Group paper

Air Transport/Aviation Industry in Brazil and India

BRIC and the International Economy Spring term 2016

Hannes rml; Nahatai Chiangpradit; Jan Frieso Brodersen;

Emmanuel Matiya; Dominik Mslein

Table of Contents
1. Introduction......................................................................................................3

2. Analysis of Airline Industries...........................................................................4

2.1 Brazil........................................................................................................4
2.2 India..........................................................................................................7
3. Economic impact of the aviation sector with focus on Brazil and India........10
3.1 The catalytic impact of air transportation on trade.................................11
3.2 The catalytic impact on travel and tourism............................................13
3.3 The relation between air connectivity and productivity.........................15
3.4 Contribution to soft power of nations....................................................17
4. Conclusion......................................................................................................20
Table and Figures................................................................................................21
References..........................................................................................................28

1. Introduction
Air travel has become without doubt a prerequisite and main driver of globalization in the
20th and 21st century. The extensive importance of this sector became especially obvious when
it was severely disrupted across Europe as a consequence of the volcanic eruption in Iceland
in the year 2010 when more than 95.000 flights had to be cancelled in a six-day period (BCC;
2010). This event caused effects in European as well as worldwide economies due to the
interruptions in global supply chains, the disturbance of travelers plans and losses in the
airline industry itself. Estimations of the daily loss of airlines during this period exceed one
billion euros (Der Spiegel, 2011). Due to the geographic spread of the Eyjafjallajkull
eruption over central and northern Europe, developed economies where especially severely
affected so that there is a clear case to argue that air transport is a vital infrastructure in the
developed world. Extending this perspective by researching the importance of the airline
industry in developing countries is the objective of the authors of this student paper.
Among the developing countries, there has been a considerable focus on the four largest of
the emerging economies under the acronym BRIC, established in 2001 by the investment
banker Jim ONeill of Goldman Sachs (Puns and punditry, 2011). The four countries
Brazil, Russia, India and China are different in almost any aspect, but united in their potential
contribution to worldwide economic growth. The aircraft manufacturer Airbus Group SE
names the two megatrends of emerging economies and urbanization as the main drivers for
demand in its industry and expects the number of commercial passenger aircraft in the global
fleet to more than double in the next 20 years (Airbus Group, 2014). As comparing two of
these countries in regard to their airline industries promised to give good insights into the
topic and sufficient reliable data and resources were available, the authors decided to focus on
Brazil and India as representatives for the emerging markets in this essay. Merging the two
propositions that the airline industry is of great importance and that BRIC economies will
shape the global future to great extent, the research question was formulated as follows: How
does the Airline Industry in Brazil in India affect the respective economies?
In order to answer this research question, the authors qualitatively analyzed literature on the
topic and present its findings in this essay. It is structured as follows in two main parts: After
this introduction, the airline industries of Brazil and India are described in terms of their
history and current state of demand, competition and regulation. After the airline industries of
these countries have been introduced separately from each other, the second part analyzes
their impact on a selection of channels that influence the economy and gives insights. These
channels include the impact of air traffic on the tourism industry, the productivity, the
employment market and the so-called soft power of a country. Here, differences and
commonalities of India and Brazil are pointed out. In the end, a conclusion is given that sums
up the findings on the importance on the airline industries in Brazil and India.

2. Analysis of Airline Industries

2.1 Brazil
History and regulations
The Brazilian aviation industry has experienced significant changes over the past two
decades. The industry has boosted the Brazilian economy with high growth rates in domestic
and international flights [see figure 2.1.1]. From 1980 to 2012 route networks to Europe
increased from 14 to 43, whereas routes to US increased from 3 to 27. Brazil is viewed as a
developing economy has not reached its full potential taking into consideration the growing
middle class and consequently leaving a huge future potential in the industry (OAG, 2012).
In 1990s the Brazilian airline industry experienced deregulation, the monopolies were
broken up and new entrants joined the markets. The new entrants were primarily low cost
carriers (LCC), while the traditional full service carriers (FSC) were now suddenly involved
in a price war. Since the liberation of the aviation markets the industry has been experiencing
new entrants, mergers and acquisitions and failures. In 1990s the industry included four
major players including Varig Airlines, Vasp, Transbrasil and TAM (Brazilian Airlines, 2016).
In early 2000, Varig was suffering from the new reality, price competition, mainly because of
a new low-cost carrier GOL and tariff wars with VASP and Transbrasil. Hence, Varig went
through unsuccessful restructuring, which ended up splitting the entire company. This
enabled GOL to acquire a part of it. Hereafter, VASP and Transbrasil went out of business
and consequently only two major carriers remained in the aviation sector, that were TAM,
which became the Brazilian flagship full-service carrier and GOL, which focused on the lowcost model mainly on the domestic market (Barros et. al., 2016)
In 2003, the Brazilian aviation authorities, ANAC (The National Civil Aviation), started
implementing new measures in accordance to the directives of the new government. They
implemented some re-regulations to control excess capacity routes and over competition in
the markets, although these were only imposed if carriers were in a poor financial position.
Consequently, new aircraft imports were banned and controls of price competition were put
into practice once again. Market concentration, such as the code-share agreements increased
rapidly. The re-regulation allowed the regulator to concede gains in capacity in a case it did
not damage the competitors. Since the new re-regulation, the Brazilian airline market
capacity has been growing in average 10% [see figure 2.1.2] year-on-year base in the first
decade of 2000, while the Brazilian economy at the same time has been growing rapidly and
consequently enabling the working class into higher income levels, where flying has become
more popular for long-haul domestic transportation than busses (IATA, 2015).
The boom in aviation after 2003 attracted more entrants to the market. In 2008, David
Neeleman, the founder of JetBlue in the United States founded a low-cost carrier called Azul.
The airline has been growing rapidly and increasing its market share from GOL and TAM.
Today Azul controls 15% of the market together with TRIP, which merged with Azul. The
tightened competition led to further acquisitions. In 2011 GOL acquired Webjet to gain more
4

slots at Brazilian airports and at the same time more market share. Although, GOL shut down
Webjet at the end of 2012. At the same time in 2012, TAM was acquired by Chilean airline
called LAN and became part of the LATAM group. (Brazilian Airlines, 2016).
It can be argued, that the Brazilian aviation industry is still centralized in relation to the size
and population of the country, since three airlines (TAM, GOL and Azul) account for over
92% of the domestic passenger market. The ongoing decade, Avianca Brazil, the second fullservice airline has increased its market share holding now for 7% of the market and leaving
only 1% of the market for smaller regional carriers. (OAG, 2012).
Demand
The Brazilian aviation industry have practiced a significant capacity and passenger growth in
the last two decades, which has been driven by the regulation changes and the low cost
carriers in the region. Today, the Brazilian airline industry accounts for 5% of the total global
airline industry in terms of passengers kilometers travelled - with growing expectations. The
demand in Brazil is mainly focused in domestic flights with the share of 88.7% (2011) [see
figure 2.1.3], although the shares of international flights have been growing slowly but
steadily for the last 15 years. (OAG, 2016).
The importance of aviation for Brazil cannot be overstated, since the land area of the country
is about the size of USA and has 200 million people, it is a crucial link for the infrastructure,
which is poor in other ways of transportation. In addition, the country hosted the soccer
World Cup in 2014 and will turn its attention for the Olympics this year. Consequently, it
needs to be well prepared to facilitate international and domestic flights with respective
capacities (Bloomberg, 2015).
Still couple of years ago the expectations for future demand was highly optimistic, but
currently Brazil is experiencing unexpectedly harsh recession, with plummeting currency and
slowing GDP. Consequently, it has had an impact on the aviation industry [see figure 2.1.4]
with dropping domestic air travel demand (Associao Brasileira das Empresas Areas 2012).
The National Civil Aviation Agency (ANAC) announced in the end of 2015, that the loss of
four major airlines (Avianca, Azul, Gol and TAM) was R$3.7 billion in January-September
2015. Only Avianca had some positive figures - third quarter net profit was R$9.2 million
(Brazilian Airlines, 2016). Although, the current situation seems shocking for the economy,
the Brazilians see the future of aviation in a positive light the coming summer Olympic
games, future potential of growing labor force with more disposable income levels and
growing market for international flights will contribute to brighter future in aviation [see
figure 2.1.5]. As mentioned in the beginning, Brazil has a huge potential due to it still being a
developing country with expected growth of 109% of total passengers between 2012-2020
(Associao Brasileira das Empresas Areas 2012).
Competition
5

The competition have intensified after the deregulations and arrival of new entrants in 1990,
but after the re-regulations in 2003 the competition have centralized as the major airlines such
as TAM, Avianca, Azul and GOL accounts about 99% of the market share. The first two
being full service carriers and the latter two being low-cost carriers. The current regulations
aid the companies, which have excess capacity or companies who are in a poor financial
situation (only when competitors are not affected) as mentioned before. Consequently, it has
effects on longer stable growth in the industry but the same time it can lead to higher
centralization. The following figure presents the competitors and their respective seat
capacities in 2011 (Associao Brasileira das Empresas Areas 2012).
Competition with international carriers is wider, because the regulations does not involve
them. The international carriers consist of more than 20 competitors worldwide with market
shares a lot more equal by seat capacities than in the domestic competition. Consequently, the
international airline competition is more intense and decentralized than the domestic
competition, and it is projected to intensify even more in the future. Many foreign airlines
have showed their interest in the growing airline markets in Brazil. The new figure shows the
top 20 international carriers by seat capacity in 2011 (Associao Brasileira das Empresas
Areas 2012).

2.2 India
History
The Indian aviation industry began with the emergence of Tata airlines in the 1940s. This was
a result of a partnership between a Royal Air force pilot Mr. Vincent and Mr. JRD Tata who
was the first Indian to get an A-license. Tata airlines went on to become Air India in 1946. In
1953 the Indian government decided to nationalize all existing airlines through the Air
Corporation Act. The Air Corporation Act affected both international and domestic services.
All the nationalized assets where placed into the Indian Airline Corporation and Air India
International (India Aviation, 2016).
In 1991 private airlines where given the permission to operate non-scheduled services and
chartered flights under the Air taxi scheme. This was to encourage tourism in India. It was
during this period that private players such as Jet Airways and Air Sahara entered the market.
In 1994 the Air Corporation Act was repealed which allowed private carriers to operate
scheduled services (Minisitry of Civil Aviation, n.d.).
In 2003 came the emergence of Indias first low cost carrier, Air Deccan. Prices were as low
as INR 500 (+-10USD) which disrupted the Indian aviation industry as full service
competitors were charging INR3000. More airlines entered the market such as Go Airways,
Spice Jet, and King Fisher and Paramount airways. Not all of these airlines positioned
themselves as low cost carriers, some airlines such as Paramount positioned themselves as a
high-end business class airlines (Association of Private Airport operators, 2013).
In 2004 the Indian government established the 5/20 rule. The idea behind this legislation was
that only Indian carriers with a minimum of 5 years of continuous operations and a minimum
fleet size of 20 aircrafts were permitted to operate international routes. As a result in 2005 the
government of India only designated four Indian air carriers to operate international
destinations. These airlines were Jet Airways, Indian Airways, Air India and Air Sahara.
These airlines were permitted to operate to and from Malaysia, Thailand, Hong Kong, the
UK, Singapore and the US (India Aviation, 2016).
Since the 2000s the Indian aviation industry has skyrocketed and is now the 9 th largest
aviation market in the world with a size of US$16 billion. Indias aviation industry is
projected to become the third largest aviation market by 2020 (IBEF, 2016). Airlines are
expected to operate 800 aircrafts by 2020 which would be a 56% increase from current levels.
It is further projected by 2030 India would be the largest civil aviation industry in the world
(Make in India, 2016).

Demand
Indias civil aviation industry has the high prospects for growth. This is due to rapid
economic growth, a growing large middle class with higher disposable income with rising
aspirations. According to Mckinsey Global Institute disposable income is expected to triple in
the next decade (Mckinsey Global Institute, 2007). Demand for air transportation has further
been driven by the FDI in domestic airlines, the need for regional connectivity within India
and the emergence of low cost no frills carriers (IBEF, 2016).

Passenger traffic in 2015 increased to 81.1 million from the previous mark of 67.4 million
[see figure 2.2.1].This represented a percentage increase of 20.3% from 2014. Since the turn
of the new millennium Indias passenger traffic has steadily increased at a CAGR of 3.8%.
The domestic market is expected to reach 100 million passengers by 2017 according to the
Centre for Asia Pacific Aviation (IBEF, 2016).

Growth drivers
Emergence of low cost carriers such as Spice Jet
Economic reforms undertaken by government
Inbound and outbound tourism
Fast expansion of industries due to economic growth
Organized retail boom that would require the need for timely delivery contributing to
cargo industry growth. Indias consumer confidence index remains to be one of the
highest in the world.
Government Investment in airport infrastructure with emphasis on development
through PPP model
Liberal bilateral air service agreements

Competition
There are currently 85 airlines operating to more than 40 countries in India (Make in India,
2016). A majority of thee airlines operate scheduled international routes. However in the
domestic market there are 12 airlines operating the domestic market. Three of these
companies are public companies while the rest are private airlines. The Indian market consist
of a few players controlling a majority of the market. Five of the Indian airlines control over
50% of the market share of the domestic airline industry [see figure 2.2.2].
The Indian market consist of both full service as well as low cost carriers. Some full service
carriers converted part of their business to serve the low cost market. Airlines such as Jet
airways had low cost airlines JetKonnect. Public airlines such as Air India also have low cost
carriers Air India express (Sinha, 2014). As a result the airlines in India compete for market
8

share not only in the full service domestic market but they also compete in the low cost
segment as well. For those companies that meet the 5/20 year rule and operate international
routes, they compete with the 85 other international airlines (Make in India, 2016).

Regulation
5 year/20 aircraft rule
The 5/20 rule requires an airline to have five years of domestic flying experience and 20
aircraft in its fleet before it can fly to overseas destinations. This restrictive law has made it
very difficult for new and establishing airlines to tap into the international route market such
as Vistara airlines (India Aviation, 2016). Established airlines oppose the idea of relaxing the
rule as relaxing the rule would mean more competition and possible decrease in margins. The
government spoke of revising this 5/20 year rule but the division in the industry about this
rule has resulted in delays in finalizing the civil aviation policy which the government
planned to implement in 2016 (India Aviation, 2016).
MRO and excise duty
The Indian government in its 2016-2017 budget introduced proposals for the airline industry.
It proposed various changes to the Maintenance, Repair and Overhaul operations for
airplanes. Some of these changes had to do with customs and excise duty for tools and tool
kits used in maintenance works. It also relaxed its restrictions on importing parts for service
work as well as allowing foreign aircrafts who go to India for maintenance and repair to be
allowed to stay in India up to 6 months with the possibility of an extension. The aircraft
would also be allowed to carry passengers when it arrives in India for this maintenance and
repair period as well as when it leaves. As a result this policy will lead to an increase in not
only in domestic demand for aircraft assets as repair costs will become less expensive but
there will also be a potential increase in international air traffic into India (IBEF, 2016).
FDI legislation
In terms of policy on inward FDI any investments in the Indian aviation industry is governed
by the regulations of the Directorate General of Civil Aviation. Foreign airlines are allowed to
invest in Indian companies who operate both scheduled and unscheduled services. However
they are limited to an investment of up to 49% of the paid up capital (IBEF, 2016).
Open sky policy
India has proposed the idea of an open sky policy. Under this new proposal India will enter
into reciprocal agreements with its South Asian neighbors as well as countries beyond 5,000
km from India. This policy was proposed for all unlimited flights to and from Europe
(Business today, 2016).

3. Economic impact of the aviation sector with focus on Brazil and India
The air transportation industry effects economic growth via direct, indirect and induced
influences. There is a direct impact on the economy arising within the industry due to its own
employment and activity. The air traffic industry effects economic growth indirectly through
its supply chain, as it determines the employment and activity of its suppliers, namely fuel
suppliers and construction companies that build airport facilities. The air transportation
industry also derives an induced impact as the direct and indirect employees spend their
money and supports jobs in other industries such as retail (Oxford Economics, 2008, p. 117).
The air transportation industry causes further economic and social catalytic impacts which
enhance the functioning of other industries and shape society and living standards in general
over the long run. These benefits involve, inter alia, trade and tourism. Moreover, airlines
may inhere a strong brand, which can, as a soft power, affect the perception of the airlines
country of origin.
The economic footprint that the aviation sector, which consists of airlines, airport and ground
services and aerospace, leaves on Brazilian and Indian economy can be illustrated by its
contribution to GDP and employment. In Brazil, direct effects count for BRL 13.3 billion and
138,000 jobs. Indirect effects contributes similar to the GDP accounting for BRL 11.5 billion
but are responsible for 334,000 jobs. The induced effects count in similar relation, BRL 7.3
billion GDP and 213,000 jobs. Also the catalytic impact on the tourism sector can be
estimated. It quotes for almost BRL 10 million respectively 254,000 jobs. However,
qualifying these numbers, the aviation sector contributes only 1% to Brazilians Total GDP
and 1.3% to the entire employment and this includes the catalytic benefits on the tourism
sector (Oxford Economics [b], 2011).
The picture of the economic footprint of aviation looks similar in India. In total 8,8 million
jobs were created by the aviation sector, with 7.1 million jobs accounting for catalytic effects
on tourism and 276,000 accounting for direct, 841,000 accounting for indirect and 605,000
for induced effect. The total number equals 1.8 % of the Indian employment. With regard to
GDP, aviation contributes in sum INR 912 billion, directly INR 147 billion, indirectly INR
107 billion, induced INR 77 billion and catalytic INR 582 billion. That is equal to 1.5% of the
total Indian GDP (Oxford Economics [a] 2011).
Comparing the effect of aviation on the two countries, it can be said that: First, the total
extent of aviation is relatively small in both countries with India being slightly higher in
Brazil. Second, whereas the four channels through which aviation affects are more or less
equal, the catalytic effect on tourism in India overweighs the other channels by far.
It seems that catalytic impacts are crucial when it comes the assessment of the impact
aviation has on economy. But the wider, catalytic effects are less easily quantifiable, they
overlap, complement and amplify each other (Oxford Economics, 2008, p. 117). This is
reason enough for us, to take a closer look on how these catalytic works, how the benefits
look alike and on what they depend.
3.1 The catalytic impact of air transportation on trade
10

Trade plays, at least in the long run, an important role for economic growth and welfare. The
fact that after the Second World War the economic growth of many countries went hand in
hand with a liberal trade policy, whereas protectionism, that places tariffs and other barriers
in the way of trade, blocked economic potential, shows that.
Moreover, the worlds economies dependency on international trade is expected to increase
over the next decade. World trade is expected to nearly double, rising at more than twice the
rate of global GDP growth, with China, India and other emerging markets leading the way
(ATAG, 2014, pp. 12 - 13).
To describe which role air transportation plays in the economic enrichment of trade, it is
helpful to take a look on the key characteristics of aviation. Air transportations guarantees
shorter, more predictable journey times over longer routes than other forms of transportation.
How crucial time is when it comes to transportation and trade illustrates the estimation that
each day a good is in transit is worth 0.6 up to 2 percent of the goods value and that long
transit delays significantly lower the probability that a country will successfully export a
good (Hummels & Schaur, 2013). Another main advantage of air transport is its high
independency on geographical conditions and therefore isolated areas can be reached in
contrast to transportation via road, rail or ship. Surely, these advantages come with high cost.
However, it is notable to mention, that the competitiveness of air transportation has increased.
Since the 1990s the relative cost of air transport has been falling worldwide by around 2.5% a
year (Hummels, 2007, p.134). Further, the use of air cargo has risen 2.6 times faster than
ocean cargo (Hummels & Schaur, 2013, p. 2958).
The catalytic stimulation of trade and economic growth, which arise from the features of
aviation can be broken up as follows (Oxford Economic, 2008, p. 20 21):
1. Air transportation enables suppliers to open new markets when other forms of
transportation are not a viable option due to geographical and time restrictions
respectively high transportation costs. This is true for perishable goods as flowers for
example. Moreover, for high-value, low-weight and time sensitive goods aviation is the
more cost-effective form of transport. Among these goods are machinery parts,
electronics, medical equipment, drugs and blood samples and precious stones. The
importance of air transportation with regard to high-value goods can be seen from the fact
that the 35 % of total value of internationally transported goods are transported by air
whereas the volume share accounting for 0.5% is much lower (Oxford Economics [a],
2011; ATAG, 2014, S. 4).
2. Air transportation helps to access wider markets which allows firms to produce at a
higher scale. The arising economies of scale lower the unit cost of a good.
3. Due to air transport countries can easier play on their comparative advantages regarding
the production of time sensitive goods with low labor cost or the extraction of valuable
natural resources.
11

4. The fast speed and reliability of air transportation allows companies to source the
component parts for their production from around the world and enable streamlined
production, which leads to an increased efficiency and therefore lower costs.
5. With air cargo both the production time and distribution time can be reduced facilitating
the supply to match the demand more effective. In addition to the general benefits of
shorter delivery times, air transportation enables firms to deliver custom-made goods and
to react faster on a changing customer demand.
6. Finally, due to aviation business people can meet each other easier, business ties between
customers and supplier are promoted.
To put it into a nutshell, by the increased access to international markets and the promotion of
the production across borders, air transportation facilitates the world trade und helps
countries to participate in the global economy.
It seems reasonable to conclude that the catalyzing effect that aviation has on world trade and
the participation of countries in the global economy also applies to a lesser extent, namely the
domestic markets of the developing countries India and Brazil. The conditions and relative
advantages of air transportation are comparable. Both India and Brazil are countries with
large size, a lack of infrastructure and geographical barriers and the domestic economy can
profit from the speed and reliability of air transportation. Aviation allows for example a better
linkage of the landlocked city Manaus with the rest of Brazil. Also the high importance of
aviation on the transportation of time sensitive goods can be shown within the Brazilian
market with an example in health industry. Aviation counts for the transport of about 7000
time sensitive items as organs, tissues, special containers or medical teams, which are carried
on over 4,000 trips in the country for transplant purposes during 2012, which equals 99% of
all of such items (ATAG, 2014, p.41).
One example shows how the catalytic effect of aviation with regard to cross-border actions
can look alike. During the 1980s the Viracopus airport in Campinas mainly turned into a
cargo airport in order to serve the surrounded electronic industry. By plane 90 % of the
industrys input were carried. Later, during the 1990s, Viracopus participated in a successful
pilot program for streamline customs clearances and was extended by another terminal in
order to become one the largest cargo hubs not only in Brazil and but also in Latin America
(World Bank, 2009, p. 59). In 2015 the airports cargo volume counted for 177.285 tons,
99.87 % of it were international traffic (Viracopos Aeroportos Brazil, 2016).
The rise of the manufacturing electronic industry in Brazil is linked to the existence of
Viracopus, since the industry heavily relied on important high valuable materials and
components which had to be imported. However, the production could not exploit its full
potential since custom procedures interfered the supply chain. But things get better when in
1998 accredited firms were allowed to declare goods prior to arrival. Also the number of
inspections was reduced. In the same year, UPS introduced a dedicated five-day-a-week
express delivery service to and from the Mercosur region via Viracopos Airport in partnership
with Challenge Air Cargo. In 2003, FedEx expanded its bonded sorting facilities in the airport
12

to 2,000 sq. m. In 2007 $67 million USD were invested to build a new express cargo terminal
(World Bank, 2009, p. 59).
The positive effect which aviation has on Brazils and Indias access to wider markets and
their participation in global economy can be seen via their air freight reaches: 45 % of the
total tonnage carried in or from by Brazil by is linked to trade with North America, followed
by 39 % to Europe, 10 % to the Caribbean and Central/South America, 4 % to Pacific Asia
and the rest of 2 % is linked to trade with middle eastern countries and Africa (Oxford
Economics [b], 2011, p. 22). In India Middle East and Africa account for 34 % of the air
trade, 32 % with the Asian Pacific region, 31 % with Europe and only 3 % with North
America (Oxford Economics [b], 2011, p. 21).
3.2 The catalytic impact on travel and tourism
Over the past decades, there has been an expansion and diversification of tourism becoming
one of the fastest growing sector of global economy emerging of new destinations.
According to World travel and tourism council, in 2015, travel and tourism contributes to 7.2
trillion USD to world GDP (rising in total of 9.8% of world GDP) and supports 284 million
people in employment (WTTC, 2016). The exponential growth is due to the advances in air
transport as well as to growing wealth in industrialized and emerging countries plus the
influence of globalization (World Tourism Organization, 2012). More than 52% of
international tourists travel by air (ATAG, 2014). Air transport directly contributes to 14.6
million jobs globally in tourism which are supported by the spending of foreign visitors
arriving by air, for example, hotels, restaurants, visitor attractions, local transport and car
rental, and so on. Indirect jobs provided from aviation made up 13.4 million job globally.
These direct and indirect tourism jobs supported by air transport generate 6.9 million jobs
from its induced impact through employees spending their earnings on other goods and
services. Altogether, air transport supports 35 million jobs within tourism, contributing
around $807 billion a year to world GDP (ATAG, 2014).
In developing countries, tourism plays an important role in economic development strategies
providing jobs and helps in national economic growth. This chapter we will see how
aviation can affect Brazils and Indias economy through tourism, the challenges will be
discussed.
Figure 3.2.1 shows the total contribution of tourism to Indias GDP was INR8, 309.4bn (6.3%
of GDP) in 2015, and is forecast to rise by 7.3% in 2016, and to rise by 7.5% pa to
INR18,362.2bn (7.2% of GDP) in 2026 (WTTC [b], 2016). For Brazil, the tourism
contributes to GDP was BRL514.3bn (9.0% of GDP), and is forecast to fall by 1.4% in 2016,
and to rise by 3.0% pa to BRL683.2bn (10.0% of GDP) in 2026 (WTTC [a], 2016). Both
business and leisure tourists highly contributes to both Indias and Brazils economy.
According to IMF statistics, foreign visitors spending only a little below BRL11.3 billion per
year in the Brazilian economy and over INR 548 billion in the Indian economy each year.
69.7% of visitors arrive by air which probably spend around BRL7.9 billion in Brazil
whereas 89% of visitors arrive India by air and spend around INR 488 billion [see figure
3.2.2] (Oxford Economics [a], 2011; Oxford economics [b], 2011).
13

Brazil has population over 200 million and large country territory of more than 8.3 million
sq.km, air travel is, therefore, very necessary (Worldometer, 2016). Due to its continental
dimensions, roads are not a suitable mode for transportation, especially for bringing tourists
to main attraction in five major cities Sao Paulo, Rio de Janeiro, Brasilia, Belo Horizonte,
and Salvador. However, Brazil has poor geographic distribution of passenger air
transportation. Figure 3.2.3 shows that air travel in Brazil is highly concentrated in the
Southeast, particularly over Sao Paulo, Rio and Brasilia (Graham, Papatheodorou, & Forsyth,
2010). Key demands of traveling for tourism in Brazil are rich history and culture, as well as
pleasant climate. Brazil ranks 27th in the world by outbound tourism expenditure, according
to World Tourism Organization and is likely to grow due to the increase in middle class and
good connection to the rest of the world. There are more and more passengers in both
domestic and international every year accounting to 180% growth from 2002 to 2012 and it is
the new middle class that travel spending has increased the most over the past ten years [see
figure 3.3.4].
Similar to Brazil, Indias aviation has been growing strong due to its geography where tourist
and pilgrim centers are located far apart. Since the roads and rail infrastructure in India are
underdeveloped, the air transport to India is a primary used for passenger transportation, thus
plays an important role in Indias tourism. UNWTO ranked India 23rd in the world in 2012,
in terms of international tourism expenditure (European travel commission, 2014). One of the
factors lead to rapidly increase in tourism in India is rising air capacity together with better
middle-class income in the past years.
Overall aviation positively affects Brazils and Indias economy through the improvement of
tourism where it has a little more contribution for Indias tourism. For both countries aviation
could do much better to catalyze the nations economic growth. Bottleneck problems that
limit aviation efficiency to fully contribute to maximize tourism in Brazil are airport
overloaded and high operational cost from taxes and fuel prices. 8 out of 12 major airports in
Brazil are already over its declared capacity leading to inefficiency airport operation. Fuel
prices account for 40% of the costs of an airline together with high airport taxes. These
factors lead to expensive air tickets for travelers. Especially for domestic flight, the ticket
prices are more likely to be affected by ICMS rate by state government causing domestic to
be more expensive than international flights.
On the other hand, the bottleneck that severely affects Indias aviation seems to be its poor
infrastructure and the safety. In order to handle the growth in aviation good airport
infrastructure is important to keep up with the increase in capacity. Airports in Delhi,
Mumbai, Chennai, Kolkatta and Bangalore are not adequate. Among them, Mumbai is the
worst with poor service levels and insufficient capacity (IATA, 2005). Air traffic control
system seems to be the common problem causing inconvenience to travelers and incurring
costs to airlines. Safety, one of the most important issue for Indians airline, also poses a
threat of losing large number of passengers. Air India has been rated the worlds least safe
airline (Manju, 2013). These factors limit number of flights and discourage tourists to fly
14

with Indias airline as well as face extra surveillance for existing one, thus constraint
economic growth for Indias tourism. In order for both countries to overcome the bottleneck
and increase tourism through aviation, large improvement is needed mainly on their airport
development, cost reduction (for Brazil), and on increase in safety and infrastructure (for
India).
Overall, opening up air markets (allowing airlines to start services without having to go
through lengthy government-to-government negotiations for every new route or airline) has
proven to be a real driver of travel, tourism and the economic benefits that can bring. States
should ensure that they regularly review the capacity of their airport and air traffic
infrastructure versus projected demand. This will ensure that aviation can continue to support
tourism development and deliver wider economic benefits. (ATAG, 2014)
3.3 The relation between air connectivity and productivity
Air transportation increase global connectivity which leads to strengthen long-term economic
performance from enhancing the overall levels of productivity in industries affected by
aviations benefits spillover. Productivity of the firms outside aviation industry comes from
increase accessibility of domestic firms to international markets and from increase of foreign
competition of the firms core business in its domestic market through the freer movement of
investment capital and workers between countries (ATAG, 2014).
Air travel opens up domestic market to foreign investors, increasing competition in home
market. Air transport makes it easier to import goods and transfer capital as well as crossborder mergers and acquisitions. Foreign competition increases the rivalry in domestic
market and forcing the domestic firms to become more competitive to survive. Because
foreign-based firms have specific unfamiliar capabilities differ from the domestic firms have,
it creates more dynamic environment to domestic market. Foreign firms also bring new
technological development to domestic market. All together, these factors create pressure for
domestic firm to increase its efficiency and improve its management strategy by adopting
best international practice in its production and innovation in order to remain competitive.
The domestic firms that survived and able to develop its competitiveness to meet the foreign
rivalry becoming more specialized in the area where they could gain a comparative
advantage. The weaker firms got pushed out from the market. As a result, overall domestic
productivity increases (Wiersema & Bowen, 2008). Furthermore, higher domestic
competition also reduces the mark-up over cost that firms charge their customers create
benefits to domestic customers as well as prevents monopoly pricing. Convenience of
aviation creates favorable environment for foreign firms to operate in. The more connectivity
(good accessible locations, good airport links and good air transport links), the more likely
for foreign to invest. According to Aviation beyond borders report,
In a survey of 625 businesses in five countries, respondents considered the
absence of good air transport links to be one of the major determining factors in
not making an investment. On average, 18% of firms reported that the lack of
good air transport links had affected their past investment decisions. Of the
investments that were affected, 59% were made in other locations with better air
15

services, 18% went ahead anyway, but with significantly higher costs, while in
23% of cases no investment was made. (ATAG, 2014)
The domestic firms that can successfully compete in domestic markets that have high
intensity of foreign competition are more likely to have possibilities of be able to compete
against foreign rivalries outside their home market. Therefore, it encourages the firms to
internationally increase its level of diversification. Aviation helps the firms to exploit
resources in far away market, transfer human capital, shipment of components and technical
know-how between locations when they want to expand the activities abroad.
Improve connectivity allows a country to have greater access to foreign markets (Wiersema
& Bowen, 2008). Domestic firm can globalize by growing linkage to national markets
through consumers, production activities, and relevant markets extension. With globalization,
the firm can compete in world wide basis across its national boundary through export and
direct foreign investment (FDI), increases its productivity which in turn contribute to increase
in the nations GDP [see figure 3.3.1].
The research by Andersen in business aviation analysis guide have also found that aviation
help create value to shareholder from gaining face-to-face communication. The report states
that among all the communication methods, face-to-face communication is the best method
that can gather or deliver most in amount and quality of information, making being there
imperative.
Business aircraft (like computers and telephones) become value enablers, tools
that enhance an organizations ability to transfer knowledge quickly and easily.
(Andersen, 2001)
For those developing countries, in this case, Brazil and India, the connectivity is considered
lower than developed ones where Brazils connectivity ranked slightly better than Indias.
This positively affects the ease of doing business allowing more foreign investment. Brazil
also ranked higher than India in term of ease of doing business according to World Bank
Group: Brazil ranked 116th whereas India ranked 130th out of 189 countries based on sorting
of aggregate distance to frontier scores (The World Bank, 2016). Therefore, we can assume
that by increasing the nations connectivity, Brazil and India would likely to be able to
improve its environment for foreign investment to improve overall productivity. The studies
suggest that a 10% increase in connectivity (relative to GDP) will raise the level of
productivity in the economy by a little under 0.5% in the long run. The data shows that in
India, in 2010 there were 357 routes connecting major Indian airports to urban
agglomerations around the world. On average there were 4 flights per day along these routes.
A total of 66 of these routes were connecting India to cities of more than 10 million
inhabitants, with an average of 7 flights per day available to passengers. There are more than
59 flights per day from Delhi to Bombay, providing high speed access for business and
leisure purposes throughout the day. Comparing to Brazils connectivity with 363 routes with
the average of 5 flights per day. 10% improvement in connectivity (relative to GDP) would
16

see would see a BRL2.0 billion and INR 39.3 billion per annum increase in long-run GDP for
Brazil and India respectively (Oxford Economics [a], 2010; Oxford Economics [b], 2010).
Countries such India and Brazil are located in suitable geographic location where it can
exploit an advantage from being the center of connection building well-connected networks
and increase its connectivity through capturing inter- and intra- regional flows. Another way
to enhance connectivity is through development of airport infrastructure. The improvement of
transport infrastructure together with extensive networks can decrease travel costs of
passengers and goods (Morphet & Bottini, n.d.). For instance, lower airfare, seamless
connection, increase frequency of service, shorter travel time, improvement of reliability and
quality of travel experience and so on, increasing investment-friendly environment as well as
encourage domestic firms to invest internationally. Both India and Brazil are facing the
challenging path ahead, their inadequacies of airport infrastructure prevent them from being
able to fully utilize aviation to capture their growth. To boosting required capacity needed in
infrastructure development needs considerable capital expenditure. Government will need to
weight costs and benefits for the investment to be able to sustain the nations economic
growth through aviation.
3.4 Contribution to soft power of nations
As the opposite of coercion, soft power is a concept in political science that describes the
ability to influence others through appeal and attraction instead of money and force. The idea
is that governments today can build power through less transparent channels as for example
values and culture. It was introduced by Harvard political scientist Joseph Nye in 1990.
Today, it is well established and even used by Chinas Head of State Xi Jinping in a call to
build Chinas soft power (Foreign Affairs, 2015). According to the ATAG, airlines contribute
significantly to a countrys soft power (ATAG, 2014). Their line of argumentation is that a
characteristic of countries with large global influence is that they are well connected with the
world through air transport. This argument is built on the observation that the flight
connectedness index (FCI) of a country correlates with the soft power index (SPI) as
calculated by the Institute for Government. The four countries with the highest ratings in both
indices (Germany, France, UK and USA) are the equal in both rankings and have only
varying positions among the top four. While it would be wrong to directly derive a causal
relationship from this observation, it still demonstrates a relationship between air traffic and
soft power to some extent. This relationship is also explained by the global exposure airlines
can give a country to foreign markets and the image of the home country that they broadcast
to the airlines destinations.
The most prominent examples from successful airlines that are closely related to a countrys
progress are not located in the BRIC economies so far, but in European and Asian countries.
Turkish Airlines is at the same time one of the fastest growing carries that has already grown
to a global player in the industry while emphasizing five-star service to its customers as
awarded by the consultancy Skytrax (bne IntelliNews, 2015). This development is considered
a strategic move in the foreign policy of president Erdoan and is expected to further boost
Turkeys presence in the world. Another example of a country where the national carrier is
part of an effort to build soft power is Qatar with its flag carrier Qatar Airways (Brannagan,
17

2014). Similar observations can be made in the United Arab Emirates with carriers Etihad
and Emirates and in Singapore with its highly regarded Singapore Airlines. These airlines
have in common that they are at least partially owned by the respected governments and
nowadays worldwide seen as national icons.
Turning to the countries under investigation in this paper, the first thing to note is that Brazil
has no airline in which the government holds a stake. While this is not necessarily a
precondition for an airline to enhance the countrys soft power, it makes it impossible for the
government to directly influence the airline to support the national goals and ambitions. In
addition to that, there is currently no airline in Brazil that is widely regarded as the flag
carrier of the country. TAM as the largest carrier has only a limited public image as the flag
carrier because it does not have any visible sign of Brazil in its corporate identity. Azul as one
of the challengers in the market painted an aircraft fully with the Brazilian flag but lacks the
international expansion needed in order to contribute significantly to the countrys soft power.
Airlines in Brazil are also not well known for exceptional customer service such as Turkish
Airlines or Qatar Airways. TAM and Gol only score a mediocre three out of five possible
stars in the Skytrax rating as of this year (Skytrax, 2016). This leads to the conclusion that
Brazils airlines are not very well regarded internationally and neither influenced by the
government to align their strategy with their interests. Soft power of Brazil is therefore not
influenced significantly by the airline industry in its current state in Brazil.
India, in contrast to Brazil, has a fully government-owned national Airline, Air India. As Air
India only was awarded three stars by Skytrax (Skytrax, 2016), it is not equally regarded by
passengers as the positive examples of Turkish Airlines and Qatar Airways. More often, Air
India is getting attention because of problems and disputes. In recent years, Air India has
been in financial distress and suffers from problems resulting from a merger that highly
disrupt operations (BBC; 2012). Problems at the airline even left new Boeing 787 Dreamliner
aircraft grounded because Air India failed to pay market prices for spare parts (Bloomberg,
2015). It is no surprise that an airline with such unreliable operations harms the national
image more than it can help it. Due to the fact that Air India is government-owned, India can
potentially influence the airline to help to build a stronger soft power for the country. Press
articles suggest however that the government tries to not interfere with the operations of the
airline (IBNLive, 2016). These points demonstrate that in India the airline industry is not yet
contributing to the soft power in any significant way.
Both the cases of India and Brazil demonstrate that emerging economies struggle to run
airlines as successful national symbols that enhance the countries image in the world and
strengthen its position in worldwide competition. While Turkish Airlines is a notable
example, the other representatives of airlines used to build soft power mainly from developed
economies who can afford to build and sustain large airlines of international outreach and
regard. In the future, it remains unclear whether India will be able to transform the struggling
national carrier into an airline that is able to compete with Middle Eastern megacarriers. In
Brazil, it seems unlikely that the government will interfere and help to create an airline of
national identity and international importance. Interestingly, the recent cross-border merger of
18

TAM with LAN into LATAM group demonstrates that in South American emerging
economies, the soft power factor is not exploited.

19

4. Conclusion
In this essay, the objective of the student team was to answer the research question asking for
the economic importance of the airline industry in the emerging markets of India and Brazil.
First, the airline industries of both countries were presented individually. In Brazil, key
characteristics of the industry are that it is today heavily centralized on four main players,
was experiencing rapid growth due to rising demand in past years but its players recently
struggle as a result of the negative macroeconomic development. Still, passenger numbers in
Brazil have a very large potential to grow in the next decades if the economic environment
improves. In contrast to the Brazilian industry, the Indian aviation industry is far more diverse
with a higher number of private and public airlines serving the domestic and international
markets. Indian airlines did already experience very significant growth in past years and are
benefiting from a very positive outlook for demand in the country. Both countries have in
common that their airlines are challenged by a large number of foreign competitors on
international routes. In terms of regulation, both countries show a trend of liberalization with
for example the planning or introduction of open-sky-policies.
For both countries, the aviation industry is a key enabler for economic development. The
mechanism with which airlines contribute to growth and prosperity is divided in four
channels. Firstly, this paper shows that the airline industry is vital for the tourism industries in
both countries, with India having a slightly bigger reliance on air traffic for foreign travelers
than Brazil. In order to fully exploit the potential of tourism in both countries, air traffic has
to be further developed through better infrastructure, lower prices especially in Brazil and a
higher level of safety especially of Indian carriers. The second channel of impact the airline
industry has on the economy is through being a productivity enabler by fostering connectivity
in a global world. Our analysis showed that Brazil is currently slightly better connected by air
traffic globally than India. For further growth and development, both countries have to
increase their connectivity mainly through investing in airport infrastructure and opening new
routes. Related to this is the third channel of influence: the airline industry is directly
influencing trade of India and Brazil. Without well-managed access to freight and passenger
transport options, industries such as the electronics manufacturing industry in Brazil could
not exist as vital components could not be efficiently imported As a fourth point, air traffic is
potentially able to contribute to a countrys soft power through broadcasting its image to the
world and demonstrating strength. As of today, this can not be confirmed for airlines in India
and Brazil as they lack the level of service and reliability to be regarded as national icons.
With Air India being government-owned, it remains to be seen whether it will in the future
have an important impact on Indias soft power.
The observation described in the introduction that the airline industry is an absolutely
essential pillar in world trade and development proved to be true not only in developed
economies, but also for emerging markets. As the analysis of air traffic in India and Brazil
showed, a strong and well-developed airline industry is not only a sign of, but also an enabler
for growth and prosperity in emerging markets.

20

Table and Figures

Figure 2.1.1: International flights in Brazil 1980 and 2012.

Figure 2.1.2: Departure flights percentage change in Brazil 2001-2011

Figure 2.1.3: Share of destinations in Brazilian aviation industry 2011

21

Figure 2.1.4: Domestic air travel demand in Brazil 2008-2015

Figure 2.1.5: Potential number of international and domestic passengers in Brazil

from 2012 to 2020

22

Figure 2.1.6: Top 10 domestic carriers in Brazil by seat capacity 2011

Figure 2.1.7: Top 20 international carriers in Brazil by seat capacity 2011

23

Figure 2.2.1: Passenger Airline Traffic in India

Brazil

Figure 2.2.2: Domestic market share of India

India

24
Figure 3.2.1: Total contribution of travel and tourism to GDP of Brazil and India

Figure 3.2.2: Foreign visitors arrival mode of transport in 2009 in Brazil (left) and India (right)
Source: Oxford Economics, UNWTO

Figure 3.2.3: Passenger air transport distribution in Brazil (IBGE mesoregion, 2012)

25

Figure 3.2.4: Increase in Brazilian spending from 2002 to 2012

Figure 3.3.1: Foreign direct investment and connectivity of Brazil and India

26

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