Indian aerospace: Too much choice?

A plethora of low-cost start-ups has transformed Indian air transport. But how much longer can the newcomers survive as overcapacity takes its toll?

On growth figures alone, it would appear that India's civil aviation sector is booming, with a phenomenal rise in passenger traffic since the introduction of the first low-fare carrier, Air Deccan, in 2003. But a look beyond the traffic growth figures reveals much uncertainty and unease. The country's many new airlines are almost all losing money - and plenty of it - as overcapacity leads to irrational battles for market share and uneconomically low ticket prices.

Infrastructure inadequacies also remain a problem, which in some areas is stifling traffic growth, and there are concerns that not enough is being done to improve the situation. But those in government appear not to be overly concerned, as they see the troubles as natural in a market that was stifled for so long by bureaucracy and which is finally coming of age. Despite the difficulties faced by the many new airlines, long-term growth in the sector is forecast by all.

The passengers are loving it. Never before has there been so much choice in terms of flying between major cities, nor have ticket prices been so low. As infrastructure capacity issues force airlines to focus on routes connecting secondary cities, rather than just the major population centres, journey times are being reduced compared with the traditional transport choices of trains and buses.

Scheduled domestic air services are now available to 75 of the country's airports, for example - up from fewer than 50 at the start of the decade.

Until 2003 there were only four main scheduled passenger airlines in India - privately owned Jet Airways and Air Sahara, and government-owned Air India and Indian Airlines (with its small subsidiary Alliance Air). Now there are 14 scheduled airlines and more are seeking approval to launch.

Most of the new airlines have adopted the single-class no-frills model and air fares have plummeted, leading to huge growth in demand. There have also been a handful of regional operators that have started flying, connecting secondary cities and providing feed to the "metros".

On the domestic front, only 15.6 million passengers flew by air in India in the 2003-4 financial year (up 12.4% over the previous year). It is a remarkably low number in a country with a population of more than 1 billion, a rapidly expanding middle class and poor ground transport infrastructure - especially when compared with the more than 15 million passengers that travelled by rail each day during the same period.

Passenger traffic rise

In 2004-5, however, the number of domestic air travellers grew by 24%, to 19.4 million, and in 2005-6 there was 29.6% growth, to 25.2 million passengers. Growth this financial year is expected to be in excess of 40%. Between April and November 2006, nearly 29 million passengers were carried by the country's domestic airlines - more than in the whole of the previous year, and an increase of 47% during the comparable period.

International passenger traffic growth has also been strong as the government has allowed more foreign carriers to fly to India. Air Sahara and Jet Airways have been given approval to fly overseas, and both Air India and Indian Airlines have leased more aircraft and launched new international services. Civil aviation minister Praful Patel says he expects both domestic and international passenger numbers to continue growing at an average rate of around 25% annually over at least the next decade.

The passengers are not the only ones loving the sudden changes. Manufacturers are busy reworking growth forecasts for India on the back of an unexpected boom in new-aircraft orders over the past few years. Since 2004, several hundred new aircraft have been ordered by the country's airlines this seems to fit with Patel's 2005 prediction that the country's fleet of commercial aircraft would probably grow to around 2,000 by 2015, from 210 at the time.

Even Air India and Indian Airlines have been able to order aircraft, after failing to secure government approval for fleet modernisations and expansions for more than 10 years. Air India is now in the process of adding 68 new widebodies and narrowbodies to its fleet as well as to that of low-cost international subsidiary Air India Express, while Indian Airlines is adding 43 Airbus narrowbodies for growth and replacement.

Regulatory concerns

But there are problems in the background the government has expressed concerns that the sector is overheating and that, without more regulation, things could take a huge step backwards. Late last year, civil aviation minister Patel said the government was worried about ballooning financial losses by the new airlines, and said tougher controls would be put in place over the issuing of new airline licences.

The aim, he said, was to avoid a repeat of the 1990s, when many new airlines were allowed to start operating only to shut down within a few years. But it has been a controversial move, as many believe the government should let failures occur - a natural development in a young civil aviation market, and one that allows the survivors to become stronger.

Consolidation has not yet come to the market as many had anticipated, however. There were signs early last year that a wave of mergers was on the horizon, following an announcement that market leader Jet Airways had agreed to acquire Air Sahara, but the deal ultimately fell through and since then there have been no other airline tie-ups. If anything, it led to more growth rather than consolidation - Air Sahara has since announced major expansion plans in a bid to win back lost market share, leading to more overcapacity.

But many see 2007 as the year in which consolidation may finally begin, and it could prove to be a pivotal one for the country's airline sector. It looks likely to be something started by the government: to help them better compete with the new airlines and the additional foreign carriers now serving India, state-owned Air India and Indian Airlines are being set up to merge by April.

The intention is to create a true "network carrier" operation to help the enlarged entity become more competitive. At present Air India operates mainly medium and long-haul international services, while Indian Airlines operates domestic flights as well as international services to South-East Asia and the Middle East.

Air Sahara and Jet are the only other Indian carriers with international rights, but there are suggestions that regulations may soon be eased to allow for more home-based international players.

Infrastructure upgrade

Current regulations say that Indian passenger airlines must be at least five years old before they can fly outside the country, but fast-growing Kingfisher, which launched domestic services early in 2005, wants to start flying abroad as early as this year. It is lobbying hard for the five-year restriction to be dropped and the government has suggested there could be developments in the coming months.

Other likely developments this year will be to infrastructure. Last year the main Delhi and Mumbai airports were privatised through long-term leases, and their new owners are launching major upgrade works. The government is also focusing on upgrading airports in the country's other major cities, such as at Chennai and Kolkata, in addition to 35 "non-metro" airports, in a bid to push aviation into secondary parts of the country. The programme to expand these 35 airports is expected to be completed by 2010-11, and much of the construction will begin this year.

In addition, Nagpur in the centre of the country is being promoted as a major aviation centre. It is being tipped as a key cargo hub as well as one for maintenance, repair and overhaul (MRO). As part of the Air India aircraft deal, for example, Boeing agreed to set up an MRO operation there. Airbus and ATR are separately setting up training and maintenance facilities elsewhere as part of their numerous deals with other carriers.

The government has said that training will be another key focus this year, as a shortage of pilots has affected all of the country's airlines and pushed up labour costs. Regulations have been changed to make it easier to bring in foreign pilots, while the retirement age has been increased to 65. At the same time, government-owned flying schools are being expanded and foreign groups are being invited to take stakes in them, while new schools are in the planning stages with a view towards them being funded by overseas investors.

More of the country's airlines are also expected to seek strategic investors this year to bring in funds for expansion. Already several of the country's carriers are publicly traded, such as Jet Airways, SpiceJet and Air Deccan, which all have investment from overseas. Privately owned GoAir and new freight carrier First Flight Couriers are, meanwhile, now looking at selling minority stakes to strategic investors.

Much has changed in India since the last air show in Bangalore two years ago, and the following 12 months could be pivotal in terms of further development of the civil aviation sector to prepare it for a more positive future.

For passengers, the liberalisation of the past few years has been a boon - and it could be as equally beneficial for those airlines with the financial resources to survive the continuing period of heavy losses.

Source: Flight International