Over the past two decades, the civil aviation sector has transformed from a closed, unmanaged and overregulated industry to an open, liberalised and investor-friendly one. It has seen progress in phases with the entry of private airlines in 1994. Post the completion of Cochin airport in 1999, the sector remained dormant till 2002 due to lack of clarity over policy regulations. However, a dramatic change took place in the sector between 2003 and 2007, soon after Air Deccan launched its services. The introduction of other low-cost airlines such as IndiGo in 2006 and increasing passenger traffic set the tone for improvement in the existing airport infrastructure. This was complemented by a number of policy changes introduced between 2005 and 2016. Some of these policies were the opening up of foreign direct investment (FDI); reduction in customs and excise duties on aviation turbine fuel (ATF); and implementation of the New Civil Aviation Policy (NCAP), 2016, including the ambitious Regional Connectivity Scheme (RCS), among others.
Air Asia India launched its operation in 2013, close on the heels of Kingfisher Airlines’ shutting shop. Also, the launch of Vistara increased competition among the private players. The downward revision of airfares made air travel affordable for the masses. However, high footfalls of passengers led to the saturation of the existing airports. The expansion and modernisation of airports remained constant in the past two decades, with the government approving many greenfield airports such as Navi Mumbai airport in Maharashtra, Mopa airport in Goa and Pakyong airport in Sikkim to augment capacity.
Indian Infrastructure tracks the progress of the civil aviation sector and the key initiatives taken in the past 20 years…
Quantifying growth: Traffic and capacity trends
The number of airports managed by the Airports Authority of India (AAI) has increased from 125 in 2009 to 129 in 2018. The passenger handling capacity at the Indian airports has also increased to over 320 million passengers per annum (mppa) in 2016-17 from around 70 mppa in 2005-06.
In the last two decades, the majority of airports have reached saturation and are operating beyond their designed capacity. Most of the non-metro airports are heavily overutilised with airports such as at Rajkot, Nagpur and Patna witnessing utilisation rates of over 300 per cent.
Increased affordability has shifted travel patterns, resulting in a surge in passenger traffic. As the number of scheduled domestic carriers increased from three in 1999 to nine in 2006, domestic passenger traffic and aircraft movement grew concomitantly. In 1999-2000, passenger traffic was 39.03 million, which increased to 96.36 million in 2006-07. Similarly, aircraft movement reached 1.07 million in 2006-07 from 0.47 million in 1999-2000.
After recording phenomenal growth rates between 1999 and 2007, driven mainly by the launch of low-cost carriers, the tourism boom, open skies and bilateral agreements with many countries, the aviation sector witnessed a downturn a year later. Passenger traffic grew at a declining rate of 21 per cent in 2007-08 and further plummeted by 7 per cent in 2008-09, impacted by higher fares (due to higher fuel costs) and the global financial crisis. In the past five years (2013-14 to 2017-18), air passenger traffic has grown at a compound annual growth rate of 16 per cent, reaching 309 million in 2017-18.
The genesis of PPPs
The public-private partnership (PPP) experience in airport infrastructure development took off on a high. Overall, the sector has five privately managed airports. Together, these airports have mobilised an investment of around Rs 320 billion. Cochin airport was the first among these to be developed with equity participation from non-resident Indians and financial institutions in 1999.
The legal framework for the entry of private players in airport development and operations was established with the introduction of the Airports Authority of India (Amendment) Act, 2003. The first airport to be developed under this act was a greenfield airport at Hyderabad followed by Bengaluru airport. The state support agreements for these two airports were signed in 2003 and 2005 respectively. The following year, 2006, saw the signing of the operations, management and development agreement for Delhi and Mumbai airports. While the Hyderabad and Bengaluru airports were commissioned in 2008, Terminal 3 of Delhi airport was operationalised in 2010.
However, not all PPP airport development plans fructified. Gulbarga and Shimoga airports failed to take off as the private partner pulled out due to disputes among various stakeholders.
The Navi Mumbai and Mopa airport are now being implemented on a PPP basis at an investment of around Rs 200 billion. After a delay of almost 10 years on account of issues related to land acquisition and the grant of requisite approvals, the airports witnessed progress in 2017-18.
Post the success of the first wave of PPPs, the focus shifted to Tier II and Tier III cities during the period 2012-17. AAI took up the modernisation of 35 non-metro airports to world-class standards with a focus on airside and city-side development and enhancement of non-aeronautical revenue. These airports were located at Agartala, Bhopal, Bhubaneswar, Coimbatore, Dehradun, Guwahati, Imphal, Jammu, Lucknow, Madurai, Patna, Port Blair, Raipur, Ranchi, Trichy, Udaipur, Vadodara and Varanasi, among others. The upgradation of these airports was envisaged at a cost of about Rs 45 billion.
Meanwhile, the privatisation of operations and management at the Jaipur and Ahmedabad airports has been on the anvil for a long time. The proposal is currently under revision due to interest from only a single bidder.
AERA and its role in tariff fixation
The advent of private players in the sector brought in new challenges in the fair pricing and monitoring of aeronautical and associated services. As a result, the Airports Economic Regulatory Authority (AERA) Act was passed in October 2008, and AERA was established in May 2009 to do away with AAI’s involvement in tariff fixation. The AERA regulates tariffs charged by airports and monitors their performance.
In December 2017, the central government cleared the AERA (Amendment) Bill, 2017. AERA will continue to decide the tariffs for airports that are currently in operation or for those where projects have already been awarded. New airports at Jewar and Pune are likely to be among the first to be bid out under the proposed rule. The proposed amendment will also help eliminate regulatory uncertainty with respect to the potential revenue to be generated from an airport as the tariffs will be fixed prior to the bidding of an airport project.
New asset creation: Greenfield airport development
In a bid to cater to the needs of growing air traffic and to focus on regional connectivity, the government launched the Greenfield Airports Policy, 2008. Since its launch, over 40 airport projects have been granted in-principle approval. Durgapur airport was the first private greenfield airport to be completed under this policy at an investment of Rs 6 billion.
Going forward, massive investments are planned in the greenfield airport segment. Some of the notable greenfield airport projects are being undertaken in Jewar, Bhogapuram, Sindhudurg, Kannur and Dholera. Despite a separate policy in place for greenfield airports, most of these have faced inordinate delays due to land acquisition issues, difficulty in securing project finance, political and social frictions, delay in securing environmental clearances, policy ambiguities, etc.
More recently, the government proposed a new financial model for building greenfield airports in order to address the aforementioned challenges. Under the new financial model, the concession fee given by the airport operator to the concessioning authority will be based on the “per passenger aeronautical model”. Currently, the transaction structure for airports, run under the joint venture route, is based on the revenue sharing model. The proposed model concession agreement will be fine-tuned after feedback from the industry.
Game changers: NCAP, 2016 and NABH Nirman
A noteworthy achievement in the civil aviation sector was the announcement of the NCAP, 2016. The policy comprehensively covered 22 areas of the sector such as maintenance, repair and overhaul (MRO) business; ground handling services; helicopters and charters; bilateral traffic rights; and route dispersal guidelines.
The RCS, encapsulated under the NCAP, 2016, aims to provide connectivity to unserved and underserved airports in different parts of the country by reviving airstrips as “no-frills airports” at an indicative cost of Rs 500 million to Rs 1 billion. The scheme has also capped air- fares at Rs 2,500 per passenger for one-hour flights. Two rounds of bidding for routes under the scheme were done last year and 25 airports have been operationalised since December 2016. Recently, the government unveiled the draft International Air Connectivity Scheme, which is an extension of the RCS. The new scheme is designed for state governments keen to promote air connectivity on international routes. They will also provide a subsidy to the airlines willing to operate flights on the identified international routes.
Under the NCAP, 2016, the 5/20 rule has been relaxed. Airlines are now required to deploy 20 aircraft or 20 per cent of the total fleet size, whichever is higher, on domestic routes in order to secure international flying rights. With these new rules in place, airlines have started increasing their fleet size by placing fresh orders. This is also backed by their plans of beefing up international operations.
In the latest budget, the government proposed a new scheme called the NextGen Airports for Bharat (NABH) Nirman to expand the existing airport capacity by more than five times so as to handle a billion passengers annually. Under the scheme, 100 airports will be established in 15 years at an estimated investment of Rs 4 trillion, of which a sizeable investment will come from the private sector.
Airline industry: Undergoing major changes
The airline industry evolved from being a government-dominated arena to a more liberalised one with the entry of private airlines after 1993. Jet Airways and Sahara Airlines forayed into the segment and captured some of the market share of Air India and Indian Airlines. The entry of low-cost carriers (LCCs) was a trigger point for the airline industry with Air Deccan launching services in 2003; Kingfisher Airlines, SpiceJet, Paramount, GoAir, and Air India Express in 2005; and IndiGo in 2006.
While a strong growth trajectory was maintained by the airlines till 2006-07, the global financial meltdown, high ATF prices, and intense price competition severely hit their bottom lines, compelling airlines to get into mergers with other airlines to maintain their ground. In 2007, Jet Airways acquired Air Sahara following which, in 2008, Kingfisher Airlines merged with Deccan Airways. Air India, which was also incurring huge losses, merged into Indian Airlines in 2007 to form Air India. However, even the merger did not work in favour of Air India. It was then that the government decided to privatise the airline. Although the strategic disinvestment decision was taken in the early 2000s, it was only in 2017 that the plan got a renewed impetus with the cabinet approving the same. However, the proposed stake sale could not see the light of day as the debt-laden national carrier failed to attract any bidder.
All efforts made by the airlines to stay afloat went down the drain and the industry experienced a major setback when Kingfisher Airlines was grounded in October 2012. The operations of Paramount were also suspended. As a result, only six scheduled domestic carriers – Air India, Jet Airways, JetLite, SpiceJet, IndiGo and GoAir remained in the market. This called for the overhauling of segments like ATF and FDI.
In terms of market share, low-cost airlines have the major share of the pie, while the share of full-service carriers is decreasing. In 2012, IndiGo out-seated Jet Airways, the then market leader in terms of passenger traffic, with about 27 per cent market share. In June 2018, IndiGo once again cemented its position as the market leader by capturing a market share of 41.3 per cent. It is followed by Jet Airways at 13.3 per cent and Air India at 12.5 per cent.
Breaking the ATF monopoly
In the early 2000s, ATF alone accounted for 40-45 per cent of the airline’s operating expenses as compared to 10-15 per cent in other countries. To improve pricing practices, the fuel industry was later opened to private players in 2015 to encourage competition. To further bring parity in prices, the 5 per cent customs duty on ATF was scrapped in 2008.
Besides ATF, the year 2012 saw a significant change in FDI norms. The industry, which had earlier banned foreign airlines from investing in Indian airlines, was deregulated. The government allowed foreign airlines to invest up to 49 per cent either directly or indirectly in an airline, barring Air India, through government approval. This paved the way for setting up of two new airlines — Air Asia India and Vistara. Malaysian budget carrier AirAsia became the first airline to enter into a partnership with the Tata Group and Telestra Tradeplace to incorporate Air Asia India in 2013. Vistara, a joint venture between Tata Sons and Singapore Airlines, launched passenger services in January 2015. On the back of relaxed FDI limit for foreign airlines, Abu Dhabi-based Etihad Airways stepped into the market by acquiring 24 per cent stake in Jet Airways. In June 2016, the FDI policy was further relaxed, allowing overseas entities to invest up to 100 per cent in domestic airlines. However, a status quo was maintained for foreign airlines.
With regard to airports, an FDI of 100 per cent was permitted under the automatic route for both greenfield and existing projects. Later, in January 2018, the exception of Air India was also removed. Other ancillary industries also received a major boost with the opening up of FDI norms to the extent of 100 per cent in seaplanes and helicopter services, MRO and ground handling services.
New avenues for growth
AAI is committed to the upgradation of air navigation services (ANS). Major strides have been taken in adopting state-of-the-art technologies such as GPS-Aided GEO Augmented Navigation, Central Air Traffic Flow Management and automation systems for air traffic control. In order to provide secure and efficient ANS, AAI has undertaken Futuristic Telecommunications Infratructure initiatives aimed at supporting air traffic management operations while reducing telecommunications costs.
Airport developers are taking steps to monetise city-side assets to generate an additional stream of non-aeronautical revenue. To capitalise on its huge landholdings, AAI has begun the process of identifying airports for city-side development.
In the past few years, AAI has invested in equipping terminal buildings with facilities like passenger boarding bridges, common-use terminal equipment-enabled check-in counters, in-line compatible baggage handling system, self check-in kiosks, e-gates, etc. Further, plans to introduce high-tech facial recognition systems and biometric access systems for airports are also on the anvil.
India’s air traffic is certainly witnessing a high growth trajectory and traffic projections for airports continue to remain northward. With the civil aviation sector making rapid strides, the country is expected to become the third largest aviation market by 2025. However, to maintain such levels of growth and meet the rising demand for air transport, airport infrastructure needs to be augmented. The revival of no-frills airports/airstrips and the launch of NABH Nirman are expected to garner private investment into the sector. With LCCs taking delivery of narrowbody aircraft coming into the market and scaling up domestic operations, their share in the domestic market will continue to rise in the coming years.