AKGEC INTERNATIONAL JOURNAL OF TECHNOLOGY, Vol. 4, No.

The Economics of Indian Aviation Sector

Dr. K.V. Damodharan
B-1/58/2, Safdarjung Enclave, New Delhi 110029
kvdamodaran@gmail.com

Abstract -- Aviation ia a driver of economic and social development of a country. The turnover of the Indian Aviation sector today exceeds Rs 1 lac crores. Private sector has played an unprecedented role for developing the airport sector in the country. Some of the Indian companies are global brands in the airport space. The investment expected in the 12th Five Year Plan is Rs.70,000 crores and out of this Rs.55,000 is expected from private sector. Keeping rapid growth of the sector in mind, adequate qualified manpower becomes a crucial issue. There is an urgent need to set up a world class National Aviation University in India. Keywords: Aviation sector, Open sky policy, Airports Authority of India, Public private participation

reforms too played a very important role in the development of our economy by opening the civil aviation sectors for competition and private participation. Ministry of Civil Aviation (MoCA) is the nodal agency responsible for the formulation of national policies and programs for development and regulation of civil aviation sector and implementing schemes for orderly growth and expansion of air transport in the country. In order to guide the market participants, MoCA and GoI periodically responded to new industry challenges by making policy and Regulatory changes. Directorate General of Civil Aviation (DGCA) controls several aspect of flying including the licensing of pilots, certifying airports and issuing all rules and procedures governing Indian Civil Aviation sector. The Airports Authority of India (AAI) with power to manage all national and international airports was set up in 1994. AAI handles all matters relating to infrastructure for AAI airports and ANS services throughout the country. During 2008 Airports Economic Regulatory Authority of India (AERA) was established to oversee the economic regulation of the Airport sector. The sector has been opened for private participation. Open sky policy introduced. FDI restrictions removed. These measures have enhanced the investor confidence in the Civil Aviation Sector. In spite of this, the population who experienced even one air travel in life is less than 5%. Following graph indicates the Per Capita Domestic Air Trips over the year 1990-91 to 2030-31(estimated).

I. INTRODUCTION IT is now increasingly recognized that Aviation, far from being a mere mode of transportation for the elite group is a business and a driver of economic and social development of a country. Civil Aviation Sector contributes significantly to the process of development of the country, as a result of enhanced productivity and efficiency in the movement of goods and services by providing access to safe, secure and affordable Air services. Air transport is a vital element of any countrys transport infrastructure. The Civil Aviation Sector contributes significantly to the process of development while generating employment opportunities directly and indirectly besides facilitating enhancement of productivity and efficiency with significant multiplier effects across the economy. Undoubtedly air transport has contributed to the rapid growth of Indias trade and development. Recent research by Oxford Economics reveals that direct contribution of aviation sector in India to its GDP is 0.5%. The Government of India (GoI) has taken several steps to develop the Civil Aviation sector by opening the sector for private participation. Airport Council International (ACI) in its projections comparing the 20 countries in the world forecasted that India will be the 3rd largest aviation market in the world by 2027 in terms of passengers handled. Indias economic policy

Figure 1. Indias per capita domestic airtrips.

INDIAN AVIATION SECTOR

The graph shows the per capita domestic trips in India are very poor at 0.045 (2011-12) as compared with other competing countries. For example the per capita domestic trip is 0.15 for China, Brazil is at 0.25 and Malaysia is at 0.54. Civil Aviation Sector is a significant economic generator because of its direct, indirect and induced impact on the countrys economy. Aviation generates substantial economic benefits for their communities. Several studies suggest that each dollar spent by aviation or aviation-dependent businesses generates an additional $1.52 in economic activity. Airport jobs are great in demand, and the average airport wage is typically higher than the average salary in a region. Aviationrelated businesses and their employees annually contribute millions of dollars in local taxes, while aviation facilities have proven to attract new industry. Subsequently, for every job at the airport, nearly three more jobs are created in the related economy. The turnover of the Indian Aviation sector today is approximately Rs 1 lac crores as can be seen in the following table (2011-12).
TABLE 1 : CURRENT TURNOVER OF THE INDIAN AVIATION SECTOR Main sector Airlines Airports MRO (Maintenance repair over haul) Cargo Ground Handling Aviation Academies Total Income of International Airlines operating in India Total Subsector Scheduled Non-scheduled AAI Airports Private Gross Revenue (~) 43,352 1,528 5,734 3,805 4,000 19,000 2,000 325 79,744 20,000 Approximately 1,00,000 Rs. cr

which 125 airports are operational. Majority of the same are with the AAI. Opening of airport infrastructure to private sector participation fuelled the growth of air traffic in India. The private sector has played an unprecedented role for developing the airport sector in the country and by acting as a key contributor for the development of Public Private Participation (PPP) model Airports. GoI has liberalized the airport sector allowing the private investors to develop both Greenfield and Brownfield Airports in the country. 5 major PPP Airports has been set up in the country and are successfully operating now. They are Bangalore International Airport Limited (BIAL), Cochin International Airport Limited (CIAL), Delhi International Airport Limited (DIAL), GMR Hyderabad International Airport Limited (GHIAL) and Mumbai International Airport Limited (MIAL). Total investment made by 5 PPP Airports in the last 5 years was to the tune of US$ 6 billion. These 5 Airports handle more than 60% of the passenger traffic and more than 70% cargo in the country. Airport modernization plans of GoI are with high impetus on private participation. The rate of growth will require huge investment. An amount of US$ 13 billion is planned for 12th five year plan. Out of which US$ 10 billion is expected from private sector. 35 non-metro airports are also identified for modernization and up gradation. India is also planning to set up 3 International major Airports at Navi Mumbai, Mopa (Goa) and Kannur (Kerala) in the near future requiring approx US$5 billion. The total investment of US$ 75 billion has been estimated for airport infrastructure development by 2031-32. Indian entrepreneurs made notable investments in acquiring airport development and operations capabilities. Some of the Indian companies have now become global brands in the airport space and have successfully developed and are managing few international airports outside India. For example, GMR is managing an Airport in Turkey and GVK is managing Airports at Indonesia. At present Airport capacity in the 6 metro cities are getting congested justifying development of second and third airports in the near future. The future development will require other Tier 2 and Tier 3 cities to have modern airport facilities and better air connectivity. As traffic base grows even moderate growth rate will continue to drive huge increase in passenger and freight. The total airport passenger traffic could grow at an average of 50 million passengers per annum generating large capacity requirement. India is witnessing such a transformational growth and the GoI is doing everything possible to attract the investment both from domestic as well as foreign investors. Recent decision on FDI in aviation sector is a case in point. The investment expected for the 12th Five Year Plan is Rs.70,000 crores and out of this Rs.55,000 is expected from private sector.

(Ref .Report on working group on Civil aviation sector June 2012- MoCA)

Let us now examine the economic contributions of different segments of Aviation sector. II. AIRPORTS When the Indian economy is all set to integrate itself into global economy, the upgradation and modernization of Airport infrastructure and its efficient use have assumed critical importance. India has presently 449 airports/airstrips. Out of

AKGEC INTERNATIONAL JOURNAL OF TECHNOLOGY, Vol. 4, No. 1

III. CONTRIBUTION OF AIRPORTS TO NATIONAL AND STATE GDP National Council of Applied Economic Research (NCAER) has conducted a study on economic impact of Delhi airport to the country .The study report shows that there is immense benefit by Direct, Indirect and Induced contributions much far from the turnover of the Airport shown in the Books of Accounts of the Airport. Delhi airport handles the maximum passenger and flights per day as compared to other airports in India. It is the 2nd busiest airport in India in terms of cargo handling per day first being Mumbai airport. This airport contributes nearly 46% of its revenue to AAI which is being used for the renovation of existing airports or for the construction of new AAI airports in India. This has multiplier impact on the national economy in terms of output and employment. This is one of the best PPP airports in India in terms of the quality of services that it provides to passengers. The passenger survey results indicate that more than 90% of the passengers provide a high rating for quality of services. Delhi airport directly contributes Rs 42.9 billion in income to the national GDP. In terms of employment, Delhi airport directly contributes 64,074 jobs, which is 0.014% of the national employment and 1.05% of Delhis employment. Construction of Delhi airport directly contributed 35,000 jobs over a three years period. Induced impact covers the wider role of the airport in generating output and employment in the regional and national economies by attracting economic activities such as investment and tourism. For example, an airport will influence company location decisions and competitiveness, attract new investments to the economy, retain existing companies and secure their expansion projects, promote exports through airfreight, enhance competitiveness of an economy through the provision of efficient passenger and freight services and attract businesses, leisure activities and tourism generating both income and employment. As per the Tourism Report 2010 published by the Ministry of Tourism, Government of India, 91% of foreign tourists arrived in India by air, and out of which Delhi airports share was 34% followed by Mumbai airport with 21%. Attracting tourists to the city generates multiple impacts on the regional economy. It increases the economic activities of many sectors particularly hotels, restaurants, finance and banking. No doubt, the economic impacts of other major Airports in India are also would be the same. IV. AIRPORT HUB AND ECONOMIC BENEFIT Airport hubs are well developed and well connected larger airports which can be interconnected with large number of smaller or regional airports called Spokes. Since, direct flight to each regional or small airport will not be economically viable

in a hub and spoke system all the long route direct connections are between two larger airports and from the hub airport passengers to smaller airport will be transported by regional flights. This is economical, efficient and fast. Today many airports particularly smaller airports are not in a viable proposition. The Hub system leads to lower Airport management cost because of economies of scale. Hub system of network fosters efficiency. It is a fact that management of smaller number of routes generally leads to more efficient use of transportation resources. Aircrafts are more likely to fly at full capacity and fly more frequently in the same route. A single Hub can cater many spoke Airports and smaller airports can be feeder airport to Hubs. Hence huge cost savings is achieved in Airport Development. A Hub and Spoke model could also ensure that many of the Indian regional Airports become viable due to the strong tourism potential existing around these un-served destinations. V. AIRLINES Among the available modes of transport, Air transport is the safest and fastest mode of transport and the services are provided across countries. This is the only mode of travel available by which one can reach any place in the globe with shortest possible time. Among the sub-sectors of civil aviation industry the Airlines industry contributes the lion share. The number of passengers using Air transport in India is growing and will reach 200 million per annum in a years time. Available information shows that the income of international airlines operating in India is to the tune of US$ 4 billion for 2010-11. If this is taken into account then size of the overall airline industry alone would exceed US$ 12 billion which shows that contribution of airline industry to the total sector revenue is more than 50%. Based on the air traffic forecast it is estimated that commercial fleet size is expected to reach 1,000 by 2020 from the present level of 400 which translate in to an investment requirement of US$ 140 billion. Apart from the key drivers which affected the growth of Indian Civil Aviation market such as rise in domestic GDP, expanding middle income group, favorable demographic divide (larger employee base), rising urban population, the emergence of low cost carrier which made the air travel affordable for common man. Both international and domestic tourist arrival has also shown a phenomenal growth. Air transport offers the fastest mode of connectivity to remote and inaccessible regions. Given the thrust of the GoI to enhance connectivity in remote and inaccessible regions of the country there is strong likelihood of demand emanating from these areas in future. Greater economic activity followed by greater integration of Indian business globally had given

INDIAN AVIATION SECTOR

greater business opportunity for travelers across national boundaries. Global air traffic is also seen shifting to Asia-Pacific region during the last few years where India and China are the two fastest growing economies that are becoming the main centre of economic activities. During the last 5 years period the sector witnessed an increasing trend among the domestic carriers to embrace the low-cost carriers (LCC) model. Total market share of LCC today is 70%. In spite of phenomenal growth potential, Indian Air transport sector is not fully tapped leaving scope for huge investment opportunities. It is expected that 376 aircrafts will be added by 2017 with an estimated value of Rs 1,47,600 crore. VI. AIR NAVIGATION SERVICE ANS service is a service essential to the safety of the aircraft while it is flying or moving on the ground. Since safety is indisputable and imperative generally ANS remains the monopoly of the government. International Civil Aviation Organization (ICAO) Convention provides for complete and exclusive sovereignty for each contacting state over the air space above its territory and each state has to undertake provision of these services in accordance with the standards and practices recommended by ICAO. In India, AAI has the sovereign right to provide ANS services at all the civilian airports in the country. Efficient Communication, Navigation and Surveillance / Air Traffic Management system are crucial elements of the civil aviation industry. ANS service is with the exclusive domain of AAI. The government has planned to hive off this service and to make an independent corporation. It is expected that developing a world class infrastructure with vigorous focus on safety will require huge investment. The investment will be in technology, people and on training. The capital requirement to modernize the ANS service in India is approx. US$ 6 7 million. Government has considered corporatization of ANS to have efficient provision of ANS services in the country and also to enhance its ability to generate and manage its own resources. ATC automation is of paramount importance to ensure a safe and secure Air Transport service. Since management of air space being a sovereign function, hiving off this function from AAI will ensure a level playing field as AAI is an airport operator itself. Since AAI is undertaking multiple functions there is always a possibility of cross subsidisation of one service with another, which will be applicable in the case of ATC / ANS service also. Since satellite based navigation system is an essential ingredient of safe and secured air transport system, availability

of an efficient satellite based navigation system for the Civil Aviation Sector must be ensured. It can also be developed as a viable business model so that the service can also be offered to other sectors on cost plus basis. An investment of Rs 4,400 crores are expected to be incurred towards development of ANS infrastructure in the country. VII. MAINTENANCE REPAIR OVERHAUL Maintenance and repair is extremely essential for any transport system. In the case of airlines it is further crucial as it takes passengers and cargo on the sky. To keep the machinery, materials, engine and the entire aircraft in an excellent working condition and also in order to maintain the flights in running condition, MRO has been set up where the aircrafts are taken for overhaul, servicing, repair and maintenance. =Indian MRO industry is estimated to be approx. US$ 0.5 billion per annum. Few MRO facilities were already completed during 11th Five year plan 2007-11. With the fleet size of Indian Scheduled and Non-scheduled operators likely to triple by 2025, there will be a huge requirement for the domestic MRO Industry. India has the potential to become a global MRO hub due to its strong engineering base, low cost operations and favorable geographical location. Both the Greenfield and Brownfield Airport projects have a strong focus on setting up MRO facilities. 100% FDI is allowed for Greenfield MRO projects. Availability of low-cost skilled manpower is an additional benefit which India based MRO operators will be offering. India has the potential to be a MRO hub due to the growing aircraft fleet, location advantage and availability of talented manpower. Indian MRO business is expected to reach US$ 2 billion by 2020. Scheduled airlines are expected to operate about 1,000 aircraft by 2020. General Aviation sector is expected to operate number of business jets, helicopters, turbo props. All these makes the strong demand for MRO in India. Rapid expansion of commercial and general aviation fleets will create demand for reliable, economical and quick turn-around maintenance facilities. The present Indian carriers are also expected to demand heavier maintenance and checks after few years which will create growing demand for MROs. Indian MRO industry is expected to triple in size from Rs 2,150 crore in 2010 to Rs 7,000 crore by 2020. VIII. GROUND HANDLING Ground Handling is an important area of work with reference to the airline industry. Whenever a flight lands in an airport there is a requirement that the passengers and the luggage has to be transported to the terminal. Similarly, whenever a passenger departs from an airport there are series of activities to be completed at the terminal. For example, issue of boarding pass, screening of luggage, transporting luggage to the flight

AKGEC INTERNATIONAL JOURNAL OF TECHNOLOGY, Vol. 4, No. 1

etc. In addition this, the cleaning of aircraft and similar such activities are called the Ground Handling activities at an airport. The Ground Handling business is expected to reach Rs 3,900 crore in next 5 years. A number of ground handling players have aggressive expansion plans in India and showed their interest in investment in India and implement new technologies with international best practices in the business. Among the technologies that are expected to have a significant impact on the ground handling operation are passenger self service solution, radio frequency identification technology (RFID), common use terminal equipment (CUTE), unit load device (ULD) scanner for cargo handling, internet and mobile technologies etc. are expected to be implemented in large scale for enhancing the efficiency of ground handling operations in India. GoI is under process of finalizing a robust ground handling policy which fosters competition and efficiency. The ground handling business in India is currently valued above US$ 0.4 billion and an investment of around US$ 5 billion will be required in developing world class ground handling and logistics facilities including high output distribution center to major airports. A number of global ground handling players have aggressive expansion plan in India. IX. GENERAL AVIATION In the airline industry there are scheduled and non-scheduled airline operators. The non-scheduled airline operators are mainly operating private jets, small aircraft for tourism and medical related travel and helicopters etc. These nonscheduled operations are run by individual operators and can be on their business, luxury or leisure. These in general are called General Aviation. India has witnessed significant growth in the number of nonscheduled airline operators with total number of operators having crossed 200 in 2011 from 36 operators in 2000. There are opportunities in GA, the fleet of which is expected to grow to 2,500 aircrafts and around 900 helicopters within a short span of time. Government policy provides several tax concessions and lower landing and parking charges for small aircraft. This will be incentive for such operators to provide connectivity non-lucrative non-density routes. The GA in India is expected to grow at 10% per annum and industry sources indicates that around 300 business jets, 300 small aircrafts and 250 helicopters are expected to be added in the current GA fleet by 2017. A total investment of more than Rs 20,000 crores in GA is expected during the next 5 years. Development of several heliports, up gradation of non-operational airstrips is also under the consideration of GoI through PPP mode as it has strong business case with significant benefits to the local economy. Huge investment is envisaged in these areas too.

X. CARGO The civil aviation business or industry is mainly on transportation of passengers or goods. The goods transportation comprises of materials, medicines, finished products, mails, animals, pets, food, cosmetics etc. This has tremendous potential as air cargo ensures fastest mode of transportation particularly required to transport perishable goods and emergency medicines etc. Indias impressive growth in international and domestic trade over the past few years has augured well for the air cargo industry in India. Any airline whether domestic or foreign carriers which meets specified operational and safety requirements are allowed to operate scheduled or nonscheduled cargo services to/from any airport in India wherever custom facilities are available. Air cargo growth rates in general are seen to be highly susceptible to the fluctuations to the GDP growth rate in India. The entry of leading private air cargo companies has brought in a wave of increase in automation, mechanization and process improvement initiatives at major air cargo terminals in the country. These are expected to yield higher air cargo throughput and improve service level quality. The potential of air cargo growth in India can be seen from the fact that some of the global airports like Dubai handled more cargo volume than all Indian airports put together. Huge potential is available untapped. Today, the total air cargo volume in the entire Indian airports in 2012-13 is 2.19 million tonnes which is less than that handled by individual airports like Hong Kong, Shanghai, Incheon and Paris etc. This shows there is significant opportunity lies ahead. Investment in cargo terminal and other related infrastructure required for carrying out cargo operations at the airport are extremely important. It is expected that the overall air cargo traffic will touch around 9 million metric tonne by 2025 assuming a growth rate of around 10%. Huge investment is anticipated in Air cargo business. XI. REGULATORY SCENARIO During 2008 Airports Economic Regulatory Authority of India (AERA) was established to oversee the economic regulation of the Major Airports. AERA regulates tariff and other aeronautical charges as well as monitors performance standards of airports. Through the same Act, an Appellate Tribunal (AERAAT) to handle the appeals from service providers and consumer groups has also been set up and are functioning now. These measures have enhanced the investor confidence in the Civil Aviation Sector. Hence part of the Aviation sector is under independent regulatory regime today. The Planning Commission of India noted that the ability to mobilize private resources in large scale critically depends upon

10

INDIAN AVIATION SECTOR

availability of a supportive investor friendly regulatory regime. In many infrastructure sectors particularly in the aviation sector the regulatory regime is just emerging to be a matured regulator. According to planning commission the infrastructure development in India is expected to follow a very different path in the coming years with much larger role for private investment in the form of PPP. Ideally, regulatory regime must be in position before any privatization. Regulatory regime plays an important role. The Government has also decided to set up a high powered Civil Aviation Authority (CAA) in the near future to oversee the Air transport in the country. XII. HUMAN RESOURCE REQUIREMENT Manpower shortage is acute in many technical categories such as pilots, cabin crew, flight dispatchers, maintenance personnel etc. Various forecasts suggest that India will require additional 3 3.5 lacs employees in aviation sector to meet the demand in the coming years. India currently has over 4,000 pilots including 400 expatriates. With the doubling fleet size expected by 2017 Indian will require around 9,000 pilots. Shortage of pilots is a great concern. Similarly, there is shortage of around 400 Air Traffic Control officers, maintenance engineers, technicians and so on. There is clear absence of qualitative and duly recognized formal educational programs in the civil aviation sector. Several institutes are providing training in all fields of aviation. Although these institutes follow the prescribed curriculum there is significant variations in the quality level of instruction and training infrastructures. It is therefore necessary to establish a National Aviation University to cater to the growing educational and training requirements of civil aviation sector in India. There is an urgent need to set up a world class National Aviation University in India. The Government is in the process of setting up of A National Aviation University in India soon. Both public sector and private sector will be investing huge amount in setting up of training centers and necessary infrastructures. XIII. CONCLUSION Aviation sector is witnessing a systematic transition from a public sector controlled to a private sector dominated, industry driven, performance oriented and dynamic sector. The reform process in the sector had a far reaching impact and helped to unleash the enormous growth potential. Over the past decade, Aviation sector witnessed a robust growth trajectory. The resilience of the Indian Economy coupled with progressive and forward looking regulatory and policy environment enabled a significant role by the private sector and achieved capacity before demand. It also enabled Indian entrepreneurs to venture into setting up world class airports overseas. According to UNCTADs World Investment Prospectus Survey 2010-12, India is the second most attractive

destination for FDI in the world. Indian markets have significant potential and offer prospectus of high profitability and a favorable regulatory regime for investors. There are great opportunities and the future is even more exciting. Competition is the best regulator for any market. It will provide quality service at affordable price .The Air passengers will have enough choices. In the near future it is expected that every Districts of India will have at least one or two world class airports. Every person who travel a distance of 80 - 100 km from his residence/ office will have the choice of selecting an airport from an option of at least 2-3 airports and an Airline from 15 20 air carriers of his choice by price and quality. Let us hope for the day when every consumer prefers air transport for their normal work and business and rail and road travel for luxury and leisure. XIV. REFERENCES
[1] Ministry of Civil Aviation Working group report on Civil Aviation Sector published in June 2012. (National Transport Development Policy Committee) [2] Approach paper on 12th Five year plan of Civil Aviation Sector by Planning Commission, August 2011. [3] Policy on Airport Infrastructure by Ministry of Civil Aviation, August 2011. [4] Consultation Paper of AERA on regulatory philosophy and approach in economic regulation of airports and air navigation services. [5] Economic impact study of Delhi Airport by NCAER. [6] Ministry of Civil Aviation Website www.civilaviation.gov.in/ [7] AERA Website www.aera.gov.in [8] APAO Website www.apaoindia.com [9] AAI Website www.aai.aero [10] Air India Website www.airindia.com.

Dr. K.V. Damodharan possesses vast experience in Telecom Sector spanning over 20 years. Worked in organizations such as BSNL, MTNL, TCIL. His eight years stint with TRAI gave him the expertise in telecom economics, tariff fixing and costing of telecom service, consumer affairs, quality of service and dealing with tariff disclosure norms and transparency etc. Presently working as Advisor (Regulatory Affairs) in Association of Private Airport Operators. Also involved in formulating various policies such as National Civil Aviation Policy, Cargo Policy, Remote area connectivity and also policy on Regulation, Performance evaluation and traffic and revenue monitoring etc. He is also Member (Telecom Advisory Board) in Power Grid Corporation Ltd. advising them in all strategic tie-ups, examining cases for new/ emerging Business opportunities, and advising the investment decisions and plans. Also worked with Competition Commission of India (CCI) dealing with issues of trade competition, anti-competitive issues and related financial and economic analysis.

11