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Civil Aviation: Ready to take off - Views on News from Equitymaster
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  • May 15, 2006

    Civil Aviation: Ready to take off

    The boom in infrastructure activities in the country has kick started significant development across various sectors, which form part of this broad category. All the segments within this sector say roads, civil aviation, ports and railways are showing robust growth amidst heightened activity. This growth moves in tandem with the growth of the economy. Amongst the above, one sector that has benefited immensely is the civil aviation sector.

    Civil aviation today is a key contributor to the growth and development of the Indian economy as well as leading to sustainable development of trade and tourism in the country. This sector provides three categories of services - operational, infrastructure and regulatory-cum-development. Domestic air services are provided by the government owned 'Indian' (erstwhile Indian Airlines) and some private airlines like Jet, Sahara, etc. International services are handled by government's Air India and many other international airlines. Airport infrastructure facilities are taken care of by the Airports Authority of India (AAI).

    Civil aviation sector has taken significant strides in the last 3-4 years, aided by the growth in international and domestic traffic. To put this in perspective, in the first three years of the Tenth Plan (2002-2007), air transport has grown at an average rate of 7% per annum. However, this CAGR growth number should be viewed in the backdrop of the fact that the world had witnessed a sharp slowdown in air traffic on account of the September 2001 attacks in the US. Despite this, the Indian aviation sector has witnessed the said growth. In fact, the robustness in the sector can be gauged from fact that during FY05, air transport witnessed a very high growth of above 24% YoY with similar growth rates witnessed in the just concluded fiscal (FY06).

    Another indicator of the strong industry growth is the fact that in the past one year, the number of aspirants seeking pilot licences has multiplied three times from 300 in FY05 to 1,045 in FY06. Part of this could be attributed to the emergence of low cost carriers (LCCs) or 'no-frills airlines' as it is popularly known. These have not only captured a significant pie of the skies in the last couple of years from the traditional carriers in the country but have also led to the growth of the industry itself by making air travel affordable to a greater number of people, in turn giving the railways a run for their money. Today, the sector has emerged as a fiercely competitive industry with the presence of a number of private and public airlines and several consumer-oriented offerings.

    To encourage the growth of civil aviation in the country, the government has come up with new plans for the sector. Some of these include:

    • Open sky policy during peak season: Non-availability of seats during the peak winter season has been one of the major constraints faced by passengers. In order to ensure sufficient availability of seats, the government adopted a limited open sky policy from November 2004 to March 2005, under which designated airlines operated additional services. A number of airlines responded to the offer and operated over 2,400 additional flights to different airports in the country during the winter period. This greatly improved the connectivity and curtailed off-loading of confirmed passengers. This policy was also adopted for FY06, under which foreign airlines had been permitted to mount their services to places where it required.

    • Signing of a revised air services agreement with USA: A revised air services agreement between India and USA was signed on 14th April 2005 replacing the earlier agreement signed in 1956. The earlier agreement had already permitted to designate any number of airlines and their services between the two countries. This agreement was maintained for FY06 with the introduction of the removal of all the restrictions on points of call, code share rights, 5th freedom rights. This provides greater commercial opportunities to Indian carriers as well as to attract more of traffic from the third country carriers.

    • Liberalisation of air services on other important routes: Traffic rights in context to countries like Brazil, Australia, UK, USA, China and many more, have been enhanced by the government so as to enable greater connectivity to/from India.

    • Opening up of international routes to private carriers: With a view to provide better connectivity on international routes, Indian scheduled carriers with at least five year's continuous operations in domestic sector and fleet size of 20 aircrafts have been permitted to operate to all overseas destinations except Gulf countries.

    • Foreign direct investment (FDI): The Government of India has increased FDI limits in air transport services and the revised limits are 100% FDI in green field airport projects and also existing airports. Further, 49% FDI and 100% investment by Non-Resident Indians (NRI) has been approved for clearance through the automatic route.

    • Private sector participation: Privatisation is being encouraged in the civil aviation sector. A recent example of this is the privatisation of international airports at Delhi and Mumbai through a JV, wherein the Airport authority of India (AAI) and other government PSUs will be holding 26% equity with the balance 74% to be held by the strategic partner. With ample opportunities available for the development of civil aviation in the country, this move by the government would help attract a lot of participation from private players.

    Thus, many greenfield projects have come on stream in recent times. The recent examples of these are the construction of Hyderabad and Bangalore international airports, which is scheduled to become operational by the middle of FY08. A similar project is also being contemplated in Goa.

    The result of all of the above has been witnessed in the tremendous growth in air traffic. Domestic and international traffic grew by 24.2%and 18% YoY respectively in FY05. Private airlines now account for 69% of domestic traffic. This growth has been the second highest in the world, next only to China, for the second consecutive year.

    As can be gauged from the recent initiatives by the government, we surely are moving in the direction of emerging as a major player in the civil aviation industry. All the factors have combined to provide the much-needed impetus to civil aviation development in the country. However, while there will be speed breakers in the pursuit to develop and grow, we believe that the opening of the sector to greater private and foreign participation is a positive move, which will aid in removing the barriers present in the sector currently and lead to the sector taking-off!



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