India has emerged as an area of opportunity for the airline sector in 2015, spurred by rapid growth and a commitment from the government to support regulatory reform. According to the International Air Transport Association (IATA), India is the fastest-growing air transport market in the world. As many as eight new operators applied for licenses last year. Prime Minister Narendra Modi has made civil aviation a focus of his Make in India campaign and is committed to implementing reforms in the sector.

The year has been particularly eventful for India’s airline players. The national carrier is eyeing operational profits for the first time in a decade and Indigo, India’s only consistently profitable airline, has launched one of the country’s biggest private sector IPOs.

National aviation policy

Indian aviation has historically been a loss-making sector, plagued by two regulations – the Route Dispersal Guidelines and the 5/20 rule. The Route Dispersal Guidelines force airlines to devote a percentage of their networks to serving remote regions as a public service obligation. The 5/20 rule prohibits new airlines from flying international routes until they have 20 aircrafts and complete five years of operations. These restrictions are huge barriers to entry for new players.

The recently released Draft National Civil Aviation Policy attempts to address these regulatory concerns. A regional connectivity fund will provide subsidies to airlines that are making losses on certain routes. Despite opposition from well entrenched domestic players including state-run Air India, the Aviation Ministry has acknowledged that there is “no scientific or economic basis” for the contentious 5/20 rule and is considering all options, including moving to a credit-based system linked to the route dispersal guidelines.

To capture the opportunity that India presents, airline operators will have to recognize that they cannot replicate strategies deployed in other markets. Instead, players will need to strengthen their fundamentals and focus on increasing utilization and profitability.

Opening the sector to foreign investment

The government is also looking to open up India’s airline sector to foreign airlines by adopting an Open Skies policy. This will allow India to enter unlimited reciprocal code-share agreements with South Asian neighbours and countries more than 5,000 kilometres away. Foreign entities can now own up to 49 percent of domestic airlines without requiring government approval. Two big foreign players, Vistara and AirAsia, have entered India through joint ventures with the Tata Group. By 2020, the government intends to allow foreign airlines to own a majority stake in regional carriers.

Addressing infrastructure concerns

Many believe that the key challenge for India's civil aviation sector is the lack of infrastructure. India has spent over $50 million since 2009 on 33 ‘ghost airports’ that are non-operational. Airports in metros, on the other hand, are running out of capacity. Lack of maintenance, repair and operation (MRO) facilities in India is a huge hurdle, forcing operators to take their planes abroad for routine maintenance.

Until recently, the Airports Authority of India, a public sector enterprise, was the only major player involved in developing and upgrading airports in the country. Private sector players are now being encouraged to participate in building and developing airports through various public-private partnership models. The government has also outlined measures to make India an MRO hub.

Outlook

Driven by the market debut of Indigo, a fall in fuel prices and a rise in the demand for air travel, India’s airline sector is gaining momentum. The government is cognizant of the fact that these favourable macro-economic conditions may not prevail and has taken proactive measures to liberalize the sector. With the total air passenger traffic set to reach 420 million passengers a year by 2020, the India opportunity is immense.