The Indian civil aviation sector has grown by leaps and bounds in the past few years, becoming the third largest domestic passenger market globally. The continuous efforts by the government to undertake expansion of existing airports and develop new airports have started to take shape. Nonetheless, there are key challenges that need attention to propel further growth of the sector…
What has been the progress in the civil aviation sector in the past one year?
Paramprit Singh Bakshi
Financial year 2016-17 was another year of strong growth of over 20 per cent on the back of a robust above 20 per cent growth in 2015-16. Domestic traffic reached almost 104 million in 2016-17, growing 21.8 per cent over the previous year. This enabled India to overtake Japan to become the third largest domestic aviation market in the world. Meanwhile, international passenger traffic grew by 8.4 per cent in 2016-17 to cross 59 million. Nonetheless, growth continued to remain well below its true potential due to bilateral restrictions. In terms of market share, low-cost carriers accounted for more than 80 per cent of the 18.5 million additional passengers carried by Indian carriers in 2016-17. IndiGo continued to consolidate its leadership position with a market share of over 40 per cent and Vistara and AirAsia India were other airlines which witnessed robust domestic passenger growth, albeit on a small base. The year also witnessed large orders for new aircraft as SpiceJet placed an order for 155 aircraft. Meanwhile, in 2016-17, airlines’ profitability softened significantly compared to the previous year, largely due to excess capacity being built and traffic stimulation due to competitive fares.
V.J. Kurian
The sector is witnessing significant changes, predominantly in the domestic segment. India has become the third largest aviation market in terms of domestic passenger traffic, behind only the US and China. For the first time in history, the country’s domestic passenger traffic touched the 100 million figure in 2016, registering a growth of around 19 per cent in 2016-17 as compared to the previous year. During 2016-17, Cochin International Airport Limited handled 8.94 million passengers, recording a domestic passenger growth of 26 per cent. Going forward, the domestic segment is going to be a game changer for the whole industry.
Raheja
Air traffic in India has been growing on a fast track. During 2016-17, 264.97 million passengers were handled at Indian airports, registering a phenomenal growth of 18.3 per cent over the previous year. Domestic passenger traffic increased by 21.5 per cent, from 169.29 million in 2015-16 to 205.68 million in 2016-17. Further, international passenger traffic increased by 8.5 per cent, from 54.66 million in 2015-16 to 59.29 million in 2016-17. During 2016-17, aircraft movement witnessed a growth of 14.1 per cent over the previous year. Besides, freight traffic also registered a 10.1 per cent growth during the same period. Flight operations have started at Shimla, Nanded, Bhatinda and Sholapur under the Regional Connectivity Scheme (RCS) – UDAN. A total 43 airports will be operationalised in the first phase of the scheme, after the first round of bidding by airlines.
The Airports Authority of India (AAI) has developed the Kishangarh and Tezu airports and the upgradation and expansion of the Hubli and Belgaum airports has also been completed. Meanwhile, new terminal buildings have been completed and commissioned at the Vadodara, Gorakhpur, Jammu and Vijayawada airports.
Phase I of the nationwide Central Air Traffic Flow Management (CATFM) system involving operations at six metro airports has commenced from April 2017. Further, AAI intends to implement CATFM Phase II covering 30 more airports in 2018. The Instrument Landing System (ILS) Category III-B has been commissioned at the Jaipur and Lucknow airports, while installation is in progress at the Kolkata and Amritsar airports. The ground-based augmentation landing system has been installed at Chennai airport. Besides, AAI has implemented upper space harmonisation at Chennai and Kolkata which will be followed by the same at Delhi and Mumbai in the next phase.
I. Prabhakara Rao
India registered total passenger traffic of around 265 million in 2016-17, an 18.3 per cent growth over 2015-16. This growth has been fuelled primarily by a steady growth in domestic passenger traffic over the past several years. While Delhi airport added a record 9.3 million passengers over 2015-16 resulting in 57.7 million passengers during 2016-17, driven by strong domestic traffic growth, international transfers/transit constituted 23.5 per cent of the international passengers. Besides, the airport handled a record 857,000 metric tonnes of cargo recording a 9 per cent year-on-year growth and operated 417.32 thousand aircraft movements with a growth of 14.1 per cent over 2015-16. Delhi airport has achieved yet another rare feat by making it to the top 30 airports in all three categories of traffic in 2016 recording the highest growth of 21 per cent.
What has been the impact of the National Civil Aviation Policy (NCAP), 2016, so far? Going forward, what are some of the policy changes expected in the sector?
Paramprit Singh Bakshi
The RCS, a key priority of the government, has the objective of bringing Tier III and Tier IV cities into the national aviation ecosystem, to support regional economic development. It is a far more comprehensive and detailed policy than the one introduced in 2007. Key elements include enhanced fiscal benefits and concessions, viability gap funding and greater commitment and involvement by state governments. The Directorate General of Civil Aviation (DGCA) has revised aircraft rules to allow for deregistration within five days of notice of default on lease payments, and authorisation for lessors to repossess and export the aircraft within five days thereafter, providing greater comfort to lessors who have aircraft in the country.
With regard to airport development, there was some resumption of activity in 2016-17. The concession to develop Mopa airport was awarded to GMR in August 2016 and in February 2017, GVK Mumbai International Airport emerged as the successful bidder for the Navi Mumbai tender. Nagpur MIHAN and Bhogapuram could be the next to be awarded, with more opportunities expected next year.
In the airport economic regulation sphere, the NCAP, 2016, clarified that future airport projects will be subject to a 30 per cent hybrid till levy. Regulatory predictability will be critical if India is to attract the $30 billion-$40 billion of capital required to develop the necessary infrastructure over the next 10-15 years. Further, in the maintenance, repair and overhaul (MRO) segment, the policy was positive for the maintenance segment with a combination of duty exemptions, removal of red tape, reduction in airport charges, plans to persuade states to zero-rate maintenance for value added tax, and the grant of infrastructure status to the segment.
V.J. Kurian
The NCAP, 2016, has laid down a framework for the future of aviation in the country. Schemes like UDAN (RCS) will have a tremendous impact. Though there are some initial hiccups, the vision will act as a catalyst for future growth. A greater number of Tier III and Tier IV cities will have direct air connectivity which will enhance their tourism potential. Besides, as a part of the policy, the Airports Economic Regulatory Authority of India, the country’s aviation regulator, introduced a definitive tariff fixation method. The adoption of the hybrid till mechanism for tariff calculation has firmed up the industry. Both airport operators and airlines now have a structured model which will help them formulate blueprints for the future.
Since the NCAP has been rolled out recently, there is no major scope for a policy shift in the near future. However, the industry is looking for changes in the implementation system. Besides, the modalities of the policy have to be worked out. Grey areas still remain in spheres such as code-sharing which need to be rectified.
Raheja
The NCAP, 2016, is the first comprehensive policy to accelerate the growth of the aviation sector in India. UDAN has been a path-breaking element of the NCAP, 2016, in making flying affordable and convenient. A total of 70 airports – 31 currently served, 12 underserved and 27 unserved airports – will connect 128 RCS routes. For this, the revival of 50 airports will be undertaken through infrastructure upgradation with a government grant of Rs 45 billion in the next two years. It is estimated that 1.3 million new airline UDAN seats will be added annually for a viability gap funding of Rs 2.05 billion per annum for the operators chosen in the first round of bidding. So far, 19 states and three union territories have signed MoUs for this purpose.
In the NCAP, 2016, the 5/20 requirement for a domestic carrier to fly abroad has been withdrawn and replaced with a scheme ensuring a level playing field for domestic carriers flying international routes. Further, open skies air services agreement has been offered to 49 countries and five SAARC nations. No prior government approval is required for Indian scheduled carriers to enter into code-share agreements with foreign carriers. Further, in a bid to fulfil the requirement of trained human resources, 1,200 air traffic controllers have been recruited in the past three years up to 2017.
In addition to the above transformational initiatives, policy changes are expected in the rationalisation of user development fees as well as for land monetisation on the city side of airports to generate sufficient revenues for airport operators for taking up development activities.
I. Prabhakara Rao
This is the first time since Independence that an integrated civil aviation policy has been brought out to sustain the high growth in the Indian aviation industry. The policy aims to take flying to the masses by making it affordable and convenient, and promotes tourism, employment and balanced regional growth. Prominent policy changes being implemented under the NCAP, 2016, include RCS with an airfare of about Rs 2,500 per passenger for a one-hour flight; rationalisation of route disbursal guidelines; and the 5/20 requirement for a level playing field. Besides, future tariffs at all airports will be calculated on a hybrid till basis with 30 per cent of non-aeronautical revenues as cross-subsidy.
UDAN was flagged off with Air India’s Shimla-Delhi flight. The scheme is getting a good response from airlines and is expected to increase air travel demand in the country. India has already become the third largest aviation market in terms of domestic passenger traffic. According to CAPA, India’s domestic air passenger traffic stood at 100 million in 2016 and was behind only the US (719 million) and China (436 million). Further, the route disbursal guideline rationalisation and the 5/20 requirement are expected to provide a level playing field for all international and Indian airlines. Another major positive outcome of the NCAP, 2016, is the removal of regulatory uncertainty for all future airports, which was earlier a major hindrance for investors in the airport sector in India.
Going forward, it is expected that the Ministry of Civil Aviation will focus on three major initiatives with a ground-level action plan for sustainable growth of the sector. The first is to develop service delivery modules for aviation security, immigration, customs, quarantine officers, etc., in consultation with the respective ministries and departments. This will help improve performance on service level agreements with various airports. The second is to ensure the economic viability of MRO service providers at Indian airports, hence facilitating foreign exchange savings. And the third is to provide full support to the Aviation Sector Skill Council and other similar organisations/agencies for imparting skills for the growing aviation industry.
What are the sector’s key challenges that remain unaddressed?
Paramprit Singh Bakshi
The NCAP, 2016, contains certain design faults that are barriers to its effective implementation. For instance, India needs a long-term bilateral policy which is aligned with its connectivity requirements to support its economic and strategic interests. The decision to offer open skies to all markets located more than 5,000 km from Delhi and to have no clear framework for engaging with markets within that range is strategically flawed. Further, the lack of airport infrastructure will be a risk to growth. Besides, there is a need to structure route dispersal guidelines and the RCS under a single regional policy which draws a distinction between essential air services, remote connectivity and commercial regional aviation. Despite increasing safety and security risks, the status quo in the reform of the DGCA and the Bureau of Civil Aviation Security continues. Further, greater clarity is needed on the benefits of 100 per cent foreign direct investment in domestic airlines and brownfield airports. Corporatising air navigation services and ensuring the commercial launch of the National Aviation University are also important factors.
V.J. Kurian
One of the biggest challenges for the sector is bringing in funds for developing infrastructure. There are only five private airport operators; even though they are actively involved in infrastructure development, the potential of this
sector has not been fully tapped. Besides, while almost all airlines plying in the country are enhancing their fleet capacity and have ordered new aircraft, the growth in infrastructure development is not taking place proportionally. Even today, the bigger airports are reeling under parking problems. Further, terminal and runway expansion works will take five-eight years for completion, which effectively means that the time for setting a proper goal is already past.
Raheja
In view of the robust growth in demand, it is time to integrate the efforts of the government to meet infrastructural requirements. Besides making more regional airports functional under UDAN, the country will also need greenfield airports. Timely identification of sites for second airports in metros like Chennai, Kolkata and Bengaluru is very important for sector growth. Meanwhile, land acquisition continues to be a challenge. In this regard, AAI has engaged CEPT University to formulate a policy framework for land procurement for six airports as pilot projects – one greenfield airport each at Chennai, Pune and Nalanda and one brownfield airport each at Coimbatore, Varanasi and Bagdogra.
Further, airports in India need to increase operational efficiency commensurate with global standards which can be achieved through the use of cutting-edge technologies and the optimum use of available infrastructure. Also, the gap in the availability of and demand for trained manpower in the aviation sector requires more training facilities which will take some time to come up. Meanwhile, regional connectivity is also likely to face teething problems before traffic stabilises on such sectors.
Lastly, another area waiting to be tapped is the MRO segment, for which sufficient space will be provided at all major/future airports. AAI is in the process of formulating a policy for this.
I. Prabhakara Rao
Despite a very positive impact created by the NCAP, 2016, there are still some challenges facing the sector today. Tariff regulation needs to have a balanced approach to encourage private investment, provide reasonable incentives for innovation in asset development and management, ensure a fair rate of return to investors and address user expectations on the level of tariffs and service quality. Further, certain liberal policy norms as outlined in the NCAP, 2016, for public-private partnership (PPP) airports, such as the liberalisation of end-use restrictions on the use of land allocated for commercial use of the airport, need to be extended to existing PPP airports, to avoid any market distortion in the future and create a harmonised PPP policy framework for airports in the country. Besides, there is a need for a dedicated mechanism to evolve innovative funding solutions for airport development, to provide low-cost financing for long periods commensurate with the concession period. Moreover, excluding aviation turbine fuel (ATF) from the goods and services tax (GST) net poses a challenge to airlines in terms of input tax credit benefits as the ATF cost accounts for nearly 45 per cent of the operational expenses.
What is the sector outlook for the next one-two years?
Paramprit Singh Bakshi
Coming off a high base, traffic growth could be a bit muted in the medium term. Nonetheless, it is likely to register a 20 per cent year-on-year growth for domestic traffic and 10-12 per cent for international traffic in 2017-18. Consequently, in 2017-18, India is likely to become the third largest globally for domestic and international departing passengers combined.
The pace of aircraft induction, subject to aircraft deliveries and their successful deployment, will be one of the key drivers of traffic growth in 2017-18. Further, low-cost carriers are likely to have a domestic market share of 75-80 per cent within two years as they take delivery of the majority of narrow-body aircraft. Meanwhile, based on our January 2017 estimates, CAPA expects that airline financials will further deteriorate in 2017-18. However, given that fuel costs continue to be below $50 a barrel, the strengthened rupee and improved yields and demand, CAPA is likely to revise financial projections for 2017-18. Overall, much of the total industry losses can be attributed to Air India, but private airlines are also facing heightened risks due to intense competition, the prospect of overcapacity, inadequacy of infrastructure, etc. Air India’s privatisation, and restructuring and consolidation of the Indian airline sector could potentially result in structural changes in the sector. While the implementation of GST has made economy class travel marginally cheaper and business class more expensive, it is also likely to increase the operating costs of carriers. Aircraft-related activities including leases and maintenance will attract GST provisions.
V.J. Kurian
It is envisaged that the gross domestic production growth rate will come down by 1-2 per cent due to the financial restructuring mechanism. This will definitely affect the aviation sector also. For the next one-two years, the hyper growth in domestic traffic may be affected and it may be stalled for a short period. But after that period, it will regain momentum.
Raheja
Passenger traffic in India is expected to grow at a compound annual growth rate (CAGR) of 11 per cent in the next two years. With this growth rate, India is likely to handle about 326 million passengers in 2018-19. At present, 500 aircraft of scheduled Indian
carriers are plying year round and we are given to understand that orders have been placed for more than 650 new aircraft. Of these, at least 63 new and leased aircraft will be added by December 2017. Going forward, AAI is geared up to meet the sector’s challenges with an investment of Rs 175 billion in the next five years.
I. Prabhakara Rao
Civil aviation in India is witnessing a new era of expansion steered by the development of contemporary airport infrastructure, growing emphasis on regional connectivity and rising urban populations. With less than 1 per cent of Indians having access to air travel, there is tremendous potential for sector growth. India has overtaken Japan to become the third largest domestic aviation market globally, with a CAGR of over 15 per cent in the past 13 years. This trend is expected to continue for the next few years with the successful launch of the RCS, the development of greenfield airports and the expansion of Delhi airport. Besides, India’s international passenger traffic is also expected to grow at a healthy rate owing to increased tourist arrivals due to visa reforms and growing business opportunities. Further, as per KPMG, over 1,000 aircraft have been ordered by Indian scheduled commercial operators, making it the third largest buyer of commercial passenger aircraft globally. Thus, airports and airlines are working together to meet the expected surge in air traffic and contribute to economic value addition.
“Regulatory predictability will be critical if India is to attract the $30 billion-$40 billion of capital required to develop the necessary airport infrastructure over the next 10-15 years.”
Paramprit Singh Bakshi, Assistant General Manager and Operations Lead, CAPA India
“For the next one-two years, the hyper growth in domestic traffic may be affected and it may be stalled for a short period. But after that period, it will regain momentum.”
V.J. Kurian, Managing Director, Cochin International Airport Limited
“In addition to making more regional airports functional under UDAN, the country will also need greenfield airports. Timely identification of sites for second airports in metros like Chennai, Kolkata and Bengaluru is very important for sector growth.”
S. Raheja, Member, Planning, Airports Authority of India
“The civil aviation industry in India is witnessing a new era of expansion
steered by the development of contemporary airport infrastructure, growing
emphasis on regional connectivity and rising urban populations.”
I. Prabhakara Rao, Chief Executive Officer, Delhi International Airport Limited