Airline Business in India

Today, even while the percentage of India’s population travelling by air has gone up to nearly three, the level of penetration is still pitifully low

Issue: 2 / 2016By B.K. PandeyIllustration(s): By Anoop Kamath

Since its liberalisation commencing in the early 1990s, despite the numerous impediments, the Indian airline industry has indeed come a long way. Traditionally, air travel was expensive and was seen as a privilege restricted to the elite and affluent sections of the society. The result was that even 25 years ago, less than half a per cent of the population of India was able to afford the luxury of air travel.

The origins of the Indian airline industry, whose foundations were laid by private entrepreneurs, can be traced back to 1929. The industry came under the control of the government after it was nationalised in 1953. This left only the two state-owned carriers on the scene, who with their subsidiaries, monopolised the Indian skies. These were Indian Airlines renamed later as ‘Indian’, that operated in the domestic sector and Air India International that operated in the international segment. In March 2007, the two state-owned airlines were merged to form the National Aviation Company of India Limited (NACIL); but continued to operate as a single entity under its brand name Air India. Incidentally, the decision of the government to merge the two, has been a subject of controversy from the word ‘go’ and many of the problems that the national carrier Air India is afflicted with today are being attributed to the merger which is as yet incomplete.

Deregulation of the Indian Airline Industry

In the wake of the economic reforms initiated by the Congress Government in the 1990s headed by Prime Minister P.V. Narasimha Rao, the civil aviation sector was deregulated opening the doors for the entry of private carriers and ending the monopoly of the state-owned carriers Indian Airlines and Air India. Soon after, a number of full-service carriers in the private sector ventured on to the scene to compete initially with only the state-owned domestic carrier Indian Airlines. The competition was restricted to the domestic sector as to fly on the international segment, a newly established airline would have to have a minimum of 20 aircraft in its fleet and five years of operations in the domestic segment. This is referred to as the ‘5/20 rule’ over which there has been raging controversy especially in the recent past and which continues with increasing ferocity even today.

Emergence of Low-Cost Airlines

The airline business in India, however, witnessed a major turning point in 2003, when Captain G.R. Gopinath ushered in the concept of low-cost air travel with the launch of his Bengaluru-based budget carrier Air Deccan. This bold and novel experiment served to bring within reach the facility of air travel to the less affluent sections of society. Following the establishment of the path-breaking Air Deccan, a number of new low-cost airlines arrived on the scene providing the air traveller a dynamic and vibrant industry with a wide range of options. Today, even while the percentage of India’s population travelling by air has gone up to nearly three, the level of penetration is still pitifully low given factors such as the size of the country, its rapidly growing population, the rate of economic growth, rise in income levels and the growing demand for enhancement of regional connectivity. The last factor will bring the facility of air travel to large segments of society that so far have remained isolated from the opportunity to avail of air travel. The potential for growth in the airline business in India is clearly immense.

Turmoil in the Airline Industry

In the last twoand-a-half decades, a number of carriers in the private sector that were unable to manage their respective business models, failed to survive in the highly competitive as well as a somewhat hostile business environment. These unfortunately had to close down or were bought off by other financially stronger players, casting an ominous shadow on the viability of the airline business in India. Sahara was taken over by Jet Airways in January 2006 and Air Deccan was acquired by the high profile Kingfisher Airlines in 2007. Later, somewhat unexpected as well as intriguing was the closure of Kingfisher Airlines set up by the glamorous Vijay Mallya and ought to have had powerful support from the financially affluent UB Group. Similar was the case with Paramount Airways that was launched by a powerful business house of South India.

The rate at which the Indian airline industry is growing, it is expected to be the third largest in the world by 2020

The Indian Airline Business Today

Today, with a market size of around $16 billion, India ranks as the ninth largest civil aviation market in the world. The rate at which it is growing, by 2020, the Indian airline industry is expected to be able to live up to the expectations of analysts to be the third largest in the world. From being regarded as an exclusive privilege for the elite, today the Indian airline industry is seen as serving the masses and is accepted as a real catalyst for economic growth.

Over the last two-and-a-half decades, the Indian airline industry has registered significant growth and as per data available on the official website of the Directorate General of Civil Aviation (DGCA), the number of carriers in the private sector including cargo airlines, holding Scheduled Operator’s Permit has grown and stands at 15. However, the journey for the Indian airlines industry over the last 25 years has not been without its trials and tribulations. Inadequate airport infrastructure has been a major impediment to the enhancement of the regional connectivity network thus stunting the growth of regional aviation.

Price of aviation turbine fuel (ATF), that constitutes around 45 per cent of the operating cost of an airline, has been inordinately high especially when compared to the prices prevailing in the region. This quite obviously places the Indian carriers in a disadvantageous position vis-à-vis their foreign counterparts who operate through Indian airports, but have the option to refuel abroad at a much lower cost. The price of ATF has been high not only on account of the escalating international price of crude but also on account of the levy of both central and state taxes which have been unreasonably high. The Indian carriers have also been facing numerous regulatory barriers on account of archaic rules imposed by an outdated regulatory agency. The state-owned Air India is the only airline which, unlike the airlines in the private sector, has been having a smooth ride thanks to life support by way of massive infusion of funds provided by the Central Government.

Improving Economics

But things are beginning to change. Fortunately for the Indian airline industry, the global price of crude began its downslide a couple of years ago. From a peak of $145 a barrel in July 2008, the price of crude has now dropped to under $30 a barrel. The airline industry, however, has not been able to derive full advantage of the drop in international price of crude on account of the various taxes and excise duty imposed by the government that continue to remain high. Nevertheless, there has been partial relief for the airlines as evident in their overall performance in the recent past.

As per data released by the DGCA, in the period January to December 2015, the airlines altogether carried 810.91 lakh passengers in the domestic segment as against 673.83 lakh during the corresponding period of previous year thereby registering a healthy growth of 20.34 per cent. Lower air fares offered by airlines are seen as the primary catalyst in the spurt in air travel. In the year 2014, the passenger traffic had increased by 9.7 per cent over the previous year. In 2013, domestic air traffic had grown only by 4.4 per cent over 2012. As compared with passenger traffic in 2011, there was in fact a decline in 2012. Growth in freight traffic as compared to passenger traffic has not been as impressive. However, analysts are of the view that freight traffic is expected to increase to 11.4 million tonnes by 2032.

Reforms Underway

Actions are underway to introduce the much-needed reforms to eliminate or mitigate the numerous regulatory barriers that the Indian airline industry often encounters. The first step the government is taking is to replace the DGCA with an autonomous and more empowered Civil Aviation Authority (CAA). This has been on the anvil for some years and hopefully this will be a reality in the near future. Introduction of the CAA will make it easier for the airlines to conduct their business with greater ease than they are able to do under the present dispensation.

The other important action that is on hand is the formulation of the new Civil Aviation Policy after an extensive consultation with the stakeholders. As a part of this exercise, the government is contemplating the removal of the 5/20 rule, a proposal on which the Indian airline industry appears to be deeply divided.

The three budget carriers—IndiGo, SpiceJet and GoAir—along with the full-service carrier Jet Airways, are opposed to the change being contemplated in the existing regulation related to operations by domestic carriers on international routes. AirAsia India and Vistara, the two carriers newly established in partnership with Tata Sons, the all-powerful business house in India, are adversely affected and are in support of the proposal to do away with the rule that they believe is incongruous and is not followed by any other country in the world. The group of the four Indian carriers, who have already borne the brunt of the 5/20 rule, is of the view that this proposal is meant to benefit the two new carriers and as such its removal is not just and fair. They have even threatened to drag the issue to court. This will be not only unhealthy for the image of the Indian airline industry but also an unfortunate development for Indian civil aviation industry as well as the nation.