reforms in aviation sector

7/28/2019 Reforms In Aviation Sector

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REFORMS IN AVIATION SECTOR


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Presentation Summary

1. Industry Overview

2. History

3. Major players

4. Effects on Indian Economy5. Government Initiatives

6. FDI in Aviation

7. Reforms in Aviation

8. Analysis and Interpretation of Findings

9. Future Scope


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INDUSTRY OVERVIEW

India is Worlds 9th largest market

Comprises of Domestic Airline, Air Cargo and Airports.

Scheduled services available from to/fro 82 airports

Bilateral with 104 countries.

Worlds 4th Domestic air passenger.

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


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HISTORY

The history of civil aviation in India started with its first commercialflight on February 18, 1911.

It was a journey from Allahabad to Naini made by a French pilotcovering a distance of about 10 km.

Since then efforts were on to improve the health of India's CivilAviation Industry.

The aviation industry in India gathered momentum after three yearswith the opening of a regular airmail service between Karachi and

Madras by the first Indian airline, Tata Sons Ltd.

However this service failed to receive any backing from the Indiangovernment.

In 1932, J.R.D. Tata founded Tata Airline, the first Indian airline.


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PRE1993

The two government airlines Air India andIndian Airlines were the only Indian carriers.Both carriers operated with relatively old

aircraft and inefficient work practices, fromairports which were functional at best.

There was no focus on developing traffic andthe market grew at uninspiring single digitrates.


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19931995

Deregulation of Aviation Sector .

Govt. protecting state-owned carriers. Only JetAirways and Air Sahara survived beyond the

initial couple of years.


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19952003

After the failure of the deregulation

experiment, the industry fell into dormancy.

No new carriers entered the market and Air

India and Indian Airlines continued to bestarved of capital. Despite the fact that the

broader economy performed well during this

period, aviation continued to show limitedgrowth.


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20032006

Arrival of Ministers of Civil Aviation recognised theimportance of aviation for the development ofbusiness, trade and tourism.

Domestic open skies policy which saw market entry by

several carriers. The arrival of the low cost airline model in India with

the launch of Air Deccan, and subsequently SpiceJet,IndiGo and Go Air

Placement of orders for 111 new aircraft for Air Indiaand Indian Airlines.

Increased foreign direct investment caps in certainsectors of the industry.


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Traffic ( in millions)


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20062007

During this period,

traffic continued to accelerate further, to levelsapproaching 40% in 2007.

Costs were increasing because of the poor state of

airport infrastructure and a shortage of human resources. There was a mismatch between supply and demand, the

rate of growth was simply too great for the industry tohandle from a management and capital perspective.

In a period of global boom, demand for skilled personnelsuch as pilots and engineers also outstripped supply,leading to a sharp escalation in wages.


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20082009

Oil reached close to US$150/barrel.

As costs spiraled upwards, carriers were

forced to raise fares, and with a simultaneous

slowdown in the Indian economy, there was

resulting decline in traffic of around 1012%

yearonyear.


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200910

Indias GDP growth slowed from over 9% in

2007/08 to 6.1% in 2008/09. However, given

the contraction globally, this was a relatively a

good result. The economy recovered earlierthan expected, with GDP growth of 7.9% in

the last quarter, ahead of expectations.


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Year over Year (YoY) growth of Domestic Passengers


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2010 ONWARDS:


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Major Players (Market Share)


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MAJOR Reforms

Major liberalization reforms in 1991

Independent aviation regulator appointed

Bilateral and multi-lateral agreements at

government level

Modernization of airports

Setting up of privatized and Greenfield airorts

100% FDI in existing airports

49% in domestic airlines under domestic route


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Effects on INDIAN Economy

10 years back there were just 2 airlines. Both state owned .But In the last 10years the economy has opened up.

India has experienced growth rate of8% per year. The mainfactors which effect the Indian Economy are:- 1. Increased no.of domestic airlines 2. Low cost airlines 3. India's improving

economy

The other factors are:-

Increased in number of business travellers to differentcountries,

Increased number of incoming tourist and businessenterprises


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PASSENGER FLOW


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GOVERNMENT INITIATIVES

Merger of AI and Indian Airlines to optimizefleet acquisition and to leverage the assetbase.

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.


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INITIATIVES CONTD.

Foreign carriers allowed to make strategic

investments (up to 49% stake) in Indian Carriers

While the domestic airlines have not been able to

attract foreign investors, foreign airlines may beinterested in taking strategic stakes due to their

deeper business understanding, longer

investment horizons and overall longer termcommitment towards the global aviation

industry.


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Modernization of Airports

(AAI) is undertaking the development andmodernization of all 35 non-metro airports in thecountry

Two green-field airports at Bangalore andHyderabad are being developed under PPPformat.

With the developments in aviation infrastructure,

we may also see some airports making moneynot purely on passenger traffic, but also bymeans of cargo, logistics, SEZs and real estateprojects being developed adjacent to airports


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LCC OPERATIONS IN INDIA

India's first low-cost airline, Air Deccan startedservice on August 25, 2003.

Success of Air Deccan has spurred the entry of

more than a dozen low-cost airlines in India.Air Deccan now faces stiff competition fromother low-cost Indian carriers such as Jetlite,SpiceJet, GoAir and Paramount Airways.

Within 8 years of operations in India, LCCshave taken the domestic market share of 49%


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FACTORS FOR LCC SUCCESS

Low Entry barrier

Attraction of Foreign Shores

Increased permitted Foreign Equity

Rising income levels and demographic profile,

have contributed significantly to the

unprecedented growth ofLCCs in India.

M j Ti li


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Major Timelines1912: Indian

State Airservice and

ImperialAirways, UKcollaborate

to ply on firstdomestic

route,betweenDelhi and

Karachi.

1915:Tata Sons

startairmailservice

betweenDelhi andMadras.

1932:Tata

Aviationsestablish

ed. Itgoes to

Colombo

in 1938.

1948:Designated

asflagcarrier

under thename Air

IndiaInternational with 49%

govt.

control.

1953: IndianAirlines

Corporation

formedthrough AirCorporationAct, 1953, bynationalizingAir India and

IndianNational

Airways.

1994: AirCorporatio

n Act. 1953repealedand thusallowedprivate

players tocome.

2003Entry oflow costcarriers.

AirDeccan,

Spice Jet,Go Air,

Indigo.


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Analysis and Interpretation of Findings

The current condition of the Indian aviation industry can be

attributed to a number of factors:

Rising Fuel Prices

Congestion

High Airport Charges

Lack of skilled manpower

Land Acquisition


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Rising Fuel Prices

Aviation Turbine Fuel (ATF) prices in India are higher than the international market.

The ATF price accounts for nearly 45% of the operational expenses.

A 10% increase in fuel price would push up costs by at least 4%,

In India there is no direct import of ATF and the ATF supplied by the Indian oil companies is from

imported crude refined by them.

The various taxes imposed on procurement of ATF include:

An import duty of 20%

An add on of 16-49% towards marketing margin and contingencies on the refinery transfer

price

An excise duty of 8% levied by the central government.

A local sales tax ranging from 4% to 39% levied by the various state governments which on

an average works out to be around 25% countrywide.


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Reforms

Reduce the excise duty to 4%

Remove the disparity in the state levied taxes. This can also be done by putting ATF

under Declared Goods category

Allowing airlines to import ATF may help in reducing the cost by almost 25% than

what the airlines are paying to the oil companies. Airlines however will have to

consider the logistics of importing fuel, including warehousing.

Investigate and report on how reductions in state level ATF taxes can lead to state

governments reaping economic benefits of local job creation within the sector,

growth of businesses associated with the sector, as well as economic development

resulting in more business and leisure traffic to the State.


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Congestion

Congestion leads to a huge wastage of fuel.

It is estimated that if a flight hovers in the sky for an additional half an

hour due to delay in allocation of landing slot, it can consume between 25

to 30 per cent extra fuel thereby increasing the operational cost of theairline by over Rs. 50,000 /-

Assuming 40 flights operating in a day from Delhi to Mumbai with an

average circling time of 30 minutes the loss amounts to Rs 40 lakhs

The congestion also affects the turn around time of the aircraft and

reduces the average aircraft utilization.


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Reforms

The airports which have been closed on account of development of

new airports in various cities may be used for other facilities like

MRO, aircraft parking and air taxi services.

These airports can be mainly used for short routes and mainly for

the LCC aircrafts.

Deployment of latest technology for air traffic management to

reduce congestion, rapid exit taxiways, keeping the size of airport

and aircraft fleets in proportion to avoid further congestion


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High Airport Charges:

The airport charges payable at the International airports are higher

than those payable at the airports designated asDomestic airports

for domestic flights.

As a consequence, the domestic airlines in India are incurring

additional costs at the international designated airports without

enjoying or utilizing any additional facilities.

In addition, the airport charges levied by the Indian airports are

stated to be amongst the highest amongst the Asian and the Gulf

countries.


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Reforms

Setting of airport charges with reference to the net costs of running the

airport, taking into account other revenues arising at the airport, loosely

called non aeronautical revenues

Providing access to the carriers to a Route Development Fund by providing

incentives to carriers to initiate new routes in the form of package

discounts on airport charges and marketing support.


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Lack of skilled manpower

There is a shortfall in the skilled manpower available in the country, to

occupy the jobs which are available across the Aviation spectrum pilots,

engineers, technicians, cabin crew, flight dispatchers, customer services,

sales, marketing, HR, finance, IT, cargo and security.

Similarly the demand for Aircraft Maintenance Engineers and Air Traffic

Controllers would rise with the increasing number of flights and the new

airports


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Reforms

DGCA on its part has undertaken certain measures to facilitate availability of more Chief

Flight Instructors (CFI), Flight Instructor In-charge (FII) by redefining eligibility criteria and also

by obtaining Qualified Flight Instructors from Defence.

A Civil Aviation Requirement (CAR) has also been issued, which permits pilots holding Flight

Instructors Rating to impart training up to the age of 65 years.

The government is setting up various training institutes and has started upgradation and

modernization of infrastructure at the India Gandhi Rashtriya Udaan Akademi to enhance its

training capacity from 40 to 100 pilots and reduce the training period.

The dearth of flight instructors is largely due to the relatively low paying nature of the job. To

retain Flying Instructors at these flying schools, compensation and other benefi ts need to

improve.


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Land Acquisition

Of late, a number of large projects are facing extreme opposition from

landowners and the cumbersomeness of the land acquisition process has

recently come to significant highlight.

It has been observed that the lack of coordination between administrative

departments of the state and central government agencies is the major

cause of delay for the infrastructure projects.


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Reforms

The land would preferably be acquired in advance by the government

before the contract is awarded to the concessionaire

Project implementing authorities must commence the land acquisition

process at the planning stage of the project rather than at the

implementation stage.

The government has recently come up with the National Rehabilitation

and Resettlement policy to address the interest of the land owners andothers affected by land acquisition. The policy stresses on minimising

displacement, land for land, making land owners stakeholders and a job

per family of Project Affected People (PAP).


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FUTURE SCOPE

The boom in the aviation sector is likely to generate nearly 3 lakh jobs by the year 2013.

The study says that the civil aviation sector is also set to become a Rs. 35,000-crore

industry by the same time.

Scheduled Aircraft - The total aircraft fleet is likely to reach 1000 by 2020,including

replacement of the current fleet of 312 aircraft, with an estimated value of US$80bn +

The growth ofIndias aviation sector has the potential to absorb up toUS$120 billion of

investment by 2020.

Air Traffic - CAPA research projects that domestic passenger traffic will reach 150-180

million by 2020, with international traffic in excess of 50million.

Airports US$ 30 billion plus investment requirement by 2020(Included 9billion already

committed)

reforms in aviation sector

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