Aviation Sector in India: Status, Opportunities and Challenges – Explained, pointwise

For 7PM Editorial Archives click HERE
Introduction

Aviation is integral to equitable economic growth and for the economy to be globally competitive. The civil aviation sector in India has the potential to become one of the largest in the world. India has become the third largest domestic aviation market in the world and is expected to overtake the UK to become the third largest air passenger market by 2024. However, the sector is also facing some critical issues which are hindering its progress. While the aviation industry is still recovering from the aftermath of the pandemic, a spate of incidents related to safety has forced the Directorate General of Civil Aviation (DGCA) to step-in. Experts have also raised concerns about the financial health of the airline operators in India.

What is the current status of the Aviation Sector in India?

India is the 7th largest civil aviation market in the world and is set to become the world’s 3rd largest by 2024.  Total Passenger traffic (International + Domestic) had been constantly increasing before the drastic fall in FY2020-21 due to COVID-19. However, the recovery has been strong with 64% increase in traffic in FY2021-22 (with respect to FY2020-21). By 2036, India’s total passenger traffic (International + Domestic) is expected to be 480 million surpassing combined traffic of Japan and Germany.

Passenger Traffic in India Aviation UPSC

Source: India Brand Equity Foundation

There are 464 Airports and Airstrips in India, of which 125 are managed by the Airports Authority of India. India plans to open 100 additional airports by 2024.

Airports in India Aviation Sector UPSC

Source: India Brand Equity Foundation

Airports Authority of India (AAI)

It was established in 1994 under the Airports Authority Act. AAI is responsible for developing, financing, operating and maintaining all Government airports in India. The Aircraft Act (1934) governs the remaining airports.

What is the need to focus on the Aviation Sector?

Robust Demand:  Rising working group and widening middle class demography is expected to boost demand for air travel. Emergence of business hubs like Mumbai (Finance), Bengaluru (IT), Chennai (IT), and Delhi (Manufacturing, IT) is likely to boost business travel as well. The passenger traffic is expected to increase manifold in coming years. Aviation sector will need 2,380 new commercial airplanes by 2038. Inline with the anticipated demand, the Government has envisaged increasing the number of operational airports to 190-200 by FY40. This necessitates a focused approach towards boosting investments to support infrastructure in the sector.

Further, as India’s international trade increases, the demand for cargo services will see a rise.

Huge potential to develop India as an MRO hub: As the aviation market expands, and number of aircraft increase, the demand for Maintenance, Repair and Operations (MRO) will also rise. (MRO centres can be considered as service centres for aircraft). India’s MRO industry is expected to grow from US$ 800 million in 2018 to more than US$ 2.4 billion by 2028. Indian airline companies will spend over 12-15% of their revenues on maintenance, which is the second highest cost component after fuel. There is lack of adequate MRO facilities at present and India’s share is only 2.5% in the Global MRO market.

Regional Connectivity and Development: Aviation sector will be crucial in ensuring balanced regional growth especially in rural and Northeast India. Aviation sector acts as a hub of various activities. The Airports function as a growth pole. They  propel growth in the region as a result of spill-over & trickledown effect. The sector can give boost to tourism sector which in turn drives the supporting infrastructure in a region, like roads, railways, hotels, markets, etc. providing direct and indirect livelihood opportunities for the locals.

Growth Drivers of India's Aviation Sector UPSC

Growth Drivers of India’s Aviation Sector. Source: India Brand Equity Foundation

What steps have been taken by the Government to support growth of the Aviation Sector?

Northeast India: Over 30 airport development projects are under progress across various regions in Northeast India. AAI plans to develop over 20 airports in Tier-II and Tier-III cities in the next 5 years. It also plans to develop Guwahati as an inter-regional hub and Agartala, Imphal and Dibrugarh as intra-regional hubs.

Greater focus on infrastructure: AAI plans to invest INR 25,000 crore (US$ 3.58 billion) in the next 5 years to augment facilities and infrastructure at airports.  The Government is planning to invest US$ 1.83 billion for development of airport infrastructure along with aviation navigation services by 2026.

Liberalization and Open sky policy: With the opening of the airport sector to private participation, 6 airports across major cities are being developed under PPP. Currently, 60% of airport traffic is handled under PPP, while the remaining 40% is managed by AAI. Participation by the private sector has improved the service levels and enhanced the passenger experience.

Increased traffic rights are being enjoyed under bilateral agreements with foreign countries. India has signed Open Sky Agreements with multiple nations like the US, Greece, Jamaica, Japan, Finland, Sri Lanka etc. An Open Sky Air Service Agreement allows for airlines from the two countries to have an unlimited number of flights as well as seats to each other’s jurisdictions.

National Civil Aviation Policy, 2016: The policy covers 22 areas of the civil aviation sector. Under the policy, Airlines can commence international operations and will have to deploy 20 aircrafts or 20% of their total capacity (whichever is higher) for domestic operations. This will improve international footprint of India-based airline services. 

Regional Connectivity Scheme (RCS)/UDAN (Ude Desh ka Aam Nagrik) has been launched under the policy. This has expanded access to air travel. In 2016, India’s top 6 airports handled 66% of India’s domestic air traffic. This has come down to ~55% in June 2022. This indicates shift of traffic pattern away from Metro routes.

Taxes and duties: 100% tax exemption has been provided for airport projects for a period of 10 years. Indian aircraft Manufacture, Repair and Overhaul (MRO) service providers are exempted completely from customs and countervailing duties. The Airport Authority of India plans to abolish royalty and offer steep discounts in lease rent to encourage MRO units to set up facilities at its airports.

Union Budget 2022-23: The Government has allocated INR 10,667 crore for the Ministry of Civil Aviation. INR 600 Crore has been provided for UDAN Scheme.

Encouragement to FDI: The Government has allowed 100% FDI under automatic route for greenfield projects, whereas 74% FDI is allowed under automatic route for brownfield projects. 100% FDI is allowed under automatic route in scheduled air transport service, regional air transport service and domestic scheduled passenger airline. FDI over 49% would require Government approval. FDI inflows in India’s air transport sector (including air freight) reached US$ 3.54 billion between April 2000-March 2022.

What are the challenges faced by the Aviation Sector?

Safety Concerns: Last couple of months have witnessed several instances of malfunctions before/during flights resulting in diversions/delays. The malfunctions are being attributed to lower turnaround times by airlines to maximize profits after a pandemic-induced slowdown. Experts have argued that low-cost airlines (which dominate the sector) give low priority to maintenance in order to save costs e.g., many snag rectifications are being undertaken by technicians rather than qualified engineers.

Moreover, the ongoing Russia-Ukraine war has created shortage of spare parts, especially those containing titanium.

Profitability of the Sector: Most airline operators have poor financial health. The situation worsened during the COVID-19 pandemic due to lockdowns and flight restrictions. Consistent losses drive down number of operators impacting competition and efficiency. To reduce losses, operators increase turnaround times of aircraft and cut-down on maintenance/safety aspects.

Profitability of Airlines in Indian Aviation Sector UPSC

Source: PRS. Most airline operators have returned consistent losses since 2014. Only Indigo was profitable for 5 of the 6 years period between 2014-15 to 2019-20. During COVID-19 pandemic, the sector suffered huge losses.

Absence of robust competition: While the policy is being liberalized; still, there are stiff regulations which act as barrier to the expansion of the sector. According to Mr. GR Gopinath (founder of Air Deccan) tough entry barriers for new entrants reduce competition, high fuel prices on account of taxes reduce profitability of airlines which prohibit the sector from operating at full efficiency. Public sector airports are inefficient and still have a monopoly in the airport segment. 

Poor rural connectivity: With mega airports controlling air and ground space, it is almost impossible to connect rural and small towns from the large metros. Although UDAN has showed some positive impact, regional connectivity still remain poor.

Policy Lacunae: There are many policy gaps that remain to be addressed e.g., the Aircraft Act, 1934 and Aircraft Rules, 1937 have not kept pace with modern technology in aerospace. This has increased costs to the industry and ultimately affected passenger growth.

What more steps can be taken going ahead?

First, the statutory regulatory authority, the Directorate General of Civil Aviation (DGCA) should be modernized, well-staffed and incentivised. Experts recommend that DGCA should be headed by aviation professionals rather than by bureaucrats from the government.

Second, The ‘Start-up India’ initiative must be promoted to the aviation sector. Young entrepreneurs are the driving force in hi-tech companies and disrupting many conventional businesses.

Third, Airport developers can now draw on wider revenue opportunities such as retail, advertising and vehicle parking. Future operators will benefit from greater operational efficiency due to satellite-based navigation systems like ‘Project Gagan’ which is in development phase.

Fourth, reforms should be undertaken in all areas of aviation for passenger airlines to grow. This includes air cargo, airports, aviation fuel taxes (State and Central, which in India are among the highest in the world) and Maintenance, Repair and Overhaul (MRO).

Fifth, since there are thousands of pilots and technicians unemployed in India, airlines should not look for foreign pilots and engineers as it can further push up the costs.

Sixth, there is a need to modify the India’s Aircraft Act, 1934 and Aircraft Rules, 1937 as it is necessary to keep pace with modern technology in aerospace, growth of industry and passenger.

Conclusion

India has a huge aviation market with large untapped potential. There is a need for continuous support to the sector from the Government through appropriate policy interventions. This will benefit domestic economy, as well as enhance the global footprint of India’s aviation sector, both in passenger and freight traffic. 

Syllabus: GS III, Infrastructure: Airports

Source: Indian Express, Mint, Mint, The Hindu, Business Standard, IBEF

Print Friendly and PDF