Indian Aviation Boom

7/27/2019 Indian Aviation Boom

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Indian aviation boom The myth and reality

Pankaj Narayan Pandit

For the aviation sector to work, needed is a support system of airports and their

infrastructure, trained manpower, passenger amenities, networks of travelagents and Internet penetration for the travellers. More important, there has tobe a rise in the per capita income to make air travel affordable.

AT THE recent Paris Air Show, airlines from India wowed the aviation industrywith orders for 250 aircraft.

In the last six months, private and public sector airlines from India have placedorders representing more than a 170 per cent increase from present fleetstrength of 158 aircraft.

Though the Indian aviation market has long-term potential, can it justify such

sudden increase in capacity?

Can you spot a serious player?: Amidst the many new entrants to the airlinesector, how can we differentiate between serious players and the casualentrants?

Whenever any new sector such as telecom or aviation hitherto underregulation is liberalised, there is a tendency to overestimate the short-termreturns, and underestimate the long-term potential.

As always, among the new entrants, a few may be motivated only by money andthe glamour of the airline sector, and others have visions of changing that world.The founders of successful Low Cost Carriers (LCC) like Ryan Air, Southwest andAir Asia, had a bit of the `change the world' passion in them.

For the aviation sector to work, needed is a support system of airports and theirinfrastructure, trained manpower such as pilots, cabin crew and maintenanceengineers, passenger amenities such as hotels,, ATF (aviation turbine fuel)


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availability on a par with international prices, networks of travel agents andInternet penetration for the travellers.

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

Why the rush for domestic skies?

Foreign equity allowed: Foreign equity up to 49 per cent and NRI (non-resident Indian) investment up to 100 per cent is now permissible in domesticairlines without any government approval.

However, the government policy bars foreign airlines from taking a stake in adomestic airline company.

Low entry barrier: Today, venture capital of $10 million or less is enough tolaunch an airline. Private airlines are known to hire foreign pilots, get expatriatesor retired personnel from the Air Force or PSU airlines, in senior managementpositions to run the show. Further, they outsource such functions as groundhandling, check-in, reservation, aircraft maintenance, catering, training, revenueaccounting, IT infrastructure, loyalty and programme management.

Airlines are known to take on contract employees such as cabin crew, ticketingand check-in agents.

Attraction of foreign shores: Domestic airlines in India, such as Air Saharaand Jet Airways, that were set up more than five years ago, have now beenallowed to use India's unutilised bilaterals for mounting flights to all parts of theworld, except the Gulf region. Jet and Sahara have gone international by starting

operations, first to SAARC countries, and then to South-East Asia, the UK, andthe US. After five years of domestic operations, many domestic airlines too willbe entitled to fly overseas by using unutilised bilateral entitlements to Indiancarriers.

Rising income levels and demographic profile: Though India's GDP (percapita) at $3,100 (on Purchase Power Parity terms) is nowhere near the Europe'slevels of $7,000, and which corresponds to 0.05 trips per person, "India isshining", at least in metro cities and urban centres, where It and BPO industrieshave made the young generation prosperous.

Demographically, India has highest percentage of people in age group of 20-50,

among its 50 million strong middle class, with high earning potential.

All this contributes for the boost in domestic air travel, particularly from a lowbase of 18 million passengers.

Untapped potential of India's tourism: Currently India attracts 3.2 milliontourists every year, while China gets 10 times the number.


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Tourist arrivals in India are expected to grow exponentially, especially due to theopen sky policy between India and the SAARC countries and the increase inbilateral entitlements with European countries, and the US.

The increase in number of international tourists will percolate down to increase indomestic passengers.

Glamour of the airlines: No other industry other than film-making is asglamorous as the airlines. Airline tycoons from the last century, like J. R. D. Tataand Howard Hughes, and Sir Richard Branson today , have been idolised by thePage 3.

Airlines have an aura of romance around them, and high net worth individualscan toy with idea of owning an airline.

All the above factors seem to have resulted in a "me too" rush to launchdomestic airlines in India.

Domestic market

According to the Directorate-General of Civil Aviation statistics, the total size ofthe 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 perday.

The average load factor, an indicator of passenger demand and efficiency of theairlines' sales and marketing efforts, was 58 per cent, a slight improvement over

the previous year's average of 56 per cent.

The new entrants on the domestic scene need to probe reasons for the low loadfactor ; is it high fares or the limitation in number of air travellers?

As per DGCA statistics, for the first time in 2003-04 (see Chart 1), domesticairlines 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 3per cent in previous years.


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Pre-requisites for survival

Low debt-equity ratio: Airline is a cyclical industry with alternating short

periods of growth and longer periods of recession. It is the staying power ofequity that gives an airline 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: An airline's most expensive assets are aircraft andhaving an average aircraft utilisation higher than 11-12 hours per day is crucialfor its survival.

Thus selecting an aircraft that is economically suited for the sectors identified,having adequate number of pilots, as well as maintenance facilities and spareparts is vital.

Aviation value chain: Chart 2 shows low operating margins of airlines againsthigh margins of their monopoly suppliers such as IT providers, airports, aircraftmanufacturers. "Airlines do the flying and others make money out of them", saysMr Giovanni Bisignani, Director-General of IATA (International Air TransportAuthority).

Second time lucky?


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Indian aviation is witnessing a mushrooming of new airlines, however, this timethey seem to be on safer grounds, with better funding of equity, and moreoptimism thanks to the success of Air Deccan.

It is likely that aircraft manufacturers, airports, aviation training institutes (forpilots, cabin crew, and ground staff), airline IT providers, oil companies

supplying ATF, aircraft maintenance centres, and air travellers will benefit fromthe rush of new airlines in Indian skies.

While the party is on, for the air traveller looking for bargains, airline promotersare advised to tighten their seat belts to avoid the shock from hard landing.

International Expertise in Aviation LawIntense competition is a fact of life in the airline industry, leading tounprecedented demands on industry leaders and startup carriers alike.

Since 1987, the Kelsey Law Group has provided counsel and representation toairlines conducting business worldwide, including American International

Airways, Transcontinental Airlines, Murray Aviation, and the Kitty Hawkcompanies.

Our attorneys have guided startup airlines through the legal complexities ofestablishing a presence in the highly regulated aviation fieldand advisedindustry leaders on matters ranging from deicing, ground handling, and fuelingagreements to the purchase or sale of a single aircraft or an entire fleet.

On behalf of our clients, weve negotiated agreements with such majorinternational companies as Boeing, British Airways, Japan Airlines, Hong Kong

Aircraft Engineering, Israeli Aircraft Industries, Lufthansa, Varig, and MobileAerospace.

Our relationships with a global network of experts ensure that our clients receivecomprehensive legal supportwherever their business takes them.

For more information please feel free to email our firm at:[email protected]
mailto:[email protected]:[email protected]

Indian Aviation Boom

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