Indian Aviation Sector 20 years of the Open Skies Policy!

Submitted by: Akanksha Agrawal 1 Submitted to: Prof. Roopa rao Anuj Gosai 2 Tarang Baheti 3 Pankaj Barcha 4 Radhika Bhatia 5

Overview of Airlines industry in India:

The aviation industry in India is one of those sectors that saw a constant pace of growth among the other industries in the world over the past many years. The open sky policy of the government has helped a lot of overseas players entering the aviation market in India. From then, it has only been growing in terms of players and the number of aircrafts. At present, private airlines account for around 75% portion of the domestic aviation market. The 9th largest aviation market in the world is India. Taking the help of the statistics from the Ministry of Civil Aviation, approximately 29.8 million passengers traveled to/from India in 2008, showing a surge of 30% from 2007. The prediction stated that international passengers will touch 50 million by 2015. More opportunities in the aviation industry in India are likely to make way for about 69 foreign airlines from 49 countries.

Growth of Indian Aviation industry

The Indian Civil Aviation market grew at a CAGR of 18%, being valued round US$ 5.6 billion in 2008. Further statistics revealed that the air traffic in August 2009 was a double digit figure. The domestic airliners flew 3.67 million passengers in August 2009, as against 2.92 million in the corresponding period of 2007, up by 26%. The Centre for Asia Pacific Aviation (CAPA) has estimated that the domestic traffic will go up by 25% to 30% till 2010 along with a surge in the international traffic by 15%. There would be more than 100 million passengers by 2010. Then again by 2020, Indian airports will in all probability handle over 100 million passengers every year. The investment plans to the tune of US$ 9 billion has been made by the Aviation Ministry for modernizing the existing airports by 2010. In terms of domestic passengers' volume, US have always been the leader with followers in the league like China, Japan and India. The number of domestic flights went up by 69% from 2005 to 2008, with the domestic aviation sector growing at 9-10%.

Market share of key players in the Indian aviation sector Name of the players Kingfisher Airlines and Kingfisher Red (previously Air Deccan) Jet Airways and Jet Lite (previously Air Sahara) IndiGo SpiceJet GoAir Paramount Airways MDLR Airlines 25% 14% 12% 3% 2% 0.004% Air India and Indian (previously Indian Airlines) 16% Market Share 28%

Future of Airlines industry in India:

The challenges of the Indian aviation industry are cited below:

Passenger traffic is estimated to grow at a CAGR of over 15% in the coming few years. The Ministry of Civil Aviation would handle around 280 million passengers by 2020. US$ 110 billion investment is envisaged till 2020 with US$ 80 billion solely for new aircraft and US$ 30 billion for developing the airport infrastructure

Role of Aviation Industry in India GDP

The Role of Aviation Industry in India GDP in the past few years has been phenomenal in all respects. The Aviation Industry in India is the most rapidly growing aviation sector of the world. With the rise in the economy of the country and followed by the liberalization in the aviation sector, the Aviation Industry in India went through a complete transformation in the recent period.

The growth in the Indian economy has increased the Gross Domestic Product above 8% and this high growth rate will be sustained for a good number of years Air traffic has grown enormously and expected to have a growth which would be above 25% in the travel segment In the present scenario around 12 domestic airlines and above 60 international airlines are operating in India With the growth in the economy and stability of the country India has become one of the preferred locations for the trade and commerce activities The growth of airlines traffic in Aviation Industry in India is almost four times above international average Aviation Industry in India have placed the biggest order for aircrafts globally Aviation Industry in India holds around 69% of the total share of the airlines traffic in the region of South Asia

Role of Aviation Industry in India GDP-Future Challenges

Initializing privatization in the airport activities Modernization of the airlines fleet to handle the pressure of competition in the aviation industry Rapid expansion plans for the major airports for the increased flow of air traffic Immense development for the growing Regional Airports

Role of Aviation Industry in India GDP-FDI Policy

The Reserve Bank of India (RBI) announced that foreign institutional investors might have shareholdings more than the limited 49% in the domestic sector.

Indian Aviation Sector 20 years of the Open Skies Policy!

India is one of the fastest growing aviation markets in the world. The Airport Authority of India (AAI) manages a total of 127 airports in the country, which include 13 international airports, 7 custom airports, 80 domestic airports and 28 civil enclaves. There are over 450 airports and 1091 registered aircrafts in the country. In the early fifties, most of the operating airlines were merged into Indian Airlines or Air India and this monopoly under the Air Corporations Act continued till about the 1990s. 1991, was the year when the Indian Government came up with the Open Skies Policy and the Indian skies were never the same again. As of today, India has 1 government airline (thats if one considers Air India and Indian Airlines as Indian which surely was, is and will be one of the biggest disaster decisions taken by anyone) and 7 private airlines Paramount, Air Deccan, Jet (includes Jet Lite (formerly Sahara), Jet Airways and Jet Konnect), Spice Jet, Go Air, Indigo and Kingfisher (includes Kingfisher and Kingfisher Red (previously Air Deccan). I am not considering MDLR, Jagson Airlines and others because their market share is too low for them to bring about any kind of change in the Indian aviation scene. The open skies policy introduced by the Government brought such a huge change in the aviation scene that suddenly everyone wanted to start their own airline. Jet Airways and Sahara Airlines were the first private airlines to begin their services after the Govt opened the skies to private players. Change became the order of the day. People were treated to a much better and organized service with well groomed crews, better seats, easy options of ticketing and a good overall feel of being in an aircraft. People started flocking to these airlines like never before. But still the monopoly of the two Air India and Indian Airlines remained on the international sector.

Around 2003-2004, another revolution took place in the Indian aviation industry.

Emergence of 'no-frills' airlines

Following the emergence of no-frills airlines in the United States and Europe and the resultant revolution witnessed therein in the aviation sector, the concept of no frills airlines

started generating interest in Asia and a number of no-frills airlines have emerged in the Asian continent. India's first no-frills airline, Air Deccan, commenced operations in August 2003. As recently as May 2005, Kingfisher Air too commenced operations taking the total number of private carriers providing scheduled services to four. In addition to Indian Airlines and these four players, Air India also carries domestic passengers on domestic legs of its international flights, offering both, full and discounted fares. Given the feeling that there is vast untapped potential in the Indian aviation segment, there is no dearth of players who are contemplating entering the Indian domestic aviation market. This revolution was bigger than any other seen before and definitely bigger than the one in 1991. Simplify Deccan an airline started by Captain Gopinath gave birth to the idea of Low Cost Carriers (LCC) or budget airlines as they are called in our country. He was single handedly responsible for making millions who had not even seen a plane let flown on it, dream of flying. And as usual as things happen in India, since this model succeeded, even Spice Jet, Indigo and Go Air began their operations on this model. All these were owned by some industrialist or the other like the Modi family, the Wadia family etc. Suddenly the Indian aviation industry which had seen bad times during the 2001 WTC attacks started looking up. People were lining up in hordes to travel on planes like never before. In between all this, Paramount Airways, an airline with a unique model of providing business class seats with economy class fares with use of Embraer Jets and having no middle seats was started in Madurai. It positioned itself as a business airline and after capturing a 27% market share in the South, it moved to the West, then East and is now set to move to the North. Recently it had the highest on time performance among all airlines. Slowly but surely, it has made a name for itself on the aviation map of the country.

This sector is greatly expected to grow as the disposable incomes of the people across the country continue rising. But most importantly, until the infrastructure issues like the size of the airports, the number of airports, the ability to handle more no of planes etc are sorted out,

we will continue to face the same problems that we have been facing over the years, day in and day out.

Need for Open Skies Policy

A recurring demand often voiced by interested parties is that, in order to promote Travel & Tourism, India should adopt an Open Skies policy. It is argued that the current policy restricts the access of foreign airlines. As a result potential tourists are not offered a choice of airlines or seats when travelling to India. This problem is exacerbated during the holiday season when it is difficult, if not impossible, to get a seat either into the country or out of it. It is argued, therefore, that India should adopt an Open Skies approach to any foreign carrier wanting to fly into India, which literally means allowing them unlimited service, capacity and points of call.

Meaning of Open Skies

At the outset we must point out that the concept of 'Open Skies' is much misunderstood in its meaning and implications. Strictly speaking Open Skies 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.

Indian Bilateral Treaties

India has signed over 180 Bilateral Agreements with different countries. In 2002 the total number of seats available was 38.09 million. Of this, the capacity operated was approximately 19.174 million seats. Since the average size of traffic to and from the country is slightly in excess of approximately 14 million passengers, normally the contracted rights should suffice the traffic demand.

Utilization of Bilateral Treaty Contracts

It is in the actual utilization of the contracted seats that the problem arises. Of the contracted amount, 50 per cent are to be utilized by the national carrier and 50 per cent by the airline owned by the contracting country. However, whilst the foreign carriers are in a position to use over 70 per cent of their entitlement, the national carrier is only able to utilize 29.4 per cent of their share. It is this shortfall that creates pressure on seats, particularly during peak tourism national carriers do not have sufficient aircrafts to be able to utilize the bilateral rights available to the country and enter into commercial and code sharing arrangements to maximize revenue. Whilst this does improve their profitability in the short run, it has a longterm adverse effect in that it deprives the country of much needed air bridges to bring in tourists and carry trade.

Under the present bilateral system, the utilization of the traffic rights on international routes to and from India, as negotiated by the Government of India, is restricted to the two Government owned 'national' carriers - namely Air India and Indian Airlines and either or both these carriers are the Indian designated carriers under the various Air services Agreements. The Operating Permits restrict the privately owned carriers, such as Jet Airways and Air Sahara, to operate only domestic routes within India.

INDIA MOVING TOWARDS OPEN SKIES POLICY

The Union Government's announcement allowing private domestic airlines with over five years experience and fleet of 20 aircraft to fly to all international destinations barring the Persian Gulf is a welcome move and an extension of the earlier liberalisation measures announced for the domestic aviation sector. On the one hand, this move will see a significant improvement in the utilisation of Bilaterals and on the other, there will be a significant improvement in the synergy of Air India and Indian Airlines which should lead to both players operating profitably. Bilaterals are based on reciprocity between two governments and are signed on the basis of Air Services Agreements (ASA). India has ASAs with 97 countries of which only 46 are being utilised which indicate that 51 are dormant and 44 being used by foreign countries while Air India and Indian Airlines use only 20 of the ASAs a meagre 35 per cent utilisation of bilateral entitlements. Jet Airways and Air Sahara, the two airlines who fulfil the criteria to operate overseas, have between them, 64 aircraft (43 for Jet and 21 for Air Sahara) and enjoy a market share of 55 per cent plus. In fact, including both, their fleet and the expanded fleet of Air India and Indian Airlines, 40 per cent of the bilateral entitlement would still go a begging. Globally, the aviation industry is going through a regulatory revolution. Bilaterals are giving way to multilaterals. Countries in the Middle East, Singapore and even Sri Lanka follow an Open Sky policy and slowly most of international aviation is moving towards it. India needed these internal changes to relate effectively to the changing environment externally.