Analysis of the Indian Aviation Industry
What is the status of the Indian aviation industry? In 2014, India accounted for nearly 83 million air passengers (including both domestic and international air travellers). The current size of the Indian civil aviation industry is about US$ 16 billion and contributes 0.5% to the country’s GDP.
India is also one of the largest and fastest growing aviation markets worldwide. Considering the year-on-year growth, in 2015 the domestic air passenger traffic in India grew at roughly 25%, followed by the US at a mere 9% growth. In these terms, the Indian aviation market has high growth potential.
Few of the factors that mainly led to the transformation in the Indian aviation industry are:
• Entry and growth of LCCs (low cost carriers)
• Development of modern airport infrastructure
• Government policies to develop transportation, and tourism
• Foreign direct investments
• Emphasis to develop regional connectivity
• Entry and growth of LCCs (low cost carriers)
• Development of modern airport infrastructure
• Government policies to develop transportation, and tourism
• Foreign direct investments
• Emphasis to develop regional connectivity
In the 11th five year plan, the government also prioritized the development of airports via ‘PPP’ (Public Private Partnership) model. Currently, there are around 450 airports in India. AAI (Airport Authority of India ) manages 125 airports of which 11 of them are the international airports, 8 are customs airports, 81 domestic airports, and 25 civil enclaves at defense airfields.
Challenges
However, still many of the Tier 2 and Tier 3 cities in India do not have airport infrastructure. Tier 2 and Tier 3 cities currently contribute only 30% of the total air passenger traffic.
However, still many of the Tier 2 and Tier 3 cities in India do not have airport infrastructure. Tier 2 and Tier 3 cities currently contribute only 30% of the total air passenger traffic.
Despite the so called ‘potential’, the Indian aviation industry has not been able to live up to the growth projections. Except for Indigo, almost all other airlines are in loss.
Few of the major challenges to the Indian aviation industry are:
• Higher cost of fuel in India
• High taxation
○ Excise duty
○ Customs duty
○ Sales tax
• High airport charges
• Higher cost of fuel in India
• High taxation
○ Excise duty
○ Customs duty
○ Sales tax
• High airport charges
One of the major reasons for the lack of profitability is the high operating cost of airlines in India. Because of high fuel prices along with high taxation, fuel constitute around 35-45% of the total operating cost of an airline in India. Considering the global average, fuel constitutes only about 20% of the total operational cost of an airline.
Indian Oil Corporation Ltd. And Bharat Petroleum Ltd. are the two major oil providers in India, which charge around 16-30% sales tax on fuel, resulting into high prices. In addition, there are certain taxes laid by the government.
Furthermore, high airport charges in the major airports such as Mumbai and Delhi also contribute to the high operating costs.
High Airport Charges
Recently new airports are built in PPP model, which are very modern. However, they charge extremely high airport charges. To further worsen the situation, AERA recently approved to further raise the taxes charges at few of these airports:
• Delhi airport: 346%
• Mumbai airport: 154%
• Chennai airport: 118%
• Kolkata airport: 242%
Recently new airports are built in PPP model, which are very modern. However, they charge extremely high airport charges. To further worsen the situation, AERA recently approved to further raise the taxes charges at few of these airports:
• Delhi airport: 346%
• Mumbai airport: 154%
• Chennai airport: 118%
• Kolkata airport: 242%
Despite such high operating costs, airlines in India are required to reduce airfare due to overcapacity, so as to attract customers. The extremely competitive pricing from LCCs have even forced the FSCs (full service carriers) to reduce their air fare, despite a higher cost structure.
Furthermore, the government policy regarding social obligation of airlines to fly uneconomic routes and interference in the pricing have made the situation much worse.
In addition, getting aviation license in India is a huge hurdle for airlines to enter the market. The procedure of getting license is slow and cumbersome.
Major Airlines in India
The Indian aviation industry is dominated by the LCCs. Few of the major airlines are:
• Air India
• Jet Airways
• Indigo
• Spice Jet
• Go Air
• Air Asia India
• Vistara
The Indian aviation industry is dominated by the LCCs. Few of the major airlines are:
• Air India
• Jet Airways
• Indigo
• Spice Jet
• Go Air
• Air Asia India
• Vistara
All these major carriers are fighting to gain maximum market share. In terms of air passengers, the Indian domestic market is currently dominated by the LCCs such as Indigo and SpiceJet. Indigo is the only Indian airline which has been capable to remain profitable continuously since the last few years.
FDI in Indian Aviation Sector
Indian airlines are passing through competitive phases where both the FSCs and LCCs are engaged in fierce competition which has resulted in:
• Addition of capacity
• Addition of routes
• Addition of products and services
• Reduction in air fare
Indian airlines are passing through competitive phases where both the FSCs and LCCs are engaged in fierce competition which has resulted in:
• Addition of capacity
• Addition of routes
• Addition of products and services
• Reduction in air fare
This aggressive expansion plans of Indian carriers have resulted in excessive supply over a deficient infrastructure. FDI allowance in airlines in India would only deteriorate the situation for already bleeding home grown airlines.
Foreign investment in airlines should be of mutual benefit, where if one country offers access and allows foreign ownership of airline, the other country should also extend the courtesy to the host country.
While open skies is a long term outcome, it cannot be achieved by a nation alone. In an environment where restrictive foreign ownership in the airline industry is compulsion, this protects the foreign carriers from both targeting Indian carriers for acquisition, and also using bilateral rights to their own advantage.
Outlook and Future
However, with the new government putting more emphasis on economic development and empowerment of Indian economy, it is expected that the Indian aviation industry will also see some favorable policies and initiatives that will further help the growth of the aviation sector.
However, with the new government putting more emphasis on economic development and empowerment of Indian economy, it is expected that the Indian aviation industry will also see some favorable policies and initiatives that will further help the growth of the aviation sector.
Indian government is planning to construct 15 new airports under the Greenfield Airport Policy. These upcoming airports will also help improve the connectivity among Tier 2 and Tier 3 cities. For the 12th five year plan, AAI is planning to invest US$ 150 million further to develop the non-metro airports.
Despite the difficult situations, the Indian aviation industry has time and again shown the potential to bounce back. With the recovery of the Indian economy, favorable government policies, the current declining trend of fuel prices, and expansion/development of airport infrastructure in the country will most likely help the airlines to tide over the adverse situation.
The key to the fast pace development of Indian aviation industry lies not just in the ‘formation of strategies and policies’ by the stakeholders (namely the airlines, airport operators, and the government), but also on early and effective implementation of these decisions.
Few of the major challenges to the Indian aviation industry are:
• Higher cost of fuel in India
• High taxation
○ Excise duty
○ Customs duty
○ Sales tax
• High airport charges
• Higher cost of fuel in India
• High taxation
○ Excise duty
○ Customs duty
○ Sales tax
• High airport charges
One of the major reasons for the lack of profitability is the high operating cost of airlines in India. Because of high fuel prices along with high taxation, fuel constitute around 35-45% of the total operating cost of an airline in India. Considering the global average, fuel constitutes only about 20% of the total operational cost of an airline.
Indian Oil Corporation Ltd. And Bharat Petroleum Ltd. are the two major oil providers in India, which charge around 16-30% sales tax on fuel, resulting into high prices. In addition, there are certain taxes laid by the government.
Furthermore, high airport charges in the major airports such as Mumbai and Delhi also contribute to the high operating costs.
High Airport Charges
Recently new airports are built in PPP model, which are very modern. However, they charge extremely high airport charges. To further worsen the situation, AERA recently approved to further raise the taxes charges at few of these airports:
• Delhi airport: 346%
• Mumbai airport: 154%
• Chennai airport: 118%
• Kolkata airport: 242%
Recently new airports are built in PPP model, which are very modern. However, they charge extremely high airport charges. To further worsen the situation, AERA recently approved to further raise the taxes charges at few of these airports:
• Delhi airport: 346%
• Mumbai airport: 154%
• Chennai airport: 118%
• Kolkata airport: 242%
Despite such high operating costs, airlines in India are required to reduce airfare due to overcapacity, so as to attract customers. The extremely competitive pricing from LCCs have even forced the FSCs (full service carriers) to reduce their air fare, despite a higher cost structure.
Furthermore, the government policy regarding social obligation of airlines to fly uneconomic routes and interference in the pricing have made the situation much worse.
In addition, getting aviation license in India is a huge hurdle for airlines to enter the market. The procedure of getting license is slow and cumbersome.
Major Airlines in India
The Indian aviation industry is dominated by the LCCs. Few of the major airlines are:
• Air India
• Jet Airways
• Indigo
• Spice Jet
• Go Air
• Air Asia India
• Vistara
The Indian aviation industry is dominated by the LCCs. Few of the major airlines are:
• Air India
• Jet Airways
• Indigo
• Spice Jet
• Go Air
• Air Asia India
• Vistara
All these major carriers are fighting to gain maximum market share. In terms of air passengers, the Indian domestic market is currently dominated by the LCCs such as Indigo and SpiceJet. Indigo is the only Indian airline which has been capable to remain profitable continuously since the last few years.
FDI in Indian Aviation Sector
Indian airlines are passing through competitive phases where both the FSCs and LCCs are engaged in fierce competition which has resulted in:
• Addition of capacity
• Addition of routes
• Addition of products and services
• Reduction in air fare
Indian airlines are passing through competitive phases where both the FSCs and LCCs are engaged in fierce competition which has resulted in:
• Addition of capacity
• Addition of routes
• Addition of products and services
• Reduction in air fare
This aggressive expansion plans of Indian carriers have resulted in excessive supply over a deficient infrastructure. FDI allowance in airlines in India would only deteriorate the situation for already bleeding home grown airlines.
Foreign investment in airlines should be of mutual benefit, where if one country offers access and allows foreign ownership of airline, the other country should also extend the courtesy to the host country.
While open skies is a long term outcome, it cannot be achieved by a nation alone. In an environment where restrictive foreign ownership in the airline industry is compulsion, this protects the foreign carriers from both targeting Indian carriers for acquisition, and also using bilateral rights to their own advantage.
Outlook and Future
However, with the new government putting more emphasis on economic development and empowerment of Indian economy, it is expected that the Indian aviation industry will also see some favorable policies and initiatives that will further help the growth of the aviation sector.
However, with the new government putting more emphasis on economic development and empowerment of Indian economy, it is expected that the Indian aviation industry will also see some favorable policies and initiatives that will further help the growth of the aviation sector.
Indian government is planning to construct 15 new airports under the Greenfield Airport Policy. These upcoming airports will also help improve the connectivity among Tier 2 and Tier 3 cities. For the 12th five year plan, AAI is planning to invest US$ 150 million further to develop the non-metro airports.
Despite the difficult situations, the Indian aviation industry has time and again shown the potential to bounce back. With the recovery of the Indian economy, favorable government policies, the current declining trend of fuel prices, and expansion/development of airport infrastructure in the country will most likely help the airlines to tide over the adverse situation.
The key to the fast pace development of Indian aviation industry lies not just in the ‘formation of strategies and policies’ by the stakeholders (namely the airlines, airport operators, and the government), but also on early and effective implementation of these decisions.
