap released by the government in 2019, India’s passenger numbers will increase to 1.1 billion by 2040, which will require a commercial fleet of more than 2,400 aircraft. Due to the explosive growth of e-commerce, India is poised to become a trans-shipment hub for South Asia.
The Vision 2040 roadmap also envisages that nearly 70% of commercial aircraft required by the Indian market will be assembled locally by 2040. It is estimated that growth in the civil aviation industry could generate US$28.6 billion in annual revenue by this time, up from US$11.4 billion currently. The Indian aviation and aero manufacturing sector employs about 200,000 people, and Vision 2040 envisages employment opportunities to surge to about one million direct jobs. Together with indirect jobs, this figure could reach about 5.5 million jobs.
According to a study conducted by the Ministry of Civil Aviation in 2016, the civil aviation sector will employ 800,000 to one million personnel directly, and another three million indirectly by 2035 in areas like airports, airlines, cargo, MRO (maintenance, repair and overhaul) and ground handling. For the direct employment opportunities estimated, the bulk of the requirement is expected to come from the airlines segment, at 32%, followed by 25% from cargo, 23% from airports, 17% from ground handling, and 3% from MRO.
Both the National Civil Aviation Policy 2016 (NCAP-2016) and Vision 2040 objectively assess the current status of the aviation industry, and the efforts of government are laudable to assess and articulate the need for reforms in the industry with a focus on improving the quality of airports, ensuring geographic reach, and connecting more people through the UDAN regional connectivity scheme (RCS), while assessing the traffic volume in the future and identifying what needs to be done to supplement growth.
The industry may see disruption due to technology developments like drones, artificial intelligence, machine learning, blockchain, biometrics, composites, superalloys, biofuels and the like. India is looking to establish its own aircraft leasing industry, which may handle almost 90% of aircraft being ordered in India by 2040. In view of this, it seems that the Vision 2040 remains a live document to deliberate and implement the disruptive changes.
Service during COVID-19
The importance of the Indian aviation industry can also be gauged from the role that it has played during these difficult times. Under the Vande Bharat Mission [to bring back Indians stranded around the world due to the coronavirus lockdown] and “air transport bubbles”, international travel to and from India, with respect to commercial passenger services and cargo, was initiated in a restricted manner.
These arrangements have assisted in supplementing repatriation flights and allowed individuals to visit their stranded family members in other countries. As of November 2020, India entered into bilateral air transport bubble agreements with 20 countries. Indian citizens/passport holders, overseas citizens of India (OCI) cardholders and foreign citizens with eligible Indian visas can travel under the respective air transport bubble arrangements in force in India.
The impact of covid-19 notwithstanding, the growth of the Indian aviation industry is real, and poised to continue in the long-term, and there should be no doubt that India will achieve what is being forecast.
National Civil Aviation Policy 2016. To augment India’s growth in civil aviation, the government formulated the NCAP 2016. Low-cost airlines dominate civil aviation in India and, per a report by a government regulator for civil aviation, the passenger load factor was highest for low-cost carriers like SpiceJet (91.1%), GoAir (86.3%), IndiGo (85.1%) and AirAsia (82.7%).
Travellers in India are extremely value-conscious, and the low-cost domestic aviation market is the largest in the world. It is heartening to note that the NCAP places a strong focus on low-cost air travel and is complementing the RCS so that more people are encouraged to travel by air. Since India is a vast country with fast developing road infrastructure, a complementary ramp-up of air travel capability and infrastructure is necessary. Low tariffs in tele- coms have delivered explosive growth in that sector and aviation is no different. The closer the cost of air travel gets to travel by train or road, the better it will be for the aviation industry.
To put a special focus on these aspects, the NCAP 2016 aims to strengthen regional air connectivity through the following initiatives:
Regional Connectivity Scheme. RCS will cover an hour-long flight, or a distance of 500-600km, with an airfare in the range of US$40 per passenger. The NCAP 2016 also postulates setting up of a viability gap fund to be contributed by the Ministry of Civil Aviation (MoCA) and state governments in the ratio of 80:20 (90:10 for northeastern states), which will look into up- grading various airstrips and airports in the country. As per the MoCA, only 75 out of 450 airstrips/airports in India have scheduled flights, so there is a huge potential in connecting them to increase mobility.
Route dispersal guidelines (RDG). RDG aims to provide air connectivity to remote regions of India. The aviation regulator has divided routes into three categories:
• Category I routes includes flights between large metro cities;
• Category II comprises flights between remote areas such as the northeast region, Jammu and Kashmir, and the Andaman and Nicobar Islands;
• Category III are remaining routes not included in Category I and II.
MRO. India’s MRO market size is worth about US$750 million, with both civil and defence aviation sectors having requirements for such services. The government is making efforts to provide benefits to the MRO industry by allowing: 100% FDI exemption/reduction from the customs duty/GST duty; faster sanction of visas to MRO experts; temporary landing permits to foreign pilots working for MRO; and the removal of airport royalty charges for a five-year pe- riod, among other benefits.
Easier international operations. To enable new airline carriers to fly internationally, the “5/20 rule” was modified and it will no longer be necessary for a carrier to have a minimum of five years of domestic flying experience, and a fleet of at least 20 aircraft, to commence international operations. The NCAP 2016 allows airlines to commence international operations if they allocate 20 aircraft, or 20% of their total capacity, for domestic operations.
Aviation infrastructure development. The NCAP 2016 envisages a joint coordination of state governments, the private sector and the Airports Authority of India to develop airports and related infrastructure. It also proposes to provide infrastructure sector status to cargo, aviation turbine fuel, MRO and ground handling, to bring about investment in such activities.
All of these initiatives will lead to the growth and development of the aviation ecosystem in India. RCS will provide a huge opportunity on urban/rural mobility, increase demand for new aircraft, and manufacturers foreign and Indian will have more orders, and generate greater employment opportunities to the “sunrise industry”. This will entail a complete overhaul in the maintenance and repair capabilities of aircraft in India.
FDI in civil aviation
The government of India has announced several policy changes in this area for India.
The most recent policy change is to allow foreign investment up to 100% in Air India by NRIs (non-residential Indians), under the automatic route.
From the graphic, it may be seen that changes to FDI policy are aimed at attracting investment in civil aviation, and to liberalize and simplify the ease of doing business in India to boost the growth of investment, income and employment. While almost all sectors of the aviation industry allow 100% FDI under the automatic route, the carriers and operators in the scheduled air transport service/domestic scheduled passenger airline category still have an FDI restriction of up to 49% (except NRIs). The government may look at liberalization and allow higher FDI in this area.
Sky’s the limit
The government has shown much determination in formulating the NCAP 2016 and Vision 2040 to lay a strong vision for the development of civil aviation in India. Most of the important aspects of civil aviation in India attract 100% FDI, as a result of which major global aviation players in some form or another have a presence in India. This is a strong indication that the global aviation industry sees value in what India has to offer.
The Indian aviation industry today is where the Indian automobile sector was about two decades ago. The automobile industry has almost all global brands manufactured in India, with a complete supply chain firmly established locally. There is no doubt that the fate of Indian civil aviation would be similar, and that day is not far away, when we manufacture an aircraft in India with maximum localization.
To enable this, we need to have constant dialogue and support between the government and the private sector so that we lay a strong foundation in domestic manufacturing for aircraft in India.
It would be encouraging to see more enablers (and rationalization of regulations) for the use of drones in India, as they offer huge capabilities and advantages. Currently, only the nano and micro category are exempt from certain regulatory requirements, and it would be desirable to see other categories of drones allowed to be put in use, with better regulatory environment and security considerations.
The aircraft finance and leasing business is a great opportunity for India to harness the potential of our banks, non-bank financial companies, securities and mutual funds, and other money markets, which will enable India to become a preferred destination of financing and leasing. It is heartening to see the focus on aircraft financing and leasing in the Finance Act, 2020.
With the opportunities and capabilities available in India, the sky is the limit.
AKHIL PRASAD is India country counsel and company secretary at Boeing International Corpora- tion. The views expressed in the article are personal.