India Aviation 2014

The 4th International Exhibition & Conference on Civil Aviation- India Aviation 2014—held at Begumpet Airport in Hyderabad from March 12-16, 2014—celebrated growth in the Indian Aviation Sector. As reported previously in this newsletter, India now has the potential to become the third largest aviation market by 2020 and the largest by 2030, with significant potential for expansion, upgradation and growth.

The industry is currently the ninth largest aviation industry in the world at $16 billion, handling 121 million domestic and 41 million international passengers with more than 85 international airlines operating to India and 5 Indian carriers connecting over 40 countries. According to the Airports Authority of India (AAI), in 2013 passenger traffic grew to 159 million and cargo traffic to 2.19 million tons, registering an impressive growth of 13 percent and 10 percent respectively from 2003.

Conference Encourages FDI in Aviation

More than 250 exhibitors, including Airbus, Boeing, Bombardier, Dassault, and Rolls Royce participated in the event in Hyderabad, which was organized by the Ministry of Civil Aviation and the Federation of Indian Chambers of Commerce and Industry (FICCI). The exhibition saw the conclusion of the biggest aviation deal ever signed in India—the $4.4 billion deal between Indian budget airline, Spice Jet, and Boeing Co. is for the sale of 42 Boeing 737 MAX jets to Spice Jet.

Inaugurating the conference, Ajit Singh, Union Civil Aviation Minister, said the government has taken initiatives to attract foreign direct investment (FDI) in the sector. “The biggest game-changer in this direction has been the decision to allow 49 percent FDI by foreign airlines in Indian carriers.” The results of this policy, according to him, are already visible, as two new scheduled airlines, Air Asia and Tata SIA, are in the process of starting their operations, and one, Etihad, has already invested $350 million into Jet Airways. This policy to encourage FDI is in keeping with the 12th Five Year Plan period (2012-2017), which included an investment of $12.1 billion in the airports sector, of which $9.3 billion is expected to come from the private sector for construction of new airports, expansion and modernization of existing airports and development of low-cost airports.

Sidharth Birla, President of FICCI, also spoke at the event about the need for FDI in aviation. “In view of the enormous growth prospects of air traffic and substantial investment projections, the Indian aviation market offers significant long-term opportunities for global aviation players. Indian government and industry are already working together closely. I am confident that this partnership will be further strengthened and play a critical role in improving regional connectivity and promoting sustainable development of the civil aviation sector.”

Airport numbers on the rise?

Despite the recent drop in passenger growth rates, government agencies have projected that around 500 airports in all, both brownfield and greenfield, would be required by 2020. The private sector is sought to be involved in a big way through different PPP models, with substantial involvement of state support in terms of financing, concessional land allotment, tax holidays and other incentives.

During the conference, FICCI and KPMG launched a report, which argues that the next generation of aviation growth in India will be triggered by regional airports. “At present, there are about 450 used/un-used/abandoned airports and airstrips spread across the country. Many Indian states, especially in Eastern India, have started taking pro-active measures to promote air connectivity. These initiatives include reduction in Sales Tax on ATF, development of no-frills airports, promotion of aviation academies and supportive policies for airlines and tourism.”

The Civil Aviation Minister corroborated this, saying that the government was looking to expand the sector by promoting regional and remote-area connectivity. The government recently announced a policy supporting the operators connecting regional and remote area airports by offering financial and other concessions. The AAI has already initiated work on more than 50 low-cost airports in remote and interior areas.

The FICCI-KPMG report also noted that the growth in Indian aviation will create significant employment opportunities. With passengers and fleets of aircraft likely to double by 2020, the need to strengthen the human resource development infrastructure is immediate. According to the report, “the total manpower requirement of airlines is estimated to rise from 62,000 in FY-2011 to 117,000 by FY-2017. It is estimated that the sector, overall, will need about 350,000 new employees to facilitate growth in the next decade. Shortfalls in skilled labour could create safety issues and may see staff salaries rise, hurting India's cost competitiveness.”

Challenges for the Aviation Sector

Though the conference and report highlighted success stories in India’s aviation sector, the industry also faces significant challenges. One of the most importance concerns is its lack of competitiveness at the global level, which is seen as a consequence of over-taxation. Central and state taxes on fuel and maintenance, as well as service taxes on air tickets and high airport charges, all slow growth in the aviation sector.

Another challenge for the industry is safety. The US Federal Aviation Administration (FAA) recently downgraded India to Category 2 under its International Aviation Safety Assessment program. This change could negatively impact India’s efforts to create a positive investment climate in its aviation sector. According to KPMG’s Head of Aerospace and Defence, “the Directorate General of Civil Aviation (DGCA) and Ministry of Civil Aviation (MoCA) need to take urgent measures to restore India back to Category 1. FAA and International Civil Aviation Organization (ICAO), on their part, should assist DGCA in a spirit of collaboration and cooperation. Keeping India’s rating down may not be in the best interests of the global aviation, aerospace and defense industry.”

Future Prospects

India’s domestic and international passengers, as well as its number of aircraft, are expected to grow significantly in the coming years. According the Civil Aviation Minister Ajit Singh, this projected growth, combined with India’s low air traffic density—72 compared to 282 in China and 2,896 in the USA—indicates, “untapped potential given the projected burgeoning young population and rising disposable income levels in future.”

It is of paramount importance for the industry stakeholders to engage and collaborate with the policy makers to come up with efficient and rational decisions that will shape the future of Indian civil aviation industry. With the right policies and focus on quality, cost and passenger interest, India would be well-placed to become one of the largest aviation markets by 2030.