The years 2015-16 and 2016-17 (so far) have mostly been positive for the Indian aviation sector, with the National Civil Aviation Policy (NCAP), 2016 finally in place, a record growth in domestic air traffic, a fall in fuel prices for airlines, the Airports Authority of India’s (AAI) focus on smaller airports and the Goa greenfield airport finally being bid out. Further, buoyant air traffic growth is expected to be maintained at around 12 per cent per annum over the next two years.
Policy
Undoubtedly the launch of the NCAP has been the biggest policy-level development for the sector. Several positive elements have been covered under the policy, including infrastructure status for maintenance repair and overhaul, ground handling, cargo and aviation turbine fuel infrastructure facilities co-located at an airport. Other positives are the focus on regional connectivity, the promotion of helicopter use, and the liberalisation of the code-share regime and bilateral traffic rights.
Apart from this, the Ministry of Civil Aviation (MoCA) has relaxed foreign direct investment (FDI) norms under which foreign investors, barring overseas airlines, have been permitted to hold 100 per cent stake in domestic scheduled air transport and regional air transport services. With respect to airports, 100 per cent FDI in brownfield projects through the automatic route has been permitted.
Financials
Union Budget 2016-17 allocated Rs 44.17 billion to the MoCA, marking a 29.95 per cent fall over the Rs 63.06 billion (revised estimate) allocated for 2015-16. Of the total amount allocated, Rs 20 billion is for plan expenditure while Rs 5.91 billion is for non-plan expenditure. The budget also allocated Rs 17.13 billion for equity infusion in Air India Limited. In addition, AAI has been allocated Rs 20.66 billion under the budget, as compared to the Rs 18.2 billion allocated for 2015-16.
Traffic growth
The year 2015-16 saw India emerge as the fastest growing major aviation market, aided by economic growth and low fuel prices. After increasing by 17.6 per cent in 2015-16 vis-à-vis 2014-15, passenger traffic growth is being sustained during 2016-17. During the first four months of 2016-17 (April-July), passenger traffic at Indian airports increased by 18.7 per cent over the same period in 2015-16, recording footfalls of around 84.5 million passengers. Meanwhile, during the period April-July 2016-17, cargo traffic at Indian airports increased by 7.1 per cent over the corresponding period in 2015-16.
Investment projections
The Twelfth Five Year Plan (ending 2016-17) is expected to see about Rs 200 billion worth of investment in airport development. For the first four years of the plan period, only Rs 170 billion-Rs 180 billion worth of investments have come through in airport development, of which more than half has come from the public sector/AAI. Most of the additional investment in 2016-17 will come from AAI since private projects are at very preliminary stages of development.
Airports
Passenger handling capacity at Indian airports increased from 72 million in 2005-06 to over 250 million as of January 2016. In terms of capacity growth at the six metro airports, a compound annual growth rate of about 14 per cent was reported between 2009-10 and 2015-16. Capacity grew from over 80 million passengers in 2009-10 to over 180 million passengers as of March 2016.
Among metro airports, Chennai and Bengaluru have initiated expansion plans. Chennai’s expansion project is currently under tendering and will increase the airport’s current capacity from 23 million passengers per annum (mppa) at present to 30 mppa. Bengaluru has begun preliminary works on its expansion plan. The plan includes a new terminal and a parallel runway and is expected to require Rs 40 billion. The new terminal will be constructed in two phases, of which the first phase will be completed by 2022, adding a capacity of 20 mppa. Meanwhile, Delhi International Airport Limited (DIAL) has submitted a plan to the MoCA for the construction of a fourth runway by 2020 and Hyderabad airport is awaiting approval for the second-phase expansion of its terminal, which has already exhausted capacity.
Among greenfield airports, the biggest development has been the bidding out of the Mopa International Airport project in Goa to GMR Airports Limited. The development brings hope for the Navi Mumbai airport project, which has been facing delays. However, apart from Mopa, progress has mainly been witnessed in the Kannur and Shirdi airport projects, while several other projects remain in limbo.
Over the past year, AAI has commissioned a number of new terminal buildings at airports such as Mohali, Khajuraho, Kadapa and Tirupati, while expansions are under way at several others. AAI is also developing greenfield airports in the Northeast (Pakyong and Itanagar) as they are unattractive to private players, yet vital for the region. Going forward, AAI plans to add capacity of 70 mppa by 2020-21 at its airports.
Airlines
The Indian airline industry has grown significantly over the years with several players joining the segment in calendar year 2015. Although, most of the airlines are still in the red, relief has come in the form of falling crude prices resulting in lower ATF prices.
Comparing market shares, IndiGo continues to dominate, reporting a 39.8 per cent market share as of July 2016. Other airlines with big shares include Jet Airways (16.3 per cent), Air India (14.8 per cent) and SpiceJet (11.7 per cent). The new airlines, AirAsia India and Vistara, have also established their presence, reporting shares of 2.2 per cent and 2.6 per cent, respectively, as of July 2016.
The other key development for the segment has been IndiGo’s initial public offering (IPO). The airline launched the IPO to raise over Rs 30 billion. The issue was oversubscribed by more than six times. The price band for the offer had been fixed at Rs 700-Rs 765 per share. Following this, GoAir has also announced plans to launch a Rs 10 billion IPO in 2016-17.
Outlook
India’s air traffic has certainly been on a high growth trajectory since 2014-15. Traffic projections for the aviation sector continue to remain positive. According to industry experts, India is expected to become the third largest aviation market before 2025. However, in order to maintain these levels of growth, additional capacity needs to be added at existing airports and new airports need to be set up. The award of Mopa airport signifies movement in the greenfield segment and the Navi Mumbai project is expected to be awarded before the end of this calendar year. However, it needs to be ensured that the revised timelines for these projects are not missed.
The operations and maintenance contracts for the non-metro airports at Ahmedabad and Jaipur are yet to be awarded. The MoU signed with the Singapore Cooperation Enterprise to operate and maintain the airports was terminated in April 2016. Moves such as this result in further dampening the interest of prospective bidders in the sector. It is, therefore, important for the government to identify how and where private participation can be facilitated in non-metro locations. However, AAI’s comprehensive infrastructure development plan with a capital expenditure outlay of Rs 17.5 billion for the next five years is a beacon of hope for the capacity-constrained sector.
On the airlines front, their profitability is expected to improve in 2016-17 with higher demand and a lowering of fuel prices. However, the operating environment will continue to remain challenging due to growing competition. A comprehensive ATF policy needs to be put in place urgently, as high taxes on the fuel (value-added tax, excise duty) are the biggest dampener on the financial health of airlines.
The implementation of the GPS Aided Geo Augmented Navigation (GAGAN) system has provided a huge boost to the industry. Going forward, new aircraft acquired will need to be fitted with GAGAN-enabled equipment.
Traffic outlook remains positive with annual traffic projected to reach 290 million by 2017-18 and, overall the sector seems poised for growth with both AAI and greenfield airports set to add capacity.
