Low Cost of Airlines Air India CHAPTER I INDUSTRY PROFILE Aviation Industry in India is one of the fastest growing aviation industries in the world. With the liberalization of the Indian aviation sector, aviation industry in India has undergone a rapid transformation. From being primarily a government-owned industry, the Indian aviation industry is now dominated by privately owned full service airlines and Low Cost Carriers (LCC). Private airlines account for around 75% share of the domestic aviation market. Earlier air travel was a privilege only a few could afford, but today air travel has become much cheaper and can be afforded by a large number of people. The origin of Indian civil aviation industry can be traced back to 1912, when the first air flight between Karachi and Delhi was started by the Indian State Air Services in collaboration with the UK based Imperial Airways. It was an extension of London- Karachi flight of the Imperial Airways. In 1932, JRD Tata founded Tata Airline, the first Indian airline. At the time of independence, nine air transport companies were carrying both air cargo and passengers. These were Tata Airlines, Indian National Airways, Air service of India, Deccan Airways, Ambica Airways, Bharat Airways, Orient Airways and Mistry Airways. After partition Orient Airways shifted to Pakistan. In early 1948, Government of India established a joint sector company, Air India International Ltd in collaboration with Air India (earlier Tata Airline) with a capital of Rs.2,00,00,000/- and a fleet of three Lockheed constellation aircraft. The inaugural flight of Air India International Ltd took off on June 8, 1948 on the Mumbai-London air route. The Government nationalized nine airline companies vide the Air Corporations Act, 1953. Accordingly it established the Indian Airlines Corporation (IAC) to cater to domestic air travel passengers and Air India International (AI) for international air travel passengers. The assets of the existing airline companies were transferred to these two corporations. This Act ensured that IAC and AI had a monopoly over the Indian skies. A third government-owned airline, Vayudoot, which provided feeder services between smaller cities, was merged with IAC in 1994. These government-owned airlines dominated Indian aviation industry till the mid-1990s. Page 1 Low Cost of Airlines Air India In April 1990, the Government adopted open-sky policy,it means unrestricted access by any carrier into the sovereign territory of a country without any written agreement specifying capacity, ports of call or schedule of services. In other words an Open Skies policy would allow the foreign airline of any country or ownership to land at any port on any number of occasions and with unlimited seat capacity. There would be no restriction on the type of aircraft used, no demand for certification, no regularity of service and no need to specify at which airports they would land. Defined in this manner, it is not surprising that Open Skies policies are adopted only by a handful of countries, most commonly those that have no national carriers of their own and that have only one or two airports. No sovereign country of any eminence practices Open Skies least of all the European Union, UK, USA, Japan, Australia or countries in South East Asia.and allowed air taxi- operators to operate flights from any airport, both on a charter and a non-charter basis and to decide their own flight schedules, cargo and passenger fares. In 1994, the Indian Government, as part of its open sky policy, ended the monopoly of IA and AI in the air transport services by repealing the Air Corporations Act of 1953 and replacing it with the Air Corporations (Transfer of Undertaking and Repeal) Act, 1994. Private operators were allowed to provide air transport services. Foreign direct investment (FDI) of up to 49% equity stake and NRI (Non Resident Indian) investment of up to 100% equity stake were permitted through the automatic FDI route in the domestic air transport services sector. However, no foreign airline could directly or indirectly hold equity in a domestic airline company. By 1995, several private airlines had ventured into the aviation business and accounted for more than 10% of the domestic air traffic. These included Jet Airways Sahara, NEPC Airlines, East West Airlines, ModiLuft Airlines, Jagsons Airlines, Continental Aviation, and Damania Airways. But only Jet Airways and Sahara managed to survive the competition. Meanwhile, Indian Airlines, which had dominated the Indian air travel industry, began to lose market share to Jet Airways and Sahara. Today, Indian aviation industry is dominated by private airlines and these include low cost carriers such as Deccan Airlines, GoAir and SpiceJetetc, who have made air travel affordable. Page 2 Low Cost of Airlines Air India Page 3 Low Cost of Airlines Air India Airlines: Size:-Of a total number of 454 airports and airstrips in India, 16 are designated as international airports. The Airports Authority of India (AAI) owns and operates 97 airports. A recent report by Centre for Asia Pacific Aviation (CAPA), Over the next 12 years, India's Civil Aviation Ministry aims at 500 operational airports. The Government aims to attract private investment in aviation infrastructure. India has been witnessing a very strong phase of development in the past few months. Many domestic as well as international players are showing interest in the growth and development of the aviation sector with immense focus on the development of the airports. Indian private airlines Jet, Sahara, Kingfisher, Deccan, Spicejet - account for around 60% of the domestic passenger traffic. Some have now started international flights. For the next years to come India is poised with strong focus on the development of its airport to meet the international standards. The government is planning modernization of the airports to establish a standard. The newly developed airports will help releasing pressure on the existing airport in the country Plans:-A projected investment of USD 8.5 billion has been planned for the development of Indian airports during the 11th plan. Mumbai and Delhi airports have already been privatized. These two airport are being upgraded at an estimated investment of US$ 4 billion for the period 2006-16. Development of airport infrastructure is a focus area for the Government. There has been a significant uptrend in domestic and international air travel. AAI has planned a heavy investment of USD 3.07 billion over the next five years. Out of it 43 per cent will be for the three metro airports in Kolkata, Chennai and Trivandrum. The rest will be invested in upgrading other non-metro airports and in the modernization of the existing aeronautical facilities. Passenger traffic is projected to grow at a CAGR of over 15% in the next 5 years. It is estimated that the data will cross 100 million passengers per annum by 2010 Cargo traffic to grow at over 20% per annum. over the next five years, crossing 3.3 million tonnes by 2010 Major investments planned in new airports and up gradation of existing airports 100% FDI is permissible for existing airports; FIPB approval required for FDI beyond 74%. 100% FDI under automatic route is permissible for greenfield airports. Page 4 Low Cost of Airlines Air India 49% FDI is permissible in domestic airlines under the automatic route, but not by foreign airline companies. 100% equity ownership by Non Resident Indians (NRIs) is permitted. AAI Act amended to provide legal framework for airport privatization. 100% tax exemption for airport projects for a period of 10 years. Open Sky Policy of the Government and rapid air traffic growth have resulted in the entry of several new privately owned airlines and increased frequency/flights for international airlines. Initiatives:-The Committee on Infrastructure has initiated several policy measures that would ensure time-bound creation of world-class airports in India. A comprehensive civil aviation policy is on the anvil. An independent Airports Economic Regulatory Authority Bill for economic regulation is also under consideration. The policy of open skies introduced some time ago has already provided a powerful spurt in traffic growth that has exceeded 20% per annum during the past two years. Major airports such as Chennai and Kolkata are also proposed to be taken up for modernization through the PPP route. To ensure balanced airport development around the country, a comprehensive plan for the development of other 35 non-metro airports is also under preparation. These measures are expected to bring a total investment of Rs. 40,000 crore (USD 8.312 billion) for modernization of the airport infrastructure. A Model Concession Agreement is also being developed for standardizing and simplifying the PPP transactions for airports, on the analogy of the highways sector. This would include upgrading of the ATC services at the airports. Issues relating to customs, immigration and security are also being resolved in a manner that enhances the efficiency of airport usage. A greenfield airport is already operational at Bangalore and the one at Hyderabad, built by private consortia at a total investment of over USD 800 million, will be operational soon. A second greenfield airport being planned at Navi Mumbai is planned to be developed using public-private partnership (PPP) mode at an estimated cost of USD 2.5 billion. 35 other city airports are proposed to be upgraded through PPP mode where an investment of USD 357 million is being considered over the next three years. Potential:- Page 5 Low Cost of Airlines Air India High demand for investments in aviation infrastructure. Favorable demographics and rapid economic growth point to a continued boom in domestic passenger traffic and international outbound traffic. Greenfield airport projects planned in resort destinations and emerging metros such as Goa, Pune, Navi Mumbai, Greater Noida and Kannur.