The growth of India’s airline industry continues apace, making the country one of the world’s key aviation markets. Yet infrastructure challenges remain and India’s airlines are deep in debt, writes Radhakrishna Rao. India’s civil-aviation sector, estimated to be growing at a robust annual rate of 15-20 percent, is considered India’s second emerging sunrise industry after Information Technology. The growth rate is one of the fastest in the Asia-Pacific region, and the country is currently the ninth-largest aviation market in the world. A massive boom in the tourism industry, coupled with a growing, cash-rich middle class and strong government support have helped, alongside growing private participation and foreign investment, and a favourable business environment. With the Government’s Open Skies policy luring an increasing number of foreign entities to enter the country’s civil-aviation market, the number of airlines and the nationwide aircraft fleet are both expanding. Recognising this, the Indian Civil Aviation Ministry’s Vision 2020 plan stresses a need to develop the country’s infrastructure, with a particular focus on well-equipped, user friendly airports to handle as many as 280 million passengers per year expected in the country by 2020.
10th Nov 2011
Indian aviation faces challenges, opportunities
The growth of India’s airline industry continues apace, making the country one of the world’s key aviation markets. Yet infrastructure challenges remain and India’s airlines are deep in debt, writes Radhakrishna Rao.
India’s civil-aviation sector, estimated to be growing at a robust annual rate of 15-20 percent, is considered India’s second emerging sunrise industry after Information Technology.
The growth rate is one of the fastest in the Asia-Pacific region, and the country is currently the ninth-largest aviation market in the world. A massive boom in the tourism industry, coupled with a growing, cash-rich middle class and strong government support have helped, alongside growing private participation and foreign investment, and a favourable business environment.
With the Government’s Open Skies policy luring an increasing number of foreign entities to enter the country’s civil-aviation market, the number of airlines and the nationwide aircraft fleet are both expanding. Recognising this, the Indian Civil Aviation Ministry’s Vision 2020 plan stresses a need to develop the country’s infrastructure, with a particular focus on well-equipped, user friendly airports to handle as many as 280 million passengers per year expected in the country by 2020.
The key challenge will be to ensure that Indian airports function with the same efficiency as global hubs such as Dubai and Singapore. That not only calls for a huge infrastructure investment, but also a totally new approach to setting up and handling airports. Interestingly, while India allows 100 percent FDI(Foreign Direct Investment) into the green-field airport projects, it does not allow direct or indirect equity participation by foreign airlines into the Indian carriers. Cash-strapped Indian carriers have, however, been vigorously advocating the need to lift this restriction.
Vijay Mallya, chairman of Kingfisher Airlines and of the Confederation of Indian Industry (CII) committee on civil aviation, estimates that the country’s aviation sector is growing at about 18 percent per year. However, he adds that the next two years will be critical in consolidating the growth as well as making the sector sustainable.
In 2004, the Indian aviation market handled about 18 million passengers, and that figure is now at about 50 million. Domestic passenger traffic grew 14.8 percent in May 2011 from the same month last year and the number of passengers flown by Indian carriers that month hit an all time high of 5,492,000.
Jet Airways, along with its low-cost carrier (LCC) subsidiary Jetlite, led the field with 26.1 percent of the market. Budget carrier Indigo carried 19.9 percent of the passenger total, a fraction less than the 20 percent handled by Kingfisher. With pilots of state-owned, debt-ridden Air India on strike that month, SpiceJet, the LCC owned by media baron Kalanithi Maran, increased its market share to 14.2 percent. Indigo had the highest passenger load factor at 89.4 percent.
“Robust growth, with [improved] economic prospects [for the] massive Indian population, and business progress and access to airports will increase the demand for aircraft,” says Dinesh Keskar, president of Boeing India. The US aircraft manufacturer predicts that India-based airlines will pursue growth strategies that reflect passengers’ preference for more flight choices, lower fares and direct access to a wider range of destinations.
Boeing predicts India will need 1,320 new commercial passenger aircraft over the next two decades. Total domestic and international traffic may increase to as many as 450 million passengers by 2020.
The New Delhi-based South Asian branch of the consultancy Centre for Asia Pacific Aviation (CAPA) says the expansion of the Indian civil aviation industry in terms of traffic, yields and profitability, buttressed by strong, long-term fundamentals will inevitable stimulate airlines to expand their fleets. Indian Prime Minister Dr Manmohan Singh says this expansion could lead to total investment in the Indian civil aviation sector in excess of US$120 billion in the years ahead.
Industry analysts say the number of aircraft being ordered by Indian carriers is a reflection of a buoyant view of their future. At the Paris Air Show in July, Indigo confirmed that it would buy 180 single-aisle Airbus A320 jetliners.
“Our order with Airbus will further establish Indigo as a leading carrier in the Indian market, and one that continues to offer low fares and high services,” says Aditya Ghosh, Indigo’s president. Indigo, which is planning to launch international operations in September, will acquire 150 of the re-engined A 320neo model and 30 of the manufacturer’s existing A320 variants, with a value at list prices of about US$16.2 billion.
Not to be outdone, Mumbai-based LCC Go Air, which currently has market share of just 6.6 percent, is gambling that rapid fleet expansion will help it grab a bigger slice of the pie. GoAir has ordered 72 A320neos at a list-price value of US$6.6-billion, with the first delivery expected in December 2016.
“In the next 24 months, GoAir will double its fleet size to be able to satisfy the market and currently we are analysing the many opportunities to sustain our profitable growth,” says Giorgio Roni, the airline’s chief executive officer. “We will concentrate our efforts on on-time performance, offering competitive fares and an overall pleasant experience on ground and on board.”
Gurgaon-based LCC SpiceJet, which is planning a major expansion of its services to smaller cities across India, has ordered 30 Boeing 737-800 single-aisle jets and as many as 30 Bombardier Q400 turboprop aircraft (including 15 options).
Air India, meanwhile, as part of an order for 111 aircraft placed in 2006, will acquire 27 of Boeing’s new 787 ‘Dreamliner’ twin-aisle twinjets, while Jet Airways has ordered ten of the super-efficient aircraft.
With all these new aircraft entering the market, the nationwide average age of Indian carriers’ fleets is now less than five years.
“If we look at aircraft orders by the Indian airlines companies, the trend is now towards narrowbody aircraft that are fuel-efficient and environment friendly, and this is the direction that is also taken by aircraft manufacturers,” says Kapil Arora, partner (aviation) at global consultancy firm E&Y.
Low-cost carriers are expected to be a major driver of growth in India’s civil aviation sector, as an increasing number of connections is established between tier-two and tier-three cities. In recent years, however, most Indian carriers have been finding international routes far more lucrative than domestic operations.
Kingfisher is so far the only Indian carrier that has ordered world’s largest commercial aircraft – the Airbus A380. Deliveries are expected from 2016, although some reports have suggested that Kingfisher may cancel its A380 orders.
Significantly, the Indian Government has yet to give clearance for regular, scheduled A380 operations at Indian airports. So far, all A380 flights into India have been special cases, while some analysts’ fears of a slowdown in economic growth and the effect of airport restrictions on Superjumbo operations leave a question mark over Kingfisher’s commitment to the aircraft type.
Despite passenger load factors, mounting debt has become an industry-wide problem. The skyrocketing price of jet fuel , increasing labour costs and the reluctance of Indian carriers to disturb the price-sensitive Indian market have all conspired to send most of the country’s carriers into red.
Kingfisher has not made a profit since it started operations in 2005 and has debts in excess of 60 billion rupees (US$1.2 billion), with accumulated losses to the tune of 53 billion rupees. The airline is struggling to minimise its losses, even as it focuses on raising funds to sustain its operations.
Jet Airways, which has a debt of around 130 billion rupees, posted a loss of 1.26 billion rupees in the fourth quarter of the 2010/11 business year, after having been profitable during the preceding three quarters. The company says fuel prices are continuing to put pressure on its margins.
Similarly, SpiceJet posted a fourth-quarter net loss of 590 million rupees. “One of the main [factors] which affected our operations was fuel cost, which accounted for about 52 percent of total costs during the quarter,” says SpiceJet Chief Executive Officer Neil Mills.
Kapil Kaul, CEO of CAPA’s New Delhi branch, says two developments – “the 50 percent increase in fuel prices and predatory pricing resorted to by” Air India – have meant the consultancy has had to revise its outlook for the country’s industry.
Air India’s woes
Still, the debts and losses of privately owned Indian carriers look insignificant compared to the dire financial state of Air India.
Once a proud symbol of Indian aviation and a market leader known for superb service, hospitality and punctuality, the flag carrier now has debts in excess of 460 billion rupees and an accumulated loss in excess of 200 billion rupees. To keep the airline flying, the Government of India has already infused 20 billion rupees into the airline and is working out a bailout package involving a further cash injection spread over the next decade.
Air India’s woes have been blamed on a number of factors, including its poorly-planned merger with domestic carrier Indian Airlines in 2007, the placing of an order 111 aircraft at a list price of 500 billion rupees in 2006, the carrier’s withdrawal from profitable routes and extremely low aircraft-utilisation rates.
As part of its business turnaround plan, Air India will expand its narrowbody fleet by 2015 to 109 aircraft from 72 now, with the widebody fleet growing from 30 jetliners to 54. But even with the plan, the carrier is unlikely to break even before the 2017/18 business year.
Meanwhile, India’s Board for Reconstruction of Public-Sector Enterprises (BRPSE) has sought to take Air India under its wing. It remains unclear whether the Indian Aviation Ministry could agree to this proposal.
Air India is to spin off its ground-handling and maintenance, repair and overhaul (MRO) activities into separate subsidiaries as part of the turnaround plan. Envisaged as profit making companies from day one, the ground-handling and engineering units will carry out third-party work, making them self-sufficient and profitable entities. Air India sources say MRO units at New Delhi, Mumbai, Thiruvananthapuram and Nagpur could go a long way towards boosting the company’s bottom-line.
The growth of India’s MRO sector has not kept pace with the rapid expansion of the airline industry, in part because of high taxation and the lack of a regulator to oversee its orderly expansion. Still, the MRO industry is growing at about 15 percent annually could easily leverage its manpower cost advantage to position India as a key Asia-Pacific maintenance hub.
Meanwhile, India’s first aircraft painting facility equipped to handle widebody and narrowbody jetliners is now close to opening at the industrial hub of Hosur, near Bangalore. This facility, a part of the airline MRO division of Mumbai-based Air Works India, the country’s largest MRO service provider, takes advantage of the expertise of the UK firm Air Livery, in which Air Works holds a controlling stake.
India’s fast-expanding civil aviation industry suggests the country should become an attractive global MRO hub. However, industry officials say the Government is hampering its ambitions to expand heavy-maintenance capabilities. Indian MRO service providers are calling for an end to customs duties on imported spare parts, as well as taxes on MRO services.
According to Air Works, most Indian carriers continue to send their aircraft “out of India” for high-level checks and maintenance, even though Air Works is capable of handling the job. Performing the work locally should be the preferred option for airlines, saving them time and money, if only by reducing aircraft down-times.
India’s air-cargo sector has seen significant growth on the back of mounting trade momentum, but is hampered by the lack of warehouse infrastructure at Indian airports. The biggest challenge ahead for the air-cargo sector, in which 79 percent FDI is permitted, is the creation of more dedicated air-cargo terminals and on-site storage facilities, with a particular focus on perishable commodities. Many enterprises that had planned to launch dedicated cargo airlines have failed to follow through with their plans.
Failure to launch
The Aviation Ministry recently recommended suspending the operator’s licence granted to Quikjet Cargo Airlines four years ago, as the company has failed to launch services. Meanwhile, Deccan-360, the air-cargo venture promoted by Capt G R Gopinath – architect of Air Deccan, which was taken over by Kingfisher not long ago – has suspended operations following serious funding problems compounded by skyrocketing fuel prices and an overambitious expansion plan.
After two years of operations, Deccan-360 is now left with just two ATR-72-202 turboprop aircraft. It has returned 60 percent of its fleet, including its mainstay Airbus A310-324 freighters.
Significantly, the thriving private-jet market in India is known to account for 12 percent of the global market. What’s more, it is much bigger than that of China or Japan.
India boasts the largest number of private jets in Asia – 142 compared with China’s 93 and Japan’s 76. Manufacturers including Gulfstream, Bombardier and Embraer are optimistic that this number should double by 2021 and are increasingly focusing efforts on India.
With infrastructure constraints one of the biggest obstacles to the growth of Indian civil aviation, a good deal has already been invested in airport development. Public-private participation and FDI has funded the construction of ultra-modern airports at Bangalore, Hyderabad and Kochi in South India. While New Delhi airport has been given a boost with the commissioning of Terminal III in 2010, modernisation programmes at Chennai and Kolkata are far from complete.
Furthermore, the country’s plan to develop and modernize airports at 35 secondary cities has yet to pick up momentum, while the construction of Navi Mumbai Airport, which is meant to relieve congestion at Mumbai’s main Chhatrapati Shivaji International Airport, has encountered repeated delays.
The problem facing Navi Mumbai is that the Civil Aviation Ministry is undecided on how to divide traffic between the existing airport and the new one. Traffic allocation is critical for the viability of the second airport, which is being built within 150km of Mumbai’s main hub.
Similarly, Mopa airport in has been delayed over the fate of the existing airport at Dabolim. Amber Dubey, director of aerospace and defence advisory for consulting firm KPMG, points out that in the case of both Hyderabad and Bangalore airports all traffic moved from the existing airports to new airports.
“This is not the case in Mumbai and Goa, where the existing airports will continue to operate,” Dubey says. “Absence of traffic allocation may lead to congestion in one airport and underutilisation of the other.”
With airports trying to cover the cost of upgrades and construction by charging airlines higher landing and parking fees, there has been a growing demand for setting up no-frills airports meant for the exclusive use of the budget carriers. According to Civil Aviation Secretary Nasim Zaidi, Air India Regional – the low-cost Air India subsidiary formerly called Alliance Air – is proposing to develop green-field airports intended for operations by smaller aircraft such as ATR 72 turboprops in three Indian states.
Fast-expanding Indian carriers are also confronted with the twin challenge of training and retaining their staff. CAPA has estimated that demand for flight attendants, pilots and engineers will reach 90,000 by 2020 from about 32,000 in 2011. The biggest challenge for carriers is finding skilled and experienced pilots. Many are forced to hire expatriate pilots paying them higher salaries than their Indian counterparts.
India’s national civil aviation regulator Directorate General of Civil Aviation (DGCA) has set a deadline of 2013 for the phasing out more than 400 expatriate pilots now flying with Indian carriers. But given the state of flying academies in India – described by industry analysts as “poor and pathetic” – it is questionable whether the airlines will be able to recruit the trained pilots they need locally.
Some schools have been found to be falsifying the number of flying hours logged by their students, with an on-going DGCA audit having revealed a clear mismatch at several flying schools. The Indian airline industry has already previously been shaken by the discovery of a number of cases of pilots obtaining their licenses fraudulently. Credentials obtained from aircraft maintenance engineering institutions in India are no more reliable, it is feared.
“Airlines in particular are concerned about where they will get the people to support their growth,” CAPA says. “A shortage of skills is already impacting their expansion and this is the case not only in technical roles such as pilots and engineers but also in the management positions.”
[Subhead:] New training facilities
In a major step towards meeting requirements for skilled manpower to support the boom in the Indian aviation sector, the state-owned pilot-training school Indira Gandhi Rashtriya Uran Akademi (IGRUA) is adding an International Aviation University and a helicopter training facility, claimed to be the first of its kind in Asia-Pacific region.
“The University aims to impart quality education in every field of aviation requirements, which includes aviation engineering, aeronautics, air traffic management, aviation administration and management, applied meteorology, aviation environmental sciences, as well as maintenance, repair and overhaul,” the Uttar Pradesh-based school says a statement.