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October 31, 2007

Growing at a rate of 18 per cent annually, the Indian civil aviation market holds out great promise for potential investors. The International Air Transport Association (IATA) in its latest estimates this October reckons India to be a driving force behind the world’s civil aviation business that is globally expected to grow from US$ 5.1 billion to US$ 5.6 billion this year.

Asia-Pacific-based airlines increased their passenger carrying capacity by 42 per cent, far higher than European and North American airlines. The rise was driven largely by huge growth in Indian and Chinese air traffic, turning Asia into the world’s fastest growing aviation market.

The aviation numbers beckoning the potential investor to India are awesome. India's Civil Aviation Ministry expects 80 million passengers by 2020. The number of air travellers increased by a record 38.5 per cent in 2006-7. India anticipates doubling of passenger traffic over the next decade.

To meet this demand, it will require 6,000 more pilots. In other words, more training institutes, more airports, more planes and more ground handling personnel -- all of which require investment.

Named by British Airways as the "next biggest after the US in the long-haul market", Indian aviation is moving at a very fast pace. Three years ago, there were 130 commercial aircraft, and the number has now swelled to 350. And growth is expected to continue apace: the Government estimates that India's fleet will reach approximately 500-550 aircraft by the end of 2010.

In the same period, the domestic market size will cross 60 million and international traffic 20 million. Aircraft manufacturer Airbus pegs India's demand at 1100 aircraft, worth US$ 105 billion, over the next 20 years. According to Civil Aviation Minister Praful Patel, the country will need 1,500 to 2,000 passenger planes in 10 years, up from 260 now.

India continues to show steady year on year growth, with a 7 per cent increase in the number of flights into and out of India (an additional 835 flights and more than 200,000 seats a month).

More passengers, more planes

India's civil aviation passenger growth, at 20 per cent, is among the highest in the world. The sector is slated to cruise far ahead of other Asian giants like China or even strong economies like France and Australia. The number of passengers who will be airborne by 2020 is a whopping 400 million.

The Centre for Asia Pacific Aviation (CAPA) predicts that domestic traffic will grow at 25 per cent to 30 per cent a year until 2010 and international traffic growth by 15 per cent, taking the overall market to more than 100 million passengers by the end of the decade. Indian carriers have 480 aircraft on order for delivery by 2012, which compares with a fleet size of 310 aircraft operating in the country today.

As pointed out by Minister of Civil Aviation, Praful Patel, the number of air travellers is about 0.8 per cent of the population. By the time even 10 per cent of the population begins to fly, India will need about 5,000 aircraft.

More diverse businesses in non-metropolitan regions are creating new demand for air services. Airlines are bulking up on capacity -- 10 Indian carriers placed orders for 400 aircraft worth US$ 15 billion.


Upgrading Airport Infrastructure

By 2020, Indian airports are estimated to handle:

100 million passengers
Including 60 million domestic passengers
Cargo in the range of 3.4 million tonnes per annum

Several improvements are envisaged to sustain this tremendous growth in the civil aviation sector. The Government’s airport modernisation plan proposes investments of US$ 9 billion by 2010. In January 2006, joint venture companies with 74 per cent private sector participation won contracts to upgrade New Delhi and Mumbai airports. The Airports Authority of India has got the contract to upgrade Kolkata airport and the Government is also planning to upgrade the Chennai airport.

The Government plans to develop around 300 unused airstrips across India - a move that has raised projections for jets required for regional connectivity. Boeing and Airbus, along with Embraer (Brazil), Bombardier (Canada), Sukhoi (Russia), ATR (France) and BAE System (UK) are keen to tap the emerging regional jet market in the country.

International no-frills budget carriers, especially Asian low-cost carriers (LCCs) are also making a beeline for India. Already, Iran’s Jazeera Airways and Sharjah-based Al Arabia have registered their presence here. Other airlines planning to enter the market are: Tiger Air (a joint venture between Temasek Holdings and Singapore Airlines), Thailand-based private carrier Nok Air, Indonesia’s Lion Air, United Arab Emirates’ Ras Al Khaima (RAK) Airlines, Malaysia’s Air Asia and Saudi Arabia’s Sama Airway.

Increased activity in the maintenance and repair operations (MRO) sector has attracted many foreign companies. Lufthansa has tied up with GMR Hyderabad International Airport Limited (GHIAL) to open an MRO facility for which it intends to invest US$ 23 million. Similarly, Boeing intends to invest US$ 100 million in a facility in Nagpur.

With airport infrastructure being upgraded, non-aeronautical revenues (from malls, bookshops and entertainment centres) are expected to contribute almost 50 per cent to revenue of airports.

Of late, the domestic market is witnessing a trend towards consolidation. In a bid to augment capacity and grab market share, the sector is witnessing a consolidation as well as rationalisation of resources. Accordingly, Jet Airways has acquired Air Sahara, Air-India and Indian are to merge, Kingfisher Airlines has entered into a strategic relationship with Air Deccan, and Paramount Airways is talking to two airlines for a possible takeover.

Aviation Schools

With the sector expanding at a fast pace, the number of aircraft being used is on the rise and so is the need for pilots. Not surprisingly, aviation school is the latest buzzword among students as India would require 7,500-8,000 pilots and an equal number or more air cabin crew by 2010. Heavy pay packets are awaiting pilots with a commercial pilot license (CPL).

To take advantage of this situation, several pilot shops are being set up across the country:

  • Airbus has decided to set up an aviation school in Bangalore to train 1,000 pilots a year
  • Rajeev Chandrasekhar's Jupiter Aviation is looking to set up a similar venture in Bangalore or Hyderabad
  • Aviation consultant Praveen Paul has set up his own aviation school
  • Many more are in the offing including Deccan Aviation's venture with ATR, and Jet Airways and budget carrier UB Group planning to set up training centres.

Airlines on a buying spree

With such rapid growth in the sector, manufacturers like Boeing and Airbus are filling their order books fast.

Jet has placed an order of 20 Boeing 737-800 series aircraft, India's largest private airline. Airbus plans to invest more than US$ 1 billion in the Indian aviation industry in the next 10 years. Bombardier Aerospace, a Canada-based company that manufactures regional aircraft and business jets, is looking to tap the growing regional market in India for flight services. SpiceJet has ordered 10 next-generation Boeing 737-800 aircraft valued at a list price of more than US$ 700 million.

FDI Policy in Indian Aviation:

Paving the way for foreign investment in domestic airline companies, the Reserve Bank of India (RBI) has said that foreign institutional investors (FIIs) can pick up stake in these airlines beyond the sectoral FDI cap of 49 per cent through secondary market purchases.

Airports

  • For greenfield airports, foreign equity up to 100 per cent is permitted through automatic approvals.
  • For existing airports, foreign equity up to 74 per cent is permitted through automatic approvals and upto 100 per cent through special permission (from FIPB).

Air Transport Services

  • Foreign equity up to 49 per cent and NRI investment up to 100 per cent is permissible in the domestic air transport services through the automatic route;
  • Equity from foreign airlines is not allowed, directly or indirectly, in the domestic air transport services.