Indian Aviation Industry: Issues & Challenges


By

Neha Arora
Research Scholar (Rajasthan University)
Lecturer
Kamal Kant Bishnoi
Lecturer
Swati Atray
Lecturer
Rajasthan Institute of Engineering and Technology
Jaipur
 


Abstract

One of the fastest growing aviation industries in the world is Indian Aviation Industry. With the liberalization of the Indian aviation sector, a rapid revolution has undergone in Indian aviation industry. Primarily it was a government-owned industry, but now it is dominated by privately owned full service airlines and low cost carriers. Around 75% share of the domestic aviation market is shared by private airlines. Earlier only few people could afford air travel, but now it can be afforded by a large number of people as it has become much cheaper because of stiff competition.

A wide range of services related to air transport such as passenger and cargo airlines, unscheduled service operators --- private jets and helicopters, airport management, and support services like Maintenance, Repairs and Overhaul (MRO), ground handling, in-flight catering, and training are being offered by Indian Aviation industry. Enormous benefit has reaped by the Aviation sector from the entry of private carriers, especially from those of the low fare ones.

Still the aviation sector contributes a small part of the travel and transportation services sector in India. In the year 2006-07 about 96 million passengers were travelled by airlines annually, while nearly 6 billion passengers carried by the railways. In 2006-07 the airlines suffered losses of around USD 500 million and the situation is expected to decline in 2007-08. The reasons of these losses were high cost of operations, intense competition, and unsustainably low fares.

Due to the increasing costs aviation industry is facing the difficulty. India's aviation sector stands up to the crisis and races against its fastest growing global competitors. Enhancement in affordability and connectivity add to the expected improvement in both passengers and cargo traffic. Large public and private investments which are supported by government initiatives in air travel infrastructure are expected to pour in. This paper will discuss about opportunities, issues & challenges faced by Aviation industry.

Introduction

Indian civil aviation industry was started in the year 1912; it was the year when the first air flight between Karachi and Delhi was started by the Indian State Air Services in association with the UK based Imperial Airways. JRD Tata founded the first Indian airline -Tata Airline in 1932.  Nine air transport companies were carrying both air cargo and passengers at the time of independence namely Tata Airlines, Indian National Airways, Air service of India, Deccan Airways, Ambica Airways, Bharat Airways, Orient Airways and Mistry Airways. Orient Airways shifted to Pakistan after partition.

In early 1948, Government of India established a joint sector company, Air India International Ltd in association with Air India (earlier Tata Airline) with a capital of Rs 2 crore. According to Air Corporations Act, 1953 the Government nationalized nine airline companies.  Indian Airlines Corporation (IAC) was established to cater to domestic air travel passengers and Air India International (AI) for international air travel passengers. Existing airline companies were transferred its assets to these two corporations. According to this Act IAC and AI had a monopoly over the Indian skies. In 1994, Vayudoot, A third government-owned airline, which provided feeder services between smaller cities, was merged with IAC. Indian aviation industry was dominated by these government-owned airlines till the mid-1990s.

In the year 1990, open-sky policy was adopted by the government and it allowed air taxi- operators to decide their own flight schedules, cargo and passenger fares. The monopoly of IA and AI in the air transport services were ended by Indian Government, as a part of its open sky policies in the year 1994. Monopoly was ended by repealing the Air Corporations Act of 1953 and replacing it with the Air Corporations (Transfer of Undertaking and Repeal) Act, 1994. Now Private operators were permitted to provide air transport services.

By the year 1995, numerous private airlines had ventured into the aviation business and accounted for more than 10 percent of the domestic air traffic. These included Jet Airways Sahara, NEPC Airlines, East West Airlines, ModiLuft Airlines, Jagsons Airlines, Continental Aviation, and Damania Airways. But only Jet Airways and Sahara managed to survive the competition. By this time, Indian Airlines began to lose market share to Jet Airways and Sahara. Today, Indian aviation industry is dominated by private airlines such as Deccan Airlines, GoAir, SpiceJet etc; these include low cost carriers who have made air travel affordable. In India Airline industry is plagued with several problems. Reasons are high aviation turbine fuel (ATF) prices, increasing labor costs and lack of skilled labor, rapid fleet expansion, and strong price competition among the players. Infrastructure constraint is one of the major challenges facing by Indian aviation industry. If Indian aviation industry has to continue its success story Airport infrastructure needs to be upgraded. In this direction some steps have already been taken. The future prospects of Indian aviation sector look bright.

Issues & Challenges

Classification of Indian Aviation Industry

The players in aviation industry can be broadly categorized in three groups:

* Public players
* Private players
* Start up players

There are three public players in Aviation industry: Air India, Indian Airlines and Alliance Air. The private players include Jet Airways, Air Sahara, Kingfisher Airlines, Spice Jet, Air Deccan and many more. Those who are planning to enter the markets are starts up players. Some of them are Omega Air, Magic Air, Premier Star Air and MDLR Airlines

Trends in Aviation Industry

1. Consolidation in aviation sector:
In aviation industries the rise in the number of alliances will help in promote the growth of aviation sector in India. Example of the Jet-Sahara merger is just the beginning. Indian aviation industry is looking forward to more consolidations.

2. The number of passengers traveling by air is on the rise:  By 2025 passenger boarding expected to double and by the same time aircraft operations are expected to triple, the number of passengers traveling by air is on rise.

3. For the traveling public, price is paramount in choosing a carrier: Airfares are fully transparent to the public and travelers are choosing the lowest price option because of the Internet and round-the-clock search facility. Even business travelers, who have been less price-sensitive, are resisting fare increases. Travelers are not giving preference to brand but the only premiums they are willing to pay for are time-of –day and direct flights.

4. Capacity is growing without much constraint: The new aircraft have been ordered by Indian carriers for delivery in the coming period, without clear plans to retire older planes. Significant numbers of regional jets are also adding by them. Kingfisher Airlines has already ordered 5 Airbus A380 aircrafts that will operate on international routes

5. Cost structures will continue to handicap legacy carriers as they compete with newer airlines, as well as with overseas carriers:  Great threats are being posed by the low cost carriers to legacy carriers, as a result of which they are reshuffle, their pricing policies. Apart from this, they are also facing competition from overseas players.

6. Oil prices are not expected to fall: Aviation Turbine Fuel (ATF) prices have been increased by 3.5 per cent, in line with the rise in international oil prices. Because of this there is a marginal increase in airfares.

7. Outsourcing:  Private airlines are famous to hire foreign pilots, get expatriates or retired personnel from the Air Force or PSU airlines, in senior management positions. Airlines are also famous to take on contract employees such as cabin crew, ticketing and check-in agents.

Aviation Sector Boom

Reason for Boom in Aviation Industry:

1. Foreign equity allowed:
Without any Government approval, foreign equity up to 49 per cent and NRI (Non-Resident Indian) investment up to 100 per cent is allowable in domestic airlines.

2. Low entry barriers: Nowadays, to launch an airline venture capital of $10 million or less is enough. Private airlines are hiring foreign pilots, get expatriates or retired personnel from the Air Force or PSU airlines in senior management positions.

3. Attraction of foreign shores: Many private players like Jet and Sahara have gone international by starting operations, first to SAARC countries, and then to South-East Asia, the UK, and the US and many more domestic airlines too will be entitled to fly overseas by using unutilized bilateral entitlements to Indian carriers.

4. Rising income levels and demographic profile: As compared to the developed country standards, India's GDP (per capita) at $3,100 is still very low but as India is shining, at least in metro cities and urban centres, where IT and BPO industries have made the young generation prosperous. Demographically, In India people in age group of 20-50 among its 50 million strong middle class, has the highest percentage with high earning potential. It contributes the boost in domestic air travel, particularly from a low base of 18 million passengers.

5. Untapped potential of India's tourism: Presently India attracts 3.2 million tourists every year, while China gets 10 times the number. Due to the open sky policy Tourist arrivals in India are expected to grow exponentially.

6. Glamour of the airlines: An airline is as glamorous as the film-making industry. Today Airline tycoons, like J. R. D. Tata and Howard Hughes, Sir Richard Branson, Dr. Vijaya Mallya, have been idolized. Airlines have an aura of glamour around them, and high net worth individuals can always toy with the idea of owning an airline.

Indian aviation boom — The myth and reality:

There is 170 per cent increase from present fleet strength of 158 aircraft as private and public sector airlines from India have placed orders in the last 6 months.

As always, among the new entrants, a few may have visions of changing that world and others may be motivated only by money and the glamour of the airline sector.

There is a need of support system of airports and their infrastructure, trained manpower such as pilots, cabin crew and maintenance engineers, passenger amenities such as hotels,, ATF (aviation turbine fuel) availability on a par with international prices, networks of travel agents and Internet penetration for the travelers for the aviation sector to work.

More important, there has to be a rise in the per capita income to make air travel affordable.

1. Rush for domestic skies

Foreign equity allowed: Without any Government approval, foreign equity up to 49 per cent and NRI (Non-Resident Indian) investment up to 100 per cent is allowable in domestic airlines.

Low entry barrier: Nowadays, to launch an airline venture capital of $10 million or less is enough. Private airlines are hiring foreign pilots, get expatriates or retired personnel from the Air Force or PSU airlines in senior management positions.

Attraction of foreign shores: Many private players like Jet and Sahara have gone international by starting operations, first to SAARC countries, and then to South-East Asia, the UK, and the US and many more domestic airlines too will be entitled to fly overseas by using unutilized bilateral entitlements to Indian carriers.

Rising income levels and demographic profile: As compared to the developed country standards, India's GDP (per capita) at $3,100 is still very low but as India is shining, at least in metro cities and urban centre, where IT and BPO industries have made the young generation prosperous. Demographically, In India people in age group of 20-50 among its 50 million strong middle class, has the highest percentage with high earning potential. It contributes the boost in domestic air travel, particularly from a low base of 18 million passengers.

Untapped potential of India's tourism: Presently India attracts 3.2 million tourists every year, while China gets 10 times the number. Due to the open sky policy Tourist arrivals in India are expected to grow exponentially.

Glamour of the airlines: An airline is as glamorous as the film-making industry. Today Airline tycoons, like J. R. D. Tata and Howard Hughes, Sir Richard Branson, Dr. Vijaya Mallya, have been idolized. Airlines have an aura of glamour around them, and high net worth individuals can always toy with the idea of owning an airline.

All the above factors are created a "me too" rush to launch domestic airlines in India.

2. Domestic market

According to the Directorate-General of Civil Aviation statistics, the total size of the domestic market was 18 million in 2003.

All scheduled domestic airlines in India carried 42,590 passengers a day in 2003-04, which was 11 per cent more than the previous year's carriage of 38,222 per day.

The average load factor, an indicator of passenger demand and efficiency of the airlines' sales and marketing efforts, was 58 per cent, It was 56% in the previous years..  The reason for low load factor is the new entrants on the domestic scene.

As per DGCA statistics, for the first time in 2003-04 (see Chart 1), domestic airlines were able to record revenue per kilometre (RPKM) higher than costs, with a positive operating margin of 3 per cent, against a negative margin of 3 per cent in previous years.


3 . Pre-requisites for survival

Low debt-equity ratio: Airline is a cyclical industry which has alternating short periods of growth and longer periods of recession. Due to the staying power of equity an airline gives the capital to stay afloat during periods of recession. Ideally the debt-equity ratio for new airlines should be less than or equal to 1.

Appropriate aircraft type: The most expensive assets of airlines are aircraft and it is having an average aircraft utilization higher than 11-12 hours per day is crucial for its survival.

Thus choosing an aircraft that is cost-effectively for the sectors identified, having sufficient number of pilots, as well as maintenance facilities and spare parts is vital.

Aviation value chain : Chart 2 shows low operating margins of airlines against high margins of their monopoly suppliers such as IT providers, airports, aircraft manufacturers. "Airlines do the flying and others make money out of them", says Mr Giovanni Bisignani, Director-General of IATA (International Air Transport Authority).


Challenges for Aviation Industry

There are several challenges in front of aviation industry because of the growth in the aviation sector and capacity expansion by carriers. These include shortage of workers and professionals, safety concerns, declining income and the lack of accompanying capacity and infrastructure. Moreover, stiff competition and rising fuel costs are also negatively impacting the industry.

1. Shortage of trained Employee: There is a shortage of trained and skilled manpower in the aviation sector as a result of which there is cut-throat competition for employees which, in turn, is driving wages to unsustainable levels. Moreover, the industry is unable to retain talented employees.

2. Regional connectivity: To provide regional connectivity is one of the biggest challenges facing the aviation sector in India. The lack of airports is hampering the growth of regional connectivity.

3. Rising fuel prices: As fuel prices have risen, the inverse relationship between fuel prices and airline stock prices has been established. Moreover, it also led to increase in the air fares.

4. Declining yields: As more players are attracted towards Aviation industry because of increasing growth prospects it will lead to more competition. All this has resulted in lower returns for all operators.

5. Gaps in infrastructure: Airport and air traffic control (ATC) infrastructure is insufficient to support growth. While a initiate has been made to upgrade the infrastructure, the results will be visible only after some years.

6. High input costs: The input costs are also very high because of some of the reasons like Withholding tax on interest repayments on foreign currency loans for aircraft acquisition. Increasing manpower costs due to shortage of technical personnel.

SWOT Analysis of Industry

Strengths:
* Growing tourism
* Rising income levels
* Liberal Environment
* Modern Fleet
* High Quality
* Economic Growth
* Political Stability

Weakness:
* Under penetrated Market
* Untapped Air Cargo Market
* Infrastructural constraints
* Airport Infrastructure
* Airways Infrastructure
* National Carrier
* Deep Pockets
* High Cost Structure
* Skilled Resources

Opportunities:
* Expecting investments
* Expected Market Size
* Market Growth
* Geographic Location
* Lower Costs, Higher Quality

Threats:
* Shortage of trained Pilots
* Shortage of Airports
* High prices
* Middle East Aviation
* Terrorism


Conclusion

Due to the rise in income levels, disposable income is increasing which enhanced the number of flyers. Indian tourism is also in the growing stage as a result there has been an increase in the number of international and domestic passengers as well. It will lead to the growth in airlines industry. Although currently there are many challenges which are being faced by the Indian Aviation Industry but the growth prospect is very much high. Government has to take an initiative to improve the Airport infrastructure and to pour in some investments as well. Some steps are already being taken by the government for the development of Aviation Industry. Concluding we can say that apart from all the challenges Aviation Industry's future is very bright in India.

Bibliography:

1. http://www.iloveindia.com/economy-of-india/aviation-industry.html

2. http://explore.oneindia.in/industry/aviation/

3. http://www.indiahousing.com/infrastructure-in-india/aviation-industry-in-india.html

4. http://www.bharatbook.com/Aviation-Industry-in-India.asp

 5. http://avindia.blogspot.com/

6. http://www.india-server.com/magazine/airlines-3.html

7. http://business.mapsofindia.com/aviation/

8. http://en.wikipedia.org/wiki/Indian_Airlines

9. http://www.researchandmarkets.com/reports/449298

10. http://www.naukrihub.com/india/aviation/overview/trends/
 


Neha Arora
Research Scholar (Rajasthan University)
Lecturer
Kamal Kant Bishnoi
Lecturer
Swati Atray
Lecturer
Rajasthan Institute of Engineering and Technology
Jaipur
 

Source: E-mail April 19, 2010

          

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