Civil Aviation - Fact Sheet

Overview
India has a civil aviation network comprising 449 airports/airstrips. There has been a dramatic rise in the levels of passenger and cargo traffic. From just 5.1 million passengers in 1970, domestic and international passenger traffic has grown to nearly 44 million passengers in 2003-04. During the last ten years the growth in passenger traffic has been a spectacular 125 per cent. By 2010, the forecast is that air traffic will increase to around 90 million. Domestic and international passenger traffic in India is projected to grow annually at 12.5 per cent and 7 per cent over the next decade. Similarly, air cargo exports from India are expected to rise from the present 0.8 million tonnes to 2.4 million tonnes while domestic cargo will rise from 300,000 tonnes to over 1 million tonnes by 2010. This growth potential, coupled with the government's decision to allow private sector participation in the running of five key airports as also in airport modernisation, ground services, aircraft manufacture, makes India a very attractive market for airport and avionics equipment manufacturers and service providers. The Government of India policy to liberalise the civil aviation market also presents foreign firms with significant export and investment opportunities.

The aviation industry in India has overcome various setbacks during the last few years following the global recession since 2000-01, terrorist attacks in the USA on, the Iraq war and the SARS scare. During 2003-04 Indian airports handled 48 million passengers - 16 million international and 32 million domestic - compared to 43 million passengers in 2002-03 (14 million, international and 29 million. domestic). Indian airports handled 1.06 million tonnes of cargo (693,000 tonnes, international and 3.75,000, domestic) in 2003-04 compared to 979,000 tonnes (646,000 tonnes of international and 333,000 tonnes of domestic). During 2002-03 the overall passenger traffic increased by 17.25 per cent. The cargo traffic was also up by 22 per cent. The traffic and cargo growth between 2002-03 and 2006-07 is forecast between 5-7.5 per cent per annum for domestic and international traffic.

Table: Passenger and Cargo Traffic
Year	No. of Passengers - International and Domestic	Freight Traffic
1970	5.1 million	81,000 tonnes
1998-99	27 million	699,000 tonnes
2001-02	40 million	800,000 tonnes
2002-03	43 million	979,000 tonnes
2003-04	48 million	1,06,8000 tonnes

Source: media reports

Upgrading the Infrastructure
The government of India has recognised the need to improve the aviation infrastructure in the country. Airports account for 40 per cent of India's trade by value and 95 per cent of international travel to and from India takes place through this mode. According to estimates, the present infrastructure can support a 20 per cent growth in passenger traffic and 10 per cent growth in cargo traffic. The ministry of civil aviation estimates that there is a need for an investment of Rs 260 - Rs 360 billion .

During the last ten years growth in passenger traffic has been a spectacular 125 per cent. By 2010, the forecast is that air traffic will increase to 90 million.

The two major airports at Mumbai and Delhi are facing significant capacity constraints and will require a massive infusion of capital investment over the next five years. The restructuring of the first phase of Delhi airport is expected to be completed by 2009 at a cost of Rs 1.9 billion. Expansion and upgradation of the current facility at Mumbai is already under way. Work has started on a new international airport at Bangalore. Apart from strengthening of the Hyderabad runway at a cost of Rs 700 million, a new international airport is also being planned at a cost of Rs 13 billion. The government has also decided to modernise 25 airports in non-metro cities. Improvement of another 55 airports is also on the anvil. The selection of airports will be done based on their commercial and traffic growth potential. The Airports Authority of India (AAI) is in the process of appointing Indian Financial consultants (IFC) and Global Technical Advisors (GTA) who will assist AAI in conducting techno-economic feasibility studies and evolve an appropriate model based on viability of the project. Work on the upgradation and modernisation of Srinagar airport has already started.

Currently, AAI manages 126 airports in the country. Nearly 40 airports are non-operational. According to a CII paper, AAI generates barely 7 per cent of its total revenue from non-aeronautical services. It has suggested that upgradation of the airports and provision of facilities such as duty-free shopping and recreational activities would lead to growth in tourism, business travel and exports. The government has decided to encourage private sector investment in such activities, including shopping complexes, golf courses, entertainment parks, aero-sports, etc near airports to promote tourism.

AAI has established international cargo facilities at four domestic airports: Nagpur, Guwahati, Lucknow and Coimbatore. The government-run domestic carrier, Indian Airlines' cargo revenue during April-September 2004 has shown an increase of over 18 per cent, as compared to the same period in the previous year and Indian Airlines has introduced a new facility called Shipment Notification System to promote export cargo through which the shipper will be informed about the status of his shipment ex-inland cargo stations, via e-mail and SMS. Air India will be operating dedicated freighters on key cargo routes i.e. India/Europe/USA, India/Japan, India/Singapore and India/China. It will also retrofit its older A310 aircraft and dry lease upto 3 AB310 freighters and 1 B747-400 freighter for providing bridge capacity.

The state government of Maharashtra has proposed the construction of an International Multi Model Passenger and Cargo Hub (MIHAN) at Nagpur. The ministry of civil aviation/AAI is willing to transfer the Nagpur airport to the Government of Maharashtra subject to finalisation of modalities. The Government of Maharashtra has already set up a Special Purpose Vehicle (SPV) in the name of Maharashtra Airport Development Company (MADC) for the development of MIHAN.

Aircraft Acquisition and Refurbishment
The national carrier Air India, which has been facing a severe capacity constraint is set to acquire new aircraft for its fleet. The fleet size of Air India would be enhanced from the current 34 to 74 by the year 2012-13. In the interim, Air India will go in for dry leasing of aircraft to launch new flights to a number of destinations. Air India proposes to expand its network and target an annual growth of 20-25 per cent by leasing passenger aircraft until the delivery of its new aircraft begins in 2007-08. Air India has also undertaken major interior refurbishment on the six B747-400 and eight A310-300 aircraft that it owns. Air India has started flights to Shanghai and Los Angeles and also introduced terminator flights from Ahmedabad to London. Air India has identified need for non-stop operations to USA and is tailoring its fleet acquisition accordingly. Services to 12 new destinations - San Francisco, Washington, Houston, Toronto, Manchester, Beijing, Seoul, Taipei,
Sydney, Lagos, Mauritius and South Africa - are being introduced in a phased manner.

Open Sky Policy

Several low cost carriers including Deccan Air, Kingfisher Air, Go Air, Royal Airways, Air One and Indus Air have begun operating flights in the domestic sector. International airlines like Jet Star, Valueair and Tiger Airways are planning to introduce flights in 2005.

The government has adopted a limited open sky policy under which designated private airlines can operate additional services to and from India subject to the existing terms of commercial agreement with the public sector Air India/Indian Airlines. The response to the scheme has been overwhelming, with private airlines putting in a request for operation of more than 2,400 additional flights (equivalent to 500,000 seats) to different airports in the country during the November 2004- March 2005 period. This move is expected to assist greater connectivity to/from India and ensure that confirmed passengers are assured of their seats. In keeping with the government's policy of allowing designated airlines of all countries that have signed the Air Services Agreement with India to operate 7 flights/week to any two international airports in India, the airlines of Austria, Finland, Republic of Korea, Maldives, Armenia and Yemen have been offered additional capacity subject to reciprocal rights to Indian carriers.

Following Indo-UK bilateral negotiations on air traffic rights in 2004, air services between India and the UK will be more than doubled by 2006. Airlines of either country will be entitled to operate 40 services per week by end-2005. UK carriers have also been granted access to Bangalore, Hyderabad and Cochin besides the four metro destinations of Mumbai, Delhi, Chennai and Kolkata and Indian carriers will fly to Glasgow, Edinburgh and Bristol in addition to London, Manchester and Birmingham. Entitlements for operations on the India-Australia sector will also be enhanced for both sides significantly from the 2100 seats per week to 6500 seats per week over the next two years. Australian carriers will also get access to Chennai, Bangalore and Hyderabad.

An Air Transport Agreement (ATA) has also been signed between the US and India, which is expected to give a boost to the existing passenger, air cargo and mail services between the two countries.The ATA would enable the Indian carriers to operate additional flights to different destinations in the US and also offers more opportunities to explore the US market in passenger, airfreight and mail services. In 2003, passenger traffic between India and the US was 2 million.

Indian Airlines and its subsidiary Alliance Air have been taking special measures to ensure connectivity in India's North Eastern States. Indian Airlines presently operates 139 flights per week offering 9472 seats and connecting 11 stations in the North Eastern States. New flights have been introduced at Shillong – Silchar route from July, 2004. Air connectivity in North-East will be further enhanced during 2005.

Push towards Privatisation
A greater push towards privatisation is evident from the fact that private carriers are now being allowed to operate flights to all parts of the world, except the Gulf and Saudi Arabia. The Gulf/Saudi Arabia routes have been reserved for the public sector airlines for the next three years. The government has also decided to review the mandated commercial agreements entered into by Air India/Indian Airlines with different airlines and phase them out over the next five years. Appropriate measures for establishing improved operational synergy between Air India and Indian Airlines for their mutual benefit are also being formulated. Increased competition is expected to further drive down tariffs. Simultaneously, the increase in capacity and connectivity will benefit passengers.

Several low-cost carriers including, Deccan Air, Kingfisher Air, Go Air, Royal Airways, Air One, Indus Air have begun to operate flights in the domestic sector. Domestic air fares in India are expensive by global standards, due to high fuel and other operating costs. As a result, domestic air travel has been mostly restricted to business travellers or the rich. But the competition in this sector promises to drive down air fares in the near future. Several international players are looking at operating budget airlines in India. Air Arabia has begun operations, initially connecting with Kerala before expanding to other cities. Low-cost airlines from Singapore like Jet Star, Valueair and Tiger Airways are among the others who are planning to introduce flights during 2005.

The AAI is working out modalities to unbundle the aircraft refuelling infrastructure. The entry of private players will help bring down fuel costs as refuelling is now monopolised by three state-owned entities - IndianOil, Bharat Petroleum and Hindustan Petroleum. IndianOil Aviation Service is the market leader for aviation fuel with a market share of 67.9 per cent. From Thiruvananthapuram in the south to Leh in the north, from Porbandar in the west to Ziro in the east, IndianOil controls a network of 94 aviation fuel stations. Every 1.6 minutes, an aircraft is refuelled by IndianOil somewhere in the country, according to company officials. ATF is one of the major operating costs of airlines in India, accounting for about 30 to 35 per cent of total operating costs as against the global level of 15 per cent. Mumbai and Delhi airports account for over 50 per cent of ATF sold in the country.

Private oil firms like Reliance and Essar have not been able to grab a pie of the aviation refuelling market so far as very few airports have land to spare for more oil storage facilities. But the state-owned oil companies have responded by offering to form an airline refuelling joint venture with the AAI, putting on the table a mixed package of equity and profit-sharing. This has sparked a fierce debate. The government oil companies say competition already exists as all major airports have at least two players supplying fuel while airports at the four metros have all the three players - IndianOil, Bharat Petroleum and Hindustan Petroleum.

Foreign Direct Investment
Forty nine per cent foreign direct investment (FDI) is permitted in financing airport infrastructure as well as in airport ground handling. The government has recently increased FDI from 40 per cent to 49 per cent in domestic air carriers. However foreign airlines are not permitted to pick up a stake directly or indirectly. Non-resident Indians and corporate bodies are allowed to hold up to 100 per cent equity in domestic airlines.

Aviation Regulator
The Civil Aviation Ministry plans to table a Bill to establish an independent Civil Aviation Economic Regulatory Authority (CAERA). The new regulator would be responsible for formalising all charges to be levied on operators and ensuring a level playing field for all players. Its tasks would include fixing of tariff, finalising parking and user charges, issuing broad guidelines to service providers, settling disputes among stakeholders in new airports and arbitrating between various users and service providers, including airlines. Initially the scope of the regulator would be limited to regulating the economic aspects of Delhi, Mumbai, Bangalore and Hyderabad airports where there is private participation and AAI is a stakeholder. Henceforth, the AAI too would be answerable to the new regulator. To start with, CAERA is expected to be a single-member regulator assisted by technical staff. The Bill seeks to expand its role in the days ahead. That may become necessary anyway, given the liberalisation initiatives underway in the sector.

This Fact Sheet has been compiled by Adite Chatterjee. For a more detailed sectoral analysis contact adite@icfdc.com

[www.icfdc.com, 21 February 2005]