Literature review for Seminar Paper

AIR FREIGHT: GLOBAL AND INDIAN SCENARIO

Under guidance of

Prof. Pramod Shetty

By

Abhijeet Sinha
Roll No.-149
PGDM (Operations)

K.J. Somaiya Institute of Management Studies and Research

1| Air freight: Global & Indian Scenario

Introduction

Air transport is a vital component of many international logistics networks, essential to managing
and controlling the flow of goods, energy, information and other resources like products,
services, and people, from the source of production to the marketplace. It is difficult or nearly
impossible to accomplish any international trading, global export/import processes, international
repositioning of raw materials/products and manufacturing without a professional logistical
support. It involves the integration of information, transportation, inventory, warehousing,
material handling, and packaging. The operating responsibility of logistics is the geographical
repositioning of raw materials, work in process, and finished inventories where required at the
lowest cost possible.

World air cargo growth will expand at a 5.8 percent annual rate over the next two decades, with
worldwide air freight traffic tripling through 2027, according to Boeing's World Air Cargo
Forecast 2008/2009. According to industry forecasts, the cargo segments of the airline business
will more than triple by 2025.

During 2007-08, total air cargo traffic at the airports in India was1.71milliontonnes, registering a
growth rate of 10.32% over 2006-07.According to AAI, Indian air cargo market in terms of
volume is expected to grow at CAGR of 11.5% from 2007-08 to 2011-12. The size of air
transport sector in India during the year 2007-08 was estimated to be Rs. 62.46 billion compared
to Rs. 57.29 billion during the year 2006-07. India is on its way to become a cargo hub after
staking claim to be the global MRO hub.

Emergence of Air Cargo business in India

Tata Airlines, a division of Tata Sons Ltd. (now Tata Group) was founded by J. R. D. Tata in
1932 as Tata Sons. It was started as a mail service over the route Karachi to Bombay and on
south to Madras. On 15 October 1932, J. R. D. Tata himself flew a single-engine De Havilland
Puss Moth carrying air mail (postal mail of Imperial Airways) from Karachi's Drigh Road
Aerodrome to Bombay's Juhu Airstrip via Ahmedabad. The aircraft continued to Madras via
Bellary piloted by former Royal Air Force pilot Nevill Vintcent. Tata Airlines initially consisted
of one Puss Moth aircraft, one Leopard Moth, one palm-thatched shed, one whole time pilot
assisted by Tata and Vintcent, one part-time engineer and two apprentice-mechanics.

2| Air freight: Global & Indian Scenario

Initial service included weekly airmail service with a Puss Moth aircraft between Karachi and
Madras via Ahmedabad and Bombay, covering over 1,300 miles. In its very first year of
operation, Tata Airlines flew 160,000 miles, carrying 155 passengers and 10.71 ton of mail. In
the next few years, Tata Airlines continued to rely for its revenue on the mail contract with the
Government of India for carriage of surcharged mail, including a considerable quantity of
overseas mail brought to Karachi by Imperial Airways.

In March 1948, after the Independence of India, 49% of the airline was acquired by the
Government of India, with an option to purchase an additional 2%. In return, the airline was
granted status to operate international services from India as the designated flag carrier under the
name Air India International. In 1953 all airlines of India including Air India and Indian National
Airways were nationalized to form Indian Airlines Corporation.

Evolution of the Indian Air Cargo Industry

Traditionally, air cargo in India has been a much-neglected segment with most of the domestic
cargo moving primarily through rail and road. A highly regulated air transport sector with an
inefficient, state-run monopoly of Air India and Indian Airlines has been key impediments. This
coupled with serious infrastructure constraints and high taxation of the industry stifled growth in
the industry for four decades until 1992. But things began to change through the 1990s and
2000s. Gradual liberalization of the air transport sector created an influx of private air carriers in
the passenger air transport segment.

New business models like the low-cost carrier model evolved. Airports were privatized and new
green-field airports were developed with Public Private Participation (PPP). With this, the
country witnessed a revolution in air transportation at the turn of the century, though
the air cargo segment did not enjoy the limelight as much as some other segments.

Blue Dart, which is an end-to-end logistics service provider operating dedicated freighter
aircraft, has been performing exceedingly well, registering revenue and profit growth in excess
of 20 percent over the last 3-4 years. But despite strong growth in the sector, even today, the
share of air cargo in the Indian domestic logistics sector as compared to other modes is negligible
by global standards. Most of the air cargo is still transported as belly cargo on passenger aircraft
and therefore becomes merely an ancillary source of revenue for airlines and not the primary line

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of business. Of these, Jet Airways and Air India carry the most belly cargo with 37.7 percent and
28.3 percent market share respectively (in terms of traffic carried). Kingfisher Airlines has a
share of 8.7 percent. Blue Dart currently enjoys a monopoly in the air express delivery space. It
has seven freighter aircraft and has about 17 percent market share in terms of traffic carried.

The total airfreight traffic in 2007-08 was 1.77 million metric tons of which the domestic
airfreight was about 0.62 million tonnes and international airfreight the balance of 1.15 million
tonnes. For a country with a billion plus people and a trillion dollar economy, these penetration
levels are quite low.

Going forward these numbers are expected to rise significantly in the coming decade. In the near
term, over the next three to four years, the impact of the global recession is expected to
constrain air-cargo demand growth, since the recession has significantly impacted trade growth
with most of the developed economies registering negative growth.

Future of Indian Air Cargo Industry

Although foreign airlines are not allowed to Fry air cargo on domestic routes within India, recent
relaxations in Foreign Direct Investment (FDI) limits have allowed foreign airlines to acquire
equity stakes of up to 74 percent in Indian cargo airlines. This is likely to bring in the much-
needed foreign capital and global best practices to the air cargo industry, which in turn will drive
further growth.

High GDP growth and exponential growth in imports and exports are key drivers for growth in
the air cargo sector. Increasing globalization, integration of the world economy and evolution
of India as a major IT service provider resulted in a rapid growth of the Indian economy. This
has hiked the aggregate demand and is the single most important driver for air cargo services.

For international air cargo, the government has already enacted an Open-Sky Policy, which
essentially means that there is freedom of pricing and that there are no bilateral restrictions on
tonnage carried or number of operators allocated on international routes. As a result a large
number of international carriers currently fly air cargo in and out of India.

Due to the open-sky policy, the international airfreight market is a highly fragmented one with
intense competition from various international airlines. The market leaders are national airlines
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of India's biggest trading partners such as Singapore, Germany, the U.A.E and the U.K. The
dominant airline in terms of market share is Singapore Airlines with only 11.1 percent share of
traffic. Others such as Lufthansa, Emirates, Air India, and British Airways, all have market
shares between five and 10 percent.

The key to establishing a dynamic and well developed, private sector-led domestic air cargo
network in India lies in the implementation of a carefully drafted policy document aimed at
tackling various issues faced by the growing industry.

Firstly on the infrastructure front, it is necessary to establish multi-modal air cargo hubs in the
country that are required for operators to establish efficient hub-and-spoke distribution networks.
This will result in lower costs, greater economic viability of operations, and the ability to
compete effectively with cheaper alternative modes of transport such as rail and road.

Focus is required on the development of cargo complexes, warehousing and storage facilities and
improved aviation facilities for cargo handling. This may be done with private participation in
investment through effective PPP (Public Private Participation) models.

The MIHAN (Multi-Modal International Hub Airport) project at the Central Indian city of
Nagpur is a step in the right direction. Nagpur is strategically located in the center of the country
to set up effective hub-and-spoke distribution networks. Focus is also necessary in developing
cargo complexes and facilities in all the major airports, particularly the new green-field airports
that are coming up. That, alongside development and upgrading of smaller regional airports and
unused airstrips across the country, some of which are already under development by the
Airports Authority of India (AAI), will automatically make feeder network operations with
smaller freighter aircraft feasible.

This will enable air cargo operators to establish effective door-to-door air express delivery
networks. Such feeder networks are expected to be particularly important for the transport of
perishables and time-sensitive cargo and also in hilly terrains such as in India's Northeast region,
where rail and road networks are poor and extremely inefficient due to the nature of the terrain.

With the Indian economy slowing from 8-9 percent growth levels to 6-7 percent, air cargo is
expected to register a CAGR of 8.3 percent up to 2012-13, which is good given the

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circumstances. However, the demand should begin to pick up strongly in a post-global economic
recovery.

Regardless of the economic scenario, it is a fact that air cargo penetration levels in India are
much below the potential and are constrained by various infrastructural, economic and regulatory
issues that need to be addressed. On the regulatory front, the relaxation of FDI limits is a
welcome step, but this alone may not produce the desired results.

On the regulatory front, the Indian government can ease customs and regulatory procedures that
would allow easy movement of goods on international routes. It is important to ensure that
regional cargo feeder operations are economically viable. This may be done through specific
targeted incentives such as relaxation of taxes on fuel as well as lower landing and parking
charges for small freighters.

In the domestic air cargo segment, the fast-growing air express segment, where Blue Dart enjoys
a monopoly currently, is beginning to see some competition with new players like Avicore
Aviation, Quick-Jet and Flyington Freighters. Deccan Express Limited, an air cargo venture
floated by Capt. Gopinath, the architect of India's LCC revolution and founder of the
erstwhile Air Deccan, has already begun operations and has generated some buzz in industry
circles.

Major players in the Air Cargo Industry

The air transport industry is quite large. Korean Air, Lufthansa, Singapore Airlines, Cathay
Pacific, and China Airlines are the largest combination passenger-cargo carriers, measured by
tons of capacity. American Airlines and United Airlines provide substantial cargo service
without the use of dedicated freighters. Several, particularly European, airlines such as,
Lufthansa, Air France, and KLM, have particularly broad geographic coverage, offering service
to more than 50 countries each. British Air offers cargo service to over 100. However all of these
are not active in India.

The major players in India are NACIL (National Aviation Company of India Limited (merger of
Air India and Indian), Jet Airways, Deccan 360 Cargo, Kingfisher Airlines, Blue Dart, Spice Jet

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Cargo, Foreign players - FedEx, Malaysia Airlines (MAS) and Heavy-Lift Cargo
Airlines (Australian).

Market Share of Airlines in the Indian Domestic Air Freight Traffic Market

Jet Airways Blue Dart Indigo

Air India Kingfisher Others
9% 4%

38%
28%

17%

5%

Source: Air Cargo World; Sep2009, Vol. 99 Issue 9, p20-23

Competition from Indian Railways

Major competition for the air freight business in India comes from railways which has a vast
network. The huge network strengthens the position of railways as compared to air freight in
terms of its reach, however it is very slow in comparison to air transport. The railway freight
business is expected to grow at a decent rate in the coming years especially as the ministry is

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planning to come up with dedicated freight corridors in the country. The growth rate of rail
freight can be plotted as below.

India - Freight Carried, by Rail, 1999 - 2013 (bn tonne km)

If we try to compare the volume of goods transported by rail freight and air freight, we find that
railways play a dominating role in, mainly because of its capacity to carry heavy loads and vast
network. Hence it will not be justified to compare the two modes based on volume. Instead we
try to compare the two in terms of projected business growth rate. It is represented in the graph
below.

8| Air freight: Global & Indian Scenario

 Rail vs Air Freight

15.00
Growth Rate %
10.00

5.00
Rail Freight
0.00 Air Freight

Thus we can see that as per the forecasted growth rate, air freight is expected to grow at a faster
rate , hence there is a possibility of some of the rail freight business getting shifted to air freight
considering the advantage of speed in air freight. However the chances of this happening is very
low because of cost and weight considerations, however to support the growing Indian economy,
air freight is going to play a major role.

Air Cargo: Challenges Ahead

With the globalization of manufacturing and companies increasingly incorporating the

movement of their parts and products by air, projections for the air cargo industry are optimistic.
In fact, experts tracking the movement of airfreight globally, particularly Boeing and Airbus,
project roughly 6 percent growth per year through 2025.

Certain factors and challenges are weighing heavily on the air cargo industry that now has a
direct impact on capacity, yields, and rates. At the very top of the list are concerns about high
fuel costs and the fact that capacity is growing faster than tonnage--the new 777-300 passenger
aircraft, for example, offers a whopping 25 tonnes of space.

Carriers servicing China, once regarded an easy and lucrative market for outbound shipments,
are particularly vulnerable. The Asian market, especially Hong Kong, has suffered as a result of

9| Air freight: Global & Indian Scenario

overcapacity following a host of new market entrants, which has, in turn, seen prices drop and
yields decline.

Yields may be a major issue, but of bigger concern is the high cost of oil and its impact on the
airline industry as a whole. Simply put, every additional $1 per barrel of oil costs an airline
roughly $50 million. Another factor turning consigners to ocean freight is exchange rates
associated with the weak U.S. dollar. For many products, cost competition is steep and reducing
logistics costs is a major cost reduction strategy. Still, air cargo offers the perfect solution for
time sensitive or specialist consignments.

However, the jury is out as to the impact increased freighter business will have on cargo volumes
for belly hold. Ultimately, however, service quality will be the deciding factor of future
competition. The major challenges applicable to the Indian Air cargo industry are as listed
below.

• Lack of proper infrastructure

• Dedicated cargo airports

• International standard warehouses

• Better road networks

• Speedy paperwork through automation

• Trained, knowledgeable and qualified staff

• Major Indian airports running out of capacity

• High waiting time and congestion in airports

• High fuel cost

• Aviation security

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Conclusion

The Indian Air Cargo Industry has come a long way and there is still much to do. The high
growth rate of the Indian economy will need a major support from the air cargo industry.
Government has taken several steps in the right direction and it should provide support and
incentives to the players. Deccan 360 has made a fresh start in the industry by following a hub-
and-spoke model and taking advantage of the geographical location of Nagpur. Such services
would help the tier2 and tier3 cities to contribute to the development of the economy. One of the
major challenges that the industry is facing is due to high ATF rates as compared to other
countries. Ones the government takes some steps in this regard, the air cargo will become more
feasible transport option for industries. Also there is a great potential in the industry to
contribute in multimodal transport. However there are several challenges as highlighted above
which must be taken care to make the Indian air cargo industry at par with international
standards.

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References

1) http://www.airportsindia.org.in

2) www.iata.org

3) http://civilaviation.nic.in/

4) Narayanan, Arun (Sep2009). Air Cargo World, Vol. 99 Issue 9, p20-23

5) Karen E. Thuermer (2002), Air Cargo: Challenges Ahead, Highland Ranch.

6) http://www.stattimes.com/aci2008

7) http://www.indianairports.com/

8) http://www.cygnusindia.com

9) United Parcel Service of America, Inc. UPS

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