ECONOMIC REFORM AVIATION SECTOR - INDIA

P CHANDCS SUBHASHSACHIN NIKAMK SHODHANCYRIL SIMONK VIJAY KRISHNA

SUMMARY OF PRESENTATION• Introduction

• India’s economy before 1991

• Aviation Industry before 1991

• Liberalisation policies/Government initiatives

• Impact of Liberalisation Policy

• Growth Story

• SWOT Analysis

• Reasons for current losses by Indian LCC and Govt measures

• Conclusion

INDUSTRY OVERVIEW

• India is World’s 9th largest market• Comprises of Domestic Airline, Air Cargo and Airports • Scheduled services available from to/fro 82 airports• Bilateral with 104 countries• Domestic air passenger - Worlds 4th • Enhanced connectivity – 72 foreign airlines of 49 countries• 14 scheduled airlines operating exclusively in passenger

sector• Presently it contributes 0.5 % of GDP and it is expected that

by 2030 it will contribute 5 % of GDP

HISTORY • Completed 100 years in the year 2011

• February 18, 1911 - First commercial plane between Allahabad & Naini carrying mails

• During Independence - 09 Companies Tata Airlines, Indian National Airways Air service of India, Deccan Airways Ambica Airways, Bharat Airways

Mistry Airways.

• Inaugural flight of Air India International Ltd - June 8, 1948 Mumbai-London

• Nationalized in 1953 - Private airlines not allowed Transport for elite class Restricted Growth High Cost structure Underdevelopment of infrastructure

INDIA’S ECONOMY BEFORE 1991

• Influenced by Protectionism and Public ownership.

• Existence of License Raj (Red Tape).

• Average growth rate of India was 3.5% p.a with per capita 1.3%p.a.

• More focused on Heavy Industries and Agriculture.

• Less attention towards service sector.

• Downfall of USSR and Gulf War added fuel to the fire of crisis.

INDIA’S ECONOMY BEFORE 1991

• Major imbalance in payments of loans.

• International Monetary Fund (IMF) demanded for economic reforms in return of aid.

• Prime Minister Narasimha Rao and Finance Minister Manmohan Singh took initiative to bring Liberalization.

ECONOMIC REFORMS POST 1991Policies • Liberalisation - Private Players

• Open Sky

• Direct import of ATF - Regulation

• FDI – Domestic Services Sector

• Airports control - Airports Authority of India (AAI)

• Green Field Airport

Major Timelines

1912: Indian State Air service and Imperial

Airways, UK collaborate to ply on first domestic route, between Delhi and

Karachi.

1932: Tata Aviations established. It goes to

Colombo in 1938.

1953: Indian Airlines Corporation formed

through Air Corporation Act,

1953, by nationalizing Air India and Indian National Airways.

2003 Entry of low cost carriers. Air Deccan, Spice Jet, Go

Air, Indigo.

IMPACT OF LIBERALISATION

• The Air Corporation Act, 1953 repealed

Opening up of the domestic sector Disinvestment of the two public sector airlinesNew privately owned domestic airlines

• Open Sky

Allow foreign airline of any country or ownership to land at any port on any number of occasions and with unlimited seat capacity.

• Foreign Direct Investment

Up To 49% Of Foreign Equity & 100% Of NRI investment is allowed Pertaining to the Domestic Air Transport Services

IMPACT OF LIBERALISATION

• Private Carriers permitted to operate scheduled services – 75% share in domestic aviation

• Entry of low cost carriers

• City side development of non-metro airports

• Allowing Indian carriers to compete on international routes

• Reduction in Landing charges.

• Fleet expansion plans of Air India

IMPACT OF LIBERALISATION

• Restructuring of Delhi and Mumbai airport and development of Greenfield airports at Bangalore and Hyderabad undertaken.

• Up gradation/ expansion/ development of airports undertaken depending upon traffic potential, requirement of airline operators and need of air passengers.

IMPACT OF LIBERALISATION• With the liberalization of the Indian aviation sector, aviation

industry in India has undergone a rapid transformation. From being primarily a government-owned industry, the Indian aviation industry is now dominated by privately owned full service airlines and low cost carriers.

PASSENGER FLOW2006 - 2011

MARKET SHARE2011

MAJOR GOVERNMENT INITIATIVES• Reduction of high Aviation Turbine Fuel(ATF) cost and review of its Tax structure

• Multi Modal Connectivity by building expressways to facilitate advantage of air transportation by reducing the total travel time

• Promotion of Regional Airlines by the way of liberal policy and provision of better infrastructure facilities

• Development of MRO hub

MAJOR GOVERNMENT INITIATIVES

• Merger of AI and Indian Airlines to optimize fleet acquisition and to leverage the asset base

• 100% FDI is permissible for existing airports; approval required for FDI beyond 74%

• 100% FDI under automatic route is permissible for Greenfield airports

• 100% tax exemption for airport projects for a period of 10 years

GROWTH OF THE INDUSTRY

• The growth of airlines traffic in Aviation Industry in India is almost four times above international average.

• Domestic airlines passengers traffic in increasing at the rate of 25%.

• India ranks fourth after US, China and Japan in terms of domestic passengers volume. The number of domestic flights grew by 69 per cent from 2005 to 2008. The domestic aviation sector is expected to grow at a rate of 9-10 per cent to reach a level of 150-180 million passengers by 2020.

• The industry witnessed an annual growth of 12.8 per cent during the last 5 years in the international cargo handled at all Indian airports.

GROWTH OF THE INDUSTRY

• Further, there has been an increase in tourist charter flights to India with around 686 flights bringing 150,000 tourists.

• It is predicted that international passengers will grow upto 50 million by 2015

• Aviation is now affordable with check fares and discount schemes.

• Various Operators with different business model.

• Regional connectivity – Tier II & Tier III cities

Contribution to GDP

Present Contribution < 1%.

Poised to grow at 5% contribution to GDP by 2030

OPPORTUNITIES

Airport development and modernisation• The government is promoting private participation for the development of greenfield airports and modernisation of existing airports.

Airport connectivity• The Ministry of Civil Aviation is focussing on improving connectivity to major airports.

City-side development • The government is focussing on the city-side development of airports, including real estate and commercial development. The city-side development of 24 non-major airports is being taken up.

SWOT ANALYSIS

CHALLENGES• Initializing privatization in the airport activities

• Modernization of the airlines fleet to handle the pressure of competition in the aviation industry

• Rapid expansion plans for the major airports for the increased flow of air traffic

• Development for the continuously growing Regional Airports

• Costs pressures (ATF Prices & Staff Cost)

Problems that effected airline industry- The low cost carrier ( LCC)

• The Indian aviation sector was exposed to intense competition with the advent of a low-cost airline - Air Deccan back in 2003. The success of Air Deccan spurred the entry of other LCCs like SpiceJet, Indigo, Go Air and subsequently low fare offerings from Jet airways and Kingfisher Airlines. However, longer term viability of LCCs models in India remains to be seen (Kingfisher exited the segment recently) as airport charges are same for FSCs and LCCs in India

• ATF costs contributes 30-45% of overall operating costs for Full Service Carrier’s (FSC’s) & 40-55% for Low cost carriers (LCCs)

• Domestic ATF prices are linked to fluctuation in crude oil prices and movement in INR vs. $

• High central and state levies translates into a 60-70% higher ATF prices in India over the global average

Problems that effected airline industry- The low cost carrier ( LCC)

• Significant congestion at major domestic airports increases fuel costs considerably.( (half an hour hovering at major airport could increase fuel costs by Rs.60,000 to Rs. 115,000 depending on aircraft, besides impacting aircraft utilizations)

• High airport charges, dearth of experienced commercial pilots and their demand of salaries in dollars, inflexible labor laws and overall higher cost of capital.

• While the passenger traffic growth has been steady (averaging 14% in 2010-12), intense competition has impacted yields and forced airlines back into losses in an inflated cost base scenario.

Current Govt. measures• Proposal to allow foreign carriers to make strategic investments

(up to 49% stake) in Indian Carriers.(Latest News)

• Improvement in infrastructure such that LCCs could operate on secondary airports.

• Proposal to allow airlines to directly import ATF lifting the freeze on international expansions of private airlines.

• While the domestic airlines have not been able to attract foreign investors (up to 49% FDI is allowed, though foreign airlines are currently not allowed any stake), foreign airlines may be interested in taking strategic stakes due to their deeper business understanding, longer investment horizons and overall longer term commitment towards the global aviation industry.

CONCLUSION• The success of the “open sky” policy in the first phase of economic reforms in the domestic aviation sector, international cargo, airport infrastructure .

• The opening of the Airports sector with new ‘Green field Airports ’to the private sector, has been a step forward.

• The Disinvestment of shareholding in the public sector airlines still remains to be completed.

• Reforms like allowing foreign airlines to buy stake in domestic carriers and rationalisation of central and state levies on jet fuel

implemented for a sound sustained growth.

THANK YOU