Trends and Outlook: Aviation sector on a high-growth trajectory

Aviation sector on a high-growth trajectory

The Indian aviation sector has been growing at the rate of 20 per cent for the past five years, making it the fastest growing aviation sector in the world. Domestic air passenger traffic has doubled during the past five years and in December 2018, Indian aviation completed 52 consecutive months of double-digit growth. According to an International Air Transport Association traffic study, India, which is at seventh position at present, is likely to take the third position by 2023-24 overtaking the UK, Japan, Spain and Germany. With a growing economy, rising income, supportive policy environment and intense competition among airlines, the growth story is likely to continue. The rapid expansion in airport and air navigation infrastructure will fuel it further.

Overwhelming traffic performance

  • As of March 2019, a total of 107 airports provided scheduled airline operations. In the past six years (2013-14 to 2018-19), air passenger traffic grew at a compound annual growth rate (CAGR) of 15.32 per cent. The market has more than doubled in size in the past six years from 169 million in 2013-14 to 344.7 million in 2018-19. The growth is being primarily led by the domestic passenger segment, which grew from 122.4 million in 2013-14 to 275.22 million in 2018-19. There was significant growth in the international passenger segment as well, which grew from 46.6 million in 2013-14 to 69.48 million in 2018-19. However, this growth was lower that that in the domestic segment due to bilateral restrictions and the inability of domestic airlines to grow significantly in international markets. The passenger segment saw a very high year-on-year increase in 2015-16 and 2016-17. This trend continued in 2017-18 and then reversed in 2018-19. A key reason that contributed to this trend was the operational problems faced by many domestic airlines, including the significant loss of capacity of Jet Airways. However, other airlines such as IndiGo still had a very high year-on-year growth rate.
  •  From 2013-14 to 2018-19, air freight traffic grew at a CAGR of 9.42 per cent, reaching 3.56 million tonnes (mt) in 2018-19. Of the total traffic in 2018-19, international and domestic traffic accounted for shares of 62 per cent and 38 per cent respectively. From 2013-14 to 2018-19, domestic and international freight traffic increased at a CAGR of 10.38 per cent and 8.85 per cent respectively.

Major developments spell future growth

  •  Vision 2040 for the aviation sector was unveiled recently. It charts out a comprehensive strategy for the future growth of the sector. The country will require 200 airports and a financial commitment of $40 billion-$50 billion to handle a minimum of 1.1 billion passengers flying to, from and within the country.
  • In order to meet the growing demand, the NextGen Airports for BHarat [NABH] Nirman initiative was launched to enhance airport capacity to handle 1 billion trips in the next 10-15 years. In August 2018, a new transaction structure for future greenfield airports proposed under NABH Nirman was unveiled. A new Cargo Policy was also released to tap the unexplored potential of the cargo segment. The policy aims to leverage the air cargo network to provide cargo transportation to the masses at an affordable cost and to connect every village to the national and global supply chain.
  • Meanwhile, in a bid to promote the inflow of foreign investment, 100 per cent foreign direct investment (FDI) in brownfield projects has been permitted.

Regional connectivity emerges as a boon for the sector

  • The success of Ude Desh ka Aam Naagrik (UDAN) 3 – has come on the back of the strong performance exhibited by UDAN 1 and UDAN 2. The connectivity proposed under UDAN 1 has commenced and is stable. At present, the focus is on expediting connectivity under UDAN 2.
  • In August 2018, the government released the International UDAN scheme. It seeks to promote international connectivity from non-metro cities that are covered under India’s open skies policy with other Asian countries. The routes identified so far are to provide connectivity from Guwahati to Dhaka, Kathmandu, Yangon, Kuala Lumpur, Singapore and Bangkok, while two other routes are from Vijayawada to Dubai and Singapore. In October 2018, the Airports Authority of India (AAI) invited bids for the six proposed routes from Assam, and is currently in the process of evaluating them.

Changing hands with the private sector

  • The increase in domestic and international air travel combined with congestion at most airports, and strong traffic growth at the five airports that were privatised over a decade ago have attracted the attention of several international operators and investors. The airport sector is the top contender among infrastructure sectors in terms of international interest. Global operators and investors prefer brownfield airport expansion opportunities in airports that have a passenger capacity of more than 3 million-4 million. The sector could provide an immediate opportunity to attract FDI by adoption of a public-private partnership (PPP) approach.
  •  AAI’s plans to privatise six airports – Ahmedabad, Jaipur, Lucknow, Guwahati, Thiruvanthapuram and Mangaluru – inched closer to reality. The move is expected to enhance AAI’s revenues and increase economic development in these areas in terms of job creation and allied infrastructure development. Recently, the operation, management and development of the Ahmedabad, Lucknow and Mangaluru airports was awarded to Adani Enterprises Limited on a PPP basis for a lease period of 50 years.

Capacity constraints loom large

  • Most airports (both joint venture and AAI operated) have either reached saturation levels or are expected to reach optimal capacity within a decade. Timely creation of new capacity as well as augmentation of existing capacity through increasing productivity is thus the need of the hour. Airport capacity upgradation and expansion require both the development of new greenfield airports and the expansion of existing brownfield airports and this will be funded by the Indian private sector and AAI by leveraging its balance sheet.
  • That said, several cities are expected to have multiple airports. The government has granted approval for the Noida international airport (Jewar), Mopa airport (Goa), Purandar airport (Pune), Bhogapuram airport (Visakhapatnam), Dholera airport (Ahmedabad), and Hirasar airport (Rajkot). In the private sector too, upgradation and expansion is in the offing for the Delhi, Bengaluru and Hyderabad airports in the next five years.

Technology emerges as a significant disruptor

  • Technologies such as artificial intelligence and big data are being leveraged to improve the flying ecosystem. The government has also unveiled a Drone Policy to ensure that drones are manufactured in the country.
  • Enhancing the passenger experience is another focus area. In October 2018, the Ministry of Civil Aviation (MoCA) released the policy on biometrics-based digital processing of passengers at airports – Digi Yatra. The ministry has taken the initiative to develop standards for digital processing of passengers to ensure uniform implementation and a better passenger experience across Indian airports through a connected ecosystem. It is a facial recognition-based passenger processing that is a common standard being adopted the world over in order to provide a seamless experience right from entry into the airport up to boarding the aircraft.
  • Meanwhile, Indore became the first airport in the Asia-Pacific to provide service delivery and enhanced passenger experience through a robot, developed by Acropolis India. The robot will guide and welcome passengers.
  • The MoCA has also launched the upgraded version of the AirSewa 2.0 web portal and mobile app. A need was felt for the development of an upgraded version of AirSewa with enhanced functionalities to provide a superior user experience to the 50 million passengers travelling every year. Major improvements include features such as secure sign-up and log-in with social media, a chatbot for traveller support, improved grievance management including social media grievances, real-time flight status and details of flight schedules. Further upgrades of AirSewa are being planned that will include DigiYatra registration, airport maps, BHIM payment integration and grievance escalation and transfer.
  • All the airports in the country will soon have geographical indication (GI) stores that will promote products unique to that region. A GI is an agricultural, natural or manufactured product originating from a particular area. A first-of-its-kind GI store was inaugurated at Goa airport recently to promote productsunique to that region.

Towards Vision 2040

  • Most of the airports’ passenger potential will be saturated in the next 15 years and the country will have to practically double its airport count from over 100 to 200. Airports in locations such as Delhi and Mumbai will also be saturated by 2040 and will require a third airport. If the growth trend continues, India will become one of the top aviation hubs by 2040. Passenger traffic is expected to grow sixfold to around 1.1 billion. The country has one of the largest aircraft order books currently with pending deliveries of over 1,000 aircraft. Its top 31 cities may have two airports and the cities of Delhi and Mumbai three each.
  • The tax structure for aviation turbine fuel (ATF) has been an issue in recent times and will need to be dealt with through discussion among industry stakeholders. Maintenance, repair and overhaul (MRO) and aircraft leasing are also required to be gradually aligned with leading global jurisdictions to tap the MRO needs of international airlines.
  •  Lumpiness of investments, tariff uncertainty, low interest by foreign and domestic investors, lengthy legal disputes, long bidding process, challenges in fundraising, revenue leakage risk in PPP airports and suboptimal exploitation of real estate are some of the major issues in the sector. Land acquisition is a major area of concern, especially for greenfield projects.
  • The industry is of the view that the sector is in urgent need of an institutional reboot. While drafting ambitious plans holds value, actual implementation can only happen once a sound institutional set-up is in place. In order to realise the ambitious targets under Vision 2040, attention needs to be given to critical issues such as a reduction in taxes on ATF and airport charges, and addressing issues such as delays in land acquisition and obtaining clearances.