Industry Spotlight: India’s Growing Aviation Sector

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By Pritesh Samuel

India’s Aviation Market is on a high growth path and aims to be the third-largest market by 2020 and the largest by 2030. At present, India is the ninth largest civil aviation market with a size of around US$ 16 billion. The growth of the airline industry is also expected to boost other sectors from manufacturers, ground handling services, tourism boards, shippers, and so on. The city of Bangalore in the southern state of Karnataka is India’s aviation manufacturing hub and accounts for around 65 percent of the country’s aviation manufacturing output.

India’s domestic passenger air traffic has grown steadily; it rose by 23.14 percent between January and August 2016, to reach 64.47 million from 52.36 million during the same period in 2015. Aircraft movement as of July 2016 at Indian airports was 168,400, which was a 14.3 percent increase over that observed during the same period last year. International aircraft movement also increased by 8.2 percent, compared to last year. The Centre for Asia Pacific Aviation (CAPA) states that domestic air traffic is expected to cross 100 million passengers by financial year 2017, compared to 81 million passengers in 2015. While the Indian aviation market is extremely competitive, airlines operating in the country are expected to record operating profits of US$ 1.29 billion in 2016. The air transport sector supports 8 million jobs and contributes around US$ 72 billion to the GDP. Foreign investment in the sector from April 2000 to March 2016 was valued at US$ 931.05 billion.

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Government Initiatives

The government recently unveiled the country’s first National Civil Aviation Policy 2016. With hopes to modernize existing airports, the government recently allowed 100 percent investment under the automatic route in brownfield airport projects. Previously, foreign investment beyond 74 percent was subject to the government approval route.

In addition, the government raised the FDI limit in air transport services to 100 percent under the automatic route as against the 49 percent limit earlier. Non-resident Indians (NRIs) can invest 100 percent under the automatic route, but foreign airlines can invest in Indian companies operating airport services by up to 49 percent of their paid up capital.

Regional Airports: The government wants to boost traffic at the 34 regional airports in the country to increase connectivity. To incentivize airlines to fly to such airports, the government has abolished airport charges, reduced service taxes, and excise duty levied on aviation turbine fuel. State governments will provide free police and fire services, while power, water, and other utilities will be at concessional rates. To fund this project, the government has created a separate fund and will impose a levy of around 2 percent on domestic flights. In addition, ticket prices have been capped; for a one hour long flight ticket prices cannot be more than US$ 36 (Rs 2,500) and for a half an hour journey, it cannot exceed US$ 17 (Rs 1,200).

5/20: Domestic airlines were earlier required to have 20 aircrafts and fly for at least five years before commencing on lucrative international routes. However, the policy has changed to allow any domestic airline to fly internationally so long as 20 aircrafts or 20 percent of the total aircraft capacity is allocated to domestic operations. The amended rule will benefit domestic airline Vistara (a joint venture between Indian conglomerate, Tata Sons, and Singapore Airlines), which is two years old and has a fleet of 13 commercial planes as well as Air Asia India (a joint venture between Tata Sons, Malaysian AirAsia Berhand, and Telestra Tradeplace), which has a fleet of eight planes.

Open Skies: The government will implement an Open Sky Policy on a reciprocal basis with SAARC countries and other countries beyond 3,100 miles (5,000 km) from the capital New Delhi. This is expected to enhance traffic to South Asian countries and make flying internationally viable for domestic carriers. India already has an open sky policy with the US, a near open sky agreement with the UK with a restriction on flights to and from Delhi and Mumbai. Most recently, several European countries, such as Greece, Netherlands, Sweden, and Georgia have requested additional flights to India under the open skies agreement.

Maintenance, Repair, and Overhaul (MRO): The MRO of Indian airlines is mainly done outside of India. To give a push to this sector, the government has rationalized customs duty and the procedure for clearance of goods is now simplified. Airport royalty and additional charges will not be imposed on MRO providers for 5 years from the date of approval, while state governments will be persuaded to lift value added tax (VAT) on MRO activities.

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India’s aviation market is still untapped with ample growth opportunities. Flying is still considered expensive for the majority of the population, out of which around 40 percent is in the upwardly mobile middle class. While the new civil aviation policy is in the right direction, more can be done to further grow the sector. Airport charges, landing fees, and aviation fuel in India remain some of the highest in the world. If the government addresses these concerns with the right policies, and focus on quality, cost, and passenger interest – India can easily become a larger and much more successful aviation market.