Friday, October 16, 2015

Indian Aviation: Lifts & Drags

Indian Aviation is gaining global attention with the potential it holds. It is fastest growing and 3rd largest in absolute number of passenger growth. Billionaires growth rate of 20% indicates the potential for corporate aviation. The huge gap in flights per capita (4 times less than China and 40 times less than US) is another indicator of unrealised potential.

The 'Lift' that Indian Aviation is experiencing is more due to favourable econometric factors.
  • Growing GDP and GDP/capita
  • Income distribution moving towards to middle and high income groups
  • Young demographics and increasing working population
  • Increasing urbanisation
  • Downward trend in inflation adjusted travel cost due to competition driven efficiencies

However, story of Indian Aviation is also of missed opportunities. It missed out on using geographic advantage of India to become a major hub for East-West connectivity in 1990s. More than half of the revenues of foreign travel in & out of India is with foreign players rather than with Indian operators. India also lost out on becoming MRO hub to smaller countries in neighbourhood. India constitutes just about 1% of Global MRO market. 

The 'Drags' on the Indian Aviation are due to policy and structural issues.
  • High fuel cost compared to global prices due to taxes (excise, sales tax). Hence, airlines in India are saddled with higher fuel cost compared to their global counterparts.
  • 5/20 rule (International operations only after 5 years of domestic operations and 20 aircrafts fleet). This rule delayed the airlines in India spreading their wings globally. Only few large airlines operate internationally. And the rule stifles new entrants with ambitious growth plans. 
  • Unattractive incentives for route dispersal to remote and unprofitable hubs. 
  • Lack of low cost airports. Lack of alternate airports in busy hubs. For example, Bangalore is not allowed to have its old airport as an alternate airport for domestic LCC. 
  • High tax burden on MRO operations.
  • Inadequate FBOs for General Aviation.
  • Non Acceptance of Bio jet fuel for aviation. Biojet fuel can cut both costs and emissions. In addition, it will stimulate growth in biofuel segment which has links to rural economy.
The above issues stem from years of Govt. indifference to aviation. Aviation unfortunately has been considered transport of elite and its stimulating effect on economy has been ignored. Aviation can speed up the business exchange, goods movement, tourism and overall economic growth. Today commercial aviation caters to a middle class citizen for both leisure and business travel. 

Even if we were to take the corporate aviation which is used by business heads, it helps them save 20% of time compared to commercial airlines and enable them to visit remote places at their convenience. Thats a huge improvement in their productivity and connectivity which translates into faster decision making and business growth.

In India, Aviation is a major employer and supports 1.7 million jobs. Globally, aviation contributes to 3.5% of Global GDP, but in India it contributes just about 1.5%. The 'Lift' from the favourable econometric factors presents an opportunity to derive substantial economic benefit and create jobs provided the 'Drags' are addressed. Or else, it would again become another of many missed opportunities.

Data sources: Airbus, IATA, Frost & Sullivan

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