The aviation sector has seen significant growth during the past year, owing to an increase in traffic numbers, a comparatively stable economy and low fuel prices. The new National Civil Aviation Policy (NCAP), 2016, has introduced several positive changes, infusing further optimism into the sector. However, certain issues such as the future of Air India have remained untouched and stakeholder response towards issues such as the amendment of the 5/20 rule remains lukewarm. Going forward, with a policy finally in place and encouraging traffic projections, the sector outlook remains positive. However, airport capacity needs fast augmentation as most metro airports are close to saturation…
How has the civil aviation sector progressed in the past one year?
The year 2015-16 saw India emerge as the fastest growing major aviation market, aided by economic growth and low fuel prices. Domestic passenger traffic increased by 21.3 per cent in 2015-16, over the previous fiscal, and crossed 85 million passengers. International passenger traffic grew by 7.7 per cent during the same period and crossed 27 million passengers.
Combined industry losses are estimated to have declined by more than 75 per cent – from $1.3 billion in fiscal year 2015 to around $200 million in fiscal year 2016. The leading low-cost carriers (LCCs) – IndiGo, SpiceJet and GoAir – are expected to report a combined profit of over $375 million-$400 million. SpiceJet has achieved a dramatic turnaround: from being on the verge of closure in December 2014 to posting a record annual profit of $62.3 million in the 12 months till March 2016. Likewise, Jet Airways, the only profitable full-service airline, reported net earnings of $185 million in fiscal year 2016, compared to a net loss of $343 million in 2015.
A key highlight of the year was IndiGo’s holding company, Interglobe Aviation Limited’s highly successful listing in November 2015. IndiGo posted a record profit of $300 million for the year 2015-16.
Overall, industry debt declined slightly over the previous year, from $12.6 billion to $11.8 billion. During the past year, India’s airlines have received a total of $750 million of equity, of which $490 million was accounted for by government infusions into Air India.
Compared to the previous year, the civil aviation sector has witnessed a major jump in traffic and exceeded a 20 per cent growth rate. With the increase in travel demand from Tier II and Tier III cities, growth focus has shifted from the metros. This has given way to the need for more regional connectivity, which in turn has paved the way for investments in new airlines operating on these routes. Overall, there is a steady growth expected for airports and airlines operating in these Tier II and Tier III cities.
Civil aviation has been an indirect beneficiary of India’s economic growth and the past year has been positive for the sector. The total aircraft movement during 2015-16 registered a growth of 11.9 per cent over 2014-15, while passenger and freight traffic registered a growth of 17.6 per cent and 7 per cent respectively during the same period. For airlines, the past year yielded positive results, with average passenger load factor of all scheduled domestic airlines at 80 per cent. Further, considering the robust traffic growth, all major airlines such as Indigo, SpiceJet, GoAir and Air India have together placed purchase orders for more than 800 aircraft.
On the infrastructure development front, there has been steady progress. The Airports Authority of India (AAI) has commissioned new terminal buildings at Chandigarh, Khajuraho, Kadapa and Tirupati airports, while foundation stones have been laid for new terminal buildings at Vijayawada and Gorakhpur airports. Extension of runways, expansion of aprons and construction of parallel taxi tracks has been taken up at various airports across the country to enhance airside capacity.
To develop skilled manpower, a research and development facility for air traffic management has been established at Hyderabad and the Indian Aviation Academy which is being set up to build aviation training capacity is under construction at Delhi.
For sustainable development, airports are moving towards green energy. AAI has installed 6,800 kWp of rooftop solar power and is in the process of setting up 19.8 MWp of ground-mounted solar projects at its airports.
On customer service delivery, AAI made significant improvement during 2015. As per airport service quality (ASQ) surveys conducted by the Airports Council International at 11 major AAI airports, the average ASQ rating improved from 4.26 in 2014 to 4.53 in 2015 as against the world average of 4.13. Similarly, customer satisfaction surveys carried out at 53 AAI airports by an independent agency have shown an improvement in ratings from 4.20 in 2014 to 4.25 in 2015.
The civil aviation sector has seen progressive growth with passenger traffic growing at a rate higher than global gross domestic product (GDP) growth. Aviation growth in 2015 was 6.8 per cent as compared to the global GDP growth of 2.6 per cent. Asia Pacific led the world passenger traffic in 2015 and as per industry projections, is expected to continue to lead this growth in the years to come.
The Indian civil aviation industry is poised to achieve the vision of becoming the third largest aviation market by 2020 and the largest by 2030. The industry registered a 17.6 per cent growth in passenger traffic over the previous financial year, with Delhi airport being the busiest airport having handled 48.4 million passengers in fiscal year 2016.
The growth over the past few years has been on account of the increasing presence of the LCC model, the modernisation of airports, foreign direct investment (FDI) in domestic airlines and the growing importance of regional connectivity. The recent policy measures taken by the government in the NCAP, 2016 are expected to propel the industry further.
What are your views regarding the NCAP?
There are clearly some positive elements in the NCAP, 2016. These include infrastructure status for maintenance, repair and overhaul (MRO), ground handling, cargo and aviation turbine fuel infrastructure facilities co-located at an airport. Other positive elements are focus on regional connectivity, promoting helicopter usage, the liberalisation of the codeshare regime, bilateral traffic rights, etc. These are well intended but some of them lack key details and an implementation plan. Scrapping of the controversial 5/20 rule and clarity on the economic regulation of airports (hybrid till for future tariffs at all airports) are positive developments, but changing the 5/20 norm to 0/20 is unfortunate. We expected the government to abolish 5/20.
The NCAP, however, did not address key issues including the future of Air India and AAI, the overhaul of the Directorate General of Civil Aviation, institutional strengthening at the Ministry of Civil Aviation (MoCA), infrastructure development (both physical infrastructure in the form of airports and skilled manpower availability), etc. The NCAP envisions 300 million domestic passengers over the next six years, for which airport capacity just does not exist. The policy is ambitious about growth but has not focused on creating structures for managing such growth.
The policy is one of the key benchmark achievements in the aviation sector since Independence. With the NCAP, the government has declared the focus areas in civil aviation and the avenues available for investments. The government has also categorically emphasised that the policy will be continuous and sustainable at the macro level and fine-tuning will be carried out in consultation with stakeholders.
The key thrust area in the NCAP is the regional connectivity scheme (RCS) which will be supported by the central and state governments. This will help the sector accelerate growth and will have a positive impact on the industrial and tourism sectors as well.
The policy is a proactive endeavour of the MoCA to provide air connectivity to Tier II and Tier III cities. Traditionally, the civil aviation sector has been considered elitist. However, with the frontiers thrown open by the open sky policy, FDI and modern information technology, it has become necessary to provide an impetus to the sector to support the unprecedented growth. The NCAP further aims at making flying affordable and convenient for the masses.
Apart from encouraging regional connectivity and international air travel, the policy is the first comprehensive policy for the sector which encompasses the passenger, cargo, MRO, safety, air navigation services, infrastructure, aviation education and skill development segments. It is expected that, over time, the NCAP will evolve further and fine-tune the objectives of inclusive and equitable growth in the country.
The NCAP, 2016 is a welcome step aimed at sustained growth of the industry. The policy is quite comprehensive and factors in important aspects pertaining to all stakeholders. Key focus areas which are expected to provide a significant fillip to the industry include focus on boosting regional connectivity through the RCS, encouraging airport development through AAI, state governments and the private sector, incentives to boost the MRO segment, skill development and policy measures related to changes in the 5/20 rule, bilateral traffic rights and the promotion of air cargo.
Dr Suresh Shanbhogue
No doubt the civil aviation sector in India is now at a take-off stage and thus, the new civil aviation policy of the government is timely. The policy has many positive initiatives for sector development and only time will tell how the stakeholders respond.
What steps can be taken to promote airport development in general and regional airport development in particular?
Sufficient airport capacity is a critical infrastructure requirement for the growth of the aviation sector and it starts with the development of a long-term master plan on capacity planning for the airport sector. Robust regional connectivity could get a fillip through no-frills airports. However, this requires a well-developed ecosystem where both airlines and airports work cohesively. CAPA has advocated the establishment of an airports commission responsible for the orderly direction of airport development. Further, reduced dependence on AAI for airport development has to be considered. Given its diverse set of responsibilities, AAI in its current avatar is ill-equipped and stretched.
To assess the viability of proposed airports, aspects like sufficiently robust catchment areas, adequate airspace and potential for airlines to operate are critical. Business plan approvals of airports should consider the overall viability of the project and not be based only on the clearance of technical parameters. In order to attract investors, a predictable economic environment with respect to potential revenue streams, including land for commercial development, must be established. The framework should consider the impact on all stakeholders, including the consumer, and ensure competitiveness within the sector.
Through the NCAP the country is looking for a travel population of almost 300 million by 2022 and 500 million by 2027. This may be 40-45 per cent of the total population size. Even with the current travel rate, most of the airports in the country are congested. For the expected growth to be sustainable, India needs to have huge investments in all the segments of civil aviation, especially airport development. There is a visible shift in growth from Tier I to Tier II and Tier III cities, as metros are getting congested. The central government is advising all state governments to capture the merits of the NCAP and bring out supporting state-level policies to attract investment for regional routes.
Development of airports is a continuous process. The two key requirements for regional airport development are the availability of suitable land and capital investment. Apart from this, the development of airports, especially regional ones, requires road connectivity and a host of facilities and services such as power, water, security, firefighting, communications, etc. For these, the support of the concerned state governments is essential. AAI has plans to invest Rs 150 billion over the next five years to enhance airport capacity.
For regional airport development, states should explore non-operational airports and airstrips which can be developed under the RCS. Further, the MoCA will provide viability gap funding to airlines operating flights on regional routes. The development of regional airports can be cross-subsidised by development of commercial activity at or near airports. For the success of regional airports, concerted efforts are required from the centre, state, airlines, other stakeholders and the public.
The public-private partnership (PPP) model for airport development has resulted in the creation of world-class infrastructure while providing best-in-class service to all stakeholders. The adoption of a similar model, along with the recent hybrid till policy proposal, will encourage private participation in future projects.
Airport development projects are capital intensive and have a long gestation period. While there is clarity on the regulatory framework, regional/smaller airports will require adequate support from the respective state governments, at least in the initial years.
Further, regional connectivity, as proposed in the recent policy, will provide a collaborative ecosystem, especially between regional airlines and regional airport operators, providing many opportunities to develop and promote mutual interests. This impact will be amplified further, with financial support being offered by the government in terms of viability gap funding, at least in the initial period. Last-mile multimodal connectivity will need to be ensured by the respective state governments as well.
What is the sector outlook for the next one-two years?
Indian domestic air traffic is expected to cross 100 million passengers by fiscal year 2017. With the positive economic outlook, demand is expected to remain strong at the prevailing fuel prices. For the current financial year (2016-17) domestic traffic is expected to grow at around 20 per cent. International traffic is expected to continue to expand at a steady growth rate of close to 10 per cent and could, however, rise faster if bilateral traffic rights are opened up.
IndiGo, Jet Airways, SpiceJet and GoAir are all expected to remain profitable in fiscal year 2017. However, airlines will need to remain alert to the potential downward pressure on yields as a result of expected rapid capacity increases. Apart from a pressure on yields, which was already evident in the first quarter of 2016-17, other risks include the possibility of fuel prices rising, a further depreciation of the rupee and increases in non-fuel costs as a result of complacency arising in a low oil price environment.
Airlines are expected to seek up to $1.4 billion of debt and equity funding in 2016-17, of which half could be accounted for by Air India. Jet Airways could raise $300 million-$400 million via Etihad in the form of a quasi-debt instrument. SpiceJet is also likely to seek additional funding and GoAir is expected to launch an initial public offering. The recent start-ups – AirAsia India and Vistara – are also likely to require additional funding.
Indian carriers could induct 50-60 aircraft in the 12 months till March 31, 2017, subject to A320neo challenges getting sorted out at the earliest, with more than half of these accounted for by IndiGo and GoAir. Some of these deliveries will be used for modernisation rather than growth. For example, GoAir could replace all 19 of its current aircraft to an all-neo fleet by the end of 2016-17.
By the end of 2016, India will have a stable long-term policy in place. With this, all stakeholders will start working together to attract various businesses in segments like airports, MROs, regional connectivity, etc. Definitely by around 2020, India will be a huge business centre and the civil aviation sector will have a travel growth of 20-25 per cent.
India’s civil aviation market is already among the top 10 globally and expected to be the third largest by 2022. The aviation sector could see huge growth, with many smaller towns coming up on the air connectivity map under the RCS. On a note of optimism one can say that the policy will trigger exponential growth in the sector.
The government has allowed 100 per cent FDI in domestic airlines except by foreign airlines and 100 per cent FDI in greenfield airports. Further, the development of airports in Tier II and Tier III cities is a major thrust area. It is expected that these steps will bring in the required capital to fuel sector growth.
Start-up airline projects are expected to be launched by the fourth quarter of 2016 and a host of small operators are likely to enter regional routes under the RCS. Passenger traffic growth is projected to be about 14 per cent over the next two years, to reach 290 million by 2017-18.
AAI already has capacity augmentation plans in place for several existing airports and plans to add a capacity of 75 million passengers per annum (mppa) over the next five years. In addition, capacity will also be added with the revival of unused airstrips.
The civil aviation sector is poised to grow over the next two years and even beyond. This growth will be on account of the recently announced policy measures, private sector participation in airport infrastructure development, growth in business and leisure travel, increase in FDI inflows, the emergence of LCCs, large-scale investments to enhance airport infrastructure as well growth in the air cargo industry.
Regional connectivity will provide an impetus to the sector, as air travel becomes affordable for a larger segment of society. It will also help key domestic airlines enhance their hub-and-spoke models, connecting airstrips and airports spread across the length and breadth of the country. This will be further supported by the emergence of regional airlines, which will operate primarily across regional airports.
Dr Suresh Shanbhogue
As the country is progressing, with declining poverty and increasing income levels, the civil aviation sector is slowly and steadily gaining momentum. This is an emerging sector in the country in terms of meeting the transportation needs of the people. The entry of the private sector, both in construction and operations, has improved investment levels in developing the much-needed infrastructure and improving service standards. The Indian aviation
sector has started making its presence felt globally as Delhi’s Indira Gandhi International Airport is at the world number 1 position for the second consecutive year, in the 25-40 mppa category.
“Combined industry losses are estimated to have declined by more than
75 per cent – from $1.3 billion in fiscal year 2015 to around $200 million
in fiscal year 2016.”
Paramprit Bakshi, Assistant General Manager, CAPA India
“Start-up airline projects are expected to be launched by the fourth quarter
of 2016 and a host of small operators are likely to enter regional routes
under the regional connectivity scheme.”
V.J. Kurian, Managing Director, Cochin International Airport Limited
“AAI has plans to invest Rs 150 billion over the next five years to enhance
airport capacity. A capacity of around 75 million passengers per annum is
planned to be added.”
S. Raheja, Member (Planning), Airports Authority of India
“The growth over the past few years has been on account of the increasing
presence of the LCC model, the modernisation of airports, FDI in domestic
airlines and the growing importance of regional connectivity.”
I. Prabhakara Rao, Chief Executive Officer, Delhi International Airport Limited
“The entry of the private sector, both in construction and operations, has
improved investment levels in developing the much-needed infrastructure
and improving service standards.”
Dr Suresh Shanbhogue, Director, Civil Aviation, Government of Goa