Problems in Indian Aviation industry

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'These days no one can make money on the goddamn airline business. The economics represent sheer hell'. These are the words from one of the top executives of an airline company and they match quite comfortably with Indian Aviation sector. Despite the fact that the Indian civil aviation industry in currently considered the third largest domestic civil aviation market in the world, the industry is suffering from several problems.

What is the market size ?

India’s passenger traffic grew at 16.52 per cent year on year to reach 308.75 million (12.72 per cent). Domestic passenger traffic grew around 18.28 per cent to reach 243 million in 2018-19 and is expected to become 293 million in 2020. When it comes to International passengers, it grew by 10.43 per cent to reach 65 million in 2018 and traffic is expected to become 76 million in 2020. In 2018-19, domestic freight traffic stood at 1,213.06 million tonnes, while international freight traffic was at 2,143.97 million tonnes. India’s domestic and international aircraft movements grew 14.40 per cent and 9.40 per cent to 1,886.63 thousand and 437.93 thousand during 2017-18. Number of commercial aircraft in India is around 550.

What are the perennial problems?

Increase in fuel prices
Aviation turbine fuel (ATF) is one of the important sections of the industry. Indian government didn’t not reduce the jet fuel prices in proportion to the fall in international crude oil prices. But, when there is a rise in crude prices, it increases in the fuel cost would eventually increase the operation of the airline. Besides, it could compel airlines to go for an upward fare revision to offset the increased cost of operations. Why, the jet fuel accounts for 45 percent of an airline's cost of operation. For the past one year, the ATF price has witnessed an increase of nearly 30 percent and around 25 percent in just last six months.

Government intervention

Frequent government intervention is proving to a great obstacle for the growth of Aviation industry. Several aviation experts have pointed out that India government should follows aviation industry free from policy hurdles like regulating airfares and slash taxes, including jet fuel. Besides, they advise the government to focus on building infrastructure and the air navigation system. The Indian aviation industry which contributed five per cent of GDP, offers four million jobs and another seven million jobs through tourism and related activities. So more efforts are needed, on creating infrastructure which will enable further growth.

Higher airport cost

High Airport (aeronautical) Charges levied by Airport Authority of India are higher. These charges payable at the International airports are higher than those payable at the airports designated as Domestic airports. As a result, the domestic airlines in India are incurring additional costs at the international designated airports without deriving any extra facilities. According to a latest survey, the airport charges levied by the Indian airports (Domestic and International Terminal) are amongst the highest in the Asian and the Gulf countries. This adds more burden to aviation companies.

Severe competition

There is a cut throat competition faced by the top airline due to ticket pricing. Established Airlines are threatened by low cost carriers, which are eating up their market share. In order to consolidate their market share, top premium airlines were forced to reduce their ticket fares to around 15- 20 per cent. Such a slash down in price will lead to a price war in the long run amongst the airlines with the only goal of increasing their market share.

Foreign Investments

Foreign Direct Investment (FDI) inflows in air transport between 2000-17 was around US$ 1,608.51 million. The government has announced around 100 per cent FDI under automatic route in scheduled air transport service, regional air transport service and domestic scheduled passenger airline. Currently, the Indian aviation industry is expected to witness Rs 1 lakh crore (US$ 15.52 billion) worth of investments in a few years.

Key investments and developments

Rs 15,000 crore (US$ 2.32 billion) have allotted for expanding existing terminals and constructing 15 new ones will be made through the Airport Authority of India (AAI). Government of India has signed an agreement with Australia allowing airlines on either side to offer unlimited seats to six Indian metro cities and various Australian cities. Guwahati Airport will be designated as an inter-regional hub and Agartala, Imphal and Dibrugarh as intra-regional hubs.

Government Initiatives

Allocation to Civil Aviation Ministry has been increased to Rs 6,602.86 crore (US$ 1,019.9 million) under Union Budget 2018-19. The government has launched the construction of Navi Mumbai airport which is expected to be built at a cost of US$ 2.58 billion. The first phase of the airport will be completed by the end of 2019. The Government of Andhra Pradesh is planning to develop Greenfield airports in six cities-Nizamabad, Nellore, Kurnool, Ramagundam, Tadepalligudem and Kothagudem under the PPP model. Rs 15,000 crore (US $ 2.32 billion) will be invested in 2018-19 for expanding existing terminals and constructing 15 new ones.

Conclusion

India’s aviation industry has a huge potential and offers huge growth opportunities. One of the key factors which favours such a expectation is that 40 per cent is the upwardly mobile middle class are starting to prefer air travel as the prefect mode of transport. So government must engage and collaborate with industry stakeholders to implement efficient and rational decisions that would enable the growth of India’s civil aviation industry. With the right kind of infrastructure and policies with thorough focus on quality, cost and passenger interest, India would surely achieve the third-largest aviation market by 2025.

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