The civil aviation industry in India is all set to gather momentum and the government is working at creating eco-systems that will spur this growth

At the inaugural ceremony of Aero India 2013 in Bengaluru, the Minister for Civil Aviation, Ajit Singh, seized the opportunity of explaining to an international audience, how, driven by enhanced economic growth, India would emerge among the top three civil aviation markets in the world by 2020. The International Air Transport Association (IATA), the Airports Council International and the FICCI-PwC have made similar growth forecasts with India riding high on exponential passenger/cargo/aircraft movement. In a predominantly defence-related air show, Ajit Singh had reasons to talk about the potential of civil aviation in the light of the government having tweaked the defence offset policy in the recent past to allow for investments in civil aviation.

On its own the civil aviation sector is doing well barring some occasional hiccups. India is experiencing significant growth in terms of passenger traffic and airport infrastructure development. During the last 10 years, the compounded annual growth rate (CAGR) of total passenger traffic in India has been in the region of 15 per cent. According to the Federation of Indian Chambers of Commerce and Industry (FICCI), the CAGR of domestic traffic in the period 2009 to 2011 has been 17 per cent.

Growth in Domestic Traffic

Domestic traffic in the next 10 years in India is expected to touch about 180 million passengers per annum and international traffic is likely to exceed 80 million from the current 60 million and 40 million respectively. In particular, Ajit Singh emphasised enhanced hinterland connectivity which would further drive the growth of domestic traffic. However, that would entail development of low-cost airports to provide air connectivity to the remote and interior areas of the country while encouraging the growth of regional airlines. In addition to the upgradation/development of 35 non-metro airports, the government has approved 15 more airports for infrastructure development. The passenger handling capacity in Indian airports has more than trebled in the past five years, from 72 million to 233 million. The US aerospace behemoth Boeing upped its estimates for India stating that it would require 1,450 airplanes by 2031.

Considering the huge opportunities that are opening up, at Aero India 2013, the Indian aerospace major Hindustan Aeronautics Limited (HAL) announced its express intent to foray into the civil aviation sector including aero engines manufacturing. HAL is likely to be a lead partner in the proposed Rs. 7,500 crore national civil aircraft programme to develop a regional transport aircraft. The goal is to build a 90-seater regional aircraft with private participation. Apart from development and manufacture of aircraft, HAL has civil certification as an airport operator for Ozar airport in Nashik. With Ozar airport becoming operational for civil traffic, it is expected that congestion at Mumbai airport would reduce at least partially.

Rising Cost of Fuel

While the scenario looks good, there are issues which continue to undermine the sectors’ viability; continually rising cost of aviation turbine fuel (ATF) being the foremost. Today, over 40 per cent of the operational cost of an airline in India is accounted for by the fuel bill in comparison to 13 per cent a decade ago. As per International Air Transport Association (IATA), 2013 is expected to be far more challenging with oil prices hovering above $100 per barrel (Brent). Looking at 2012, rising oil prices and continued economic weakness, especially in Europe, appear to be the greatest threat to airline profitability. With its taxation structure, India is the worst hit as cost of ATF is much higher than the global average.

IATA noted that the trends in growth of domestic air travel have differing patterns in different parts of the world. Representing under 40 per cent of worldwide industry volumes, domestic aviation markets are dominated by the United States and China. The US market expanded just 1.3 per cent in 2011; but the Chinese market grew almost 11 per cent. The Indian market, which is one-twelfth the size of the US market, grew even faster at 16 per cent.

Airports Get Busy

During 2011, airports in the country managed by the Airports Authority of India (AAI), other joint venture airports and private airports, handled 1,518 thousand aircraft movements which included 310 thousand on international and 1,208 thousand on domestic segments, 157.51 million passengers consisting of 39.48 million international and 118.03 million domestic. Apart from these, airports handled 2,308.83 thousand tonnes of freight including 1,495 thousand international and 813 thousand domestic. The total aircraft movements and passenger traffic witnessed double-digit growth of 10.93 per cent and 14.43 per cent respectively, whereas freight traffic registered a marginal increase of 0.82 per cent as compared to the traffic handled during 2010. Cargo handled during the year was 3,19,619 tonnes, which was 23.48 per cent higher than the previous year. Cargo handled at AAI airports between April 2011 and September 2011 was 1,57.161 tonnes, which was 1.12 per cent higher than that in the corresponding period of the previous year.

Foreign Direct Investment

The recent increase of foreign direct investment (FDI) up to 49 per cent in civil aviation is expected to pay dividends in the medium term as there is still a ‘wait and watch’ mode that overseas investors have adopted. But on the horizon is the Etihad Airways and Jet Airways deal with the former intending to pick up stake in the latter.

However, attempts by Kingfisher Airlines to get a foreign investor to revive the airline have not succeeded at the time of writing. The airline has been grounded for a number of reasons: finances, safety and gross mismanagement. The position of Air India is also not very sound and requires frequent infusion of funds by the government. But Air India is opposed to FDI in airlines as it perceives a threat to its international and even domestic operations. The good news however is that IndiGo, GoAir and SpiceJet have not only negotiated the turbulent times well, but have also gone on to expand to the surprise of many. All the three low-cost airlines have several planes on order.

Maintenance Repair and Overhaul

With the aircraft inventory going up, there is an urgent need to have maintenance repair and overhaul (MRO) facility within the country. India is way behind in respect of MRO facilities and the operators rely heavily on MROs overseas, which only adds to their operating costs. However, there are some developments on the horizon which will transform the MRO sector and these include joint venture projects in the pipeline. India’s MRO segment is estimated to grow at 10 per cent and reach $2.6 billion ( Rs. 14,300 crore) by 2020. Establishing MRO facilities in India will enable operators to achieve quicker turnaround, savings in operating costs and saving of precious foreign exchange.