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Development of the Indian Aviation Industry

  BHAVYA SINGH /   DECEMBER 17, 2022   

The Indian Aviation industry has flown a long distance in terms of development and contribution to the economy. Now, India is set to become the third largest aviation market in the world.

     n 1911, the United Provinces Industrial and Agricultural Exposition in Prayagraj (initially known as Allahabad) hosted the country's first commercial flight, which traveled for roughly fifteen minutes across the Yamuna River to Naini. The flight’s pilot Henri Pequet delivered 6500 mails, making it the first official airmail service. Although the first commercial aviation flight took place in India in 1911, India was merely a spectator in this event as the first regular airmail services in India were established by J.R.D. Tata in 1932 when he piloted the first ever commercial flight from Karachi’s Drigh Road Aerodrome to Mumbai’s Juhu Airstrip via Ahmedabad. The aircraft was a single-engined De Havilland Puss Moth (a British three-seater high wing airplane) and it carried 25kg of 4-anna airmail letters.

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Under the New Economic Policy of 1991, privatization in the aviation sector changed the way people would experience flights.

J.R.D. Tata, also known as ‘Father of Indian Aviation’ is known to have founded and built Tata Airlines along with his friend Nevill Vincent. Tata Airlines is now known as Air India, the flag-carrier airline of India. In 1953, the Jawaharlal Nehru government passed the Air Corporations Act and nationalized the aviation industry where eight domestic airlines operated independently along with Air India. Subsequently, the International Airports Authority of India was established in 1972 and the Bureau of Civil Aviation Security was established in 1987. While the former is responsible for developing and expanding the operational, terminal and cargo facilities in airports, the latter is responsible for laying down standards and measures with respect to security of civil flights at international and domestic airports in India. These organizations, however, were unable to improve the state of Indian airlines, which remained subpar in terms of operations, affordability, management, and services until 1991.

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Illustration by John Andrew Stewart

Under the New Economic Policy of 1991, privatization in the aviation sector changed the way people would experience flights. By 1992, the aviation sector was catering to more than 2 lakh passengers and the number continued to rise with time. Presently, the aviation sector is a highly competitive market being a capital-intensive business with high operational costs. Currently, there are 30 international, 10 customs and 103 domestic airports in India.

International integration in Indian aviation is a fundamental requirement to boost various industries and support the requirements of numerous travelers in the world including students, businessmen, tourists, diplomats etc.

One of the major developments in the aviation sector has been international integration and traffic. This aspect of the airline industry has developed tremendously and impacted various sectors like tourism, education, business, etc. On July 24th, 2014, Air India officially joined the Star Alliance, a group of the world’s biggest airlines with services from all around the world such as Lufthansa, Air Arabia, Air France, Emirates, etc. actively operating in the Indian airspace. India has entered into significant codeshare agreements with a number of nations, which have increased its international presence and traffic. Codesharing is a marketing agreement where an airline places its designator code on a flight operated by another airline, and then sells tickets for that flight. This increases international competitive ability, enhances the market size and consumer experience and footprint. International integration in Indian aviation is a fundamental requirement to boost various industries and support the requirements of numerous travelers in the world including students, businessmen, tourists, diplomats etc. Another major development in the sector is in terms of  Maintenance, Repair and Operations (MRO) services. Prior to government and private sector initiatives, the aviation industry was heavily dependent on other nations for MRO services. Today, however, there are some significant Indian players in the MRO services, like AIESL, Air Works Ltd., and others. According to Niti Aayog, India’s MRO market is estimated to be at 4 billion USD from where it was at 2.1 billion USD in 2021, forecasting a compound annual growth rate of  8.9%. This will save India’s foreign exchange reserves and reduce the operational costs of airlines as MRO services account to 12-15% of the total operating costs of an airline. 

 Domestic airlines in India are continuously expanding their services as they are recognizing the demand for air travel not just in metropolitan cities, but as development and migration is increasing, the demand for air travel stems everywhere in the country. 

Apart from international integration, the government has taken some major steps to increase air travel accessibility, connectivity and employment. One of these steps has been the National Civil Aviation Policy which was released in 2016. It aimed to improve rural connectivity, safety, and bilateral traffic rights. Ude Desh ka Aam Nagrik (UDAN) programme launched in 2017, was also aimed at increasing and improving connectivity in the regional areas along with tier 2 and tier 3 cities. The scheme aims at enhancing the economy of the country with the help of faster safety and connectivity. Under the scheme, more than half of the seats are offered at a subsidized rate, the cost of which is shared by the Centre and State govenments. UDAN was implemented after the thorough review and analysis of the government’s previously launched scheme. To improve connectivity and migration, the Government along with the private companies have tried to reach the smallest towns, villages and cities of India. In an initiative of recognizing the need for regional connectivity, a new scheme has been introduced under UDAN, known as the Small Aircraft Scheme. While UDAN focuses on 90-seater planes, under this scheme, the focus will be on increasing the production and operation of 20-seater planes for regions in India where only these kinds of aircrafts can provide access. Domestic airlines in India are continuously expanding their services as they are recognizing the demand for air travel not just in metropolitan cities, but as development and migration is increasing, the demand for air travel stems everywhere in the country. 

Additionally, the government has ensured modern development by constructing new airports, redesigning the major airports of the country, bringing technology to facilitate a higher utility and providing major tax exemptions to aircraft leasing and financing companies. However, the private sector has been in the forefront of ensuring better transportation facilities to consumers at affordable prices. One of the major examples of this development is Indigo, which is a market leader in the domestic market of aviation in India. It is Asia's fourth largest domestic airline which serves the largest number of destinations in India (74 domestic and 26 international). Prior to the launch of Indigo, Deccan Airways, Air India, and Kingfisher airlines were the major companies operating, however, the airline business is extremely capital intensive. Moreover, the industry is dependent on the Airline Turbine Fuel (ATF) prices which constitutes more than 40% of the operating costs. These circumstances make the aviation industry an extremely volatile market. Airlines incur huge losses as they are not able to reduce operational costs and are not able to increase the price of the tickets due to market competition. These reasons have led to discontinuation of huge airlines including Kingfisher and  Deccan Airways. However, since its launch in 2006, Indigo’s market share has only been increasing due to the steps that it took which made flying cheaper for the passengers and made Indigo a business leader in the aviation sector.  According to Economic Times, Indigo placed an order in 2014 for 250 A320 neo jets with Airbus, was a deal worth 25.7 billion USD which made it the highest single order in Airbus. At the time, all other airlines would buy aircrafts from Boeing due to the undue safety issues in the Airbus aircrafts. However, after the fixation of these issues, Airbus was desperately trying to re-enter the Indian market, and thus sold these aircrafts to Indigo at a discounted price. 

Another major step taken by Indigo is cutting down the logistical and operational costs. While Kingfisher and Jet Airways provided customers with many facilities including food, entertainment etc. Indigo only provided the bare minimum facilities required for the journey. This drastically reduced their operational costs (reducing the amount of fuel used per flight) and it made Indigo a leader in price wars. According to the Times of India, this has led Indigo to acquire the largest market share of 58.8% ahead of Tata Airlines with a market share of 23.4% (including Air India, Vistara and AirAsia). Presently, the Indian aviation market is a highly competitive space where the above mentioned two companies acquire more than 80% of the market share. 

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Unknown Illustration via Pinterest

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Unknown illustration via Pinterest

The Covid-19 pandemic severely impacted the aviation industry as transport was curbed. The sector incurred huge losses during the pandemic. Losses weren't just in terms of revenue, but also unemployment, defaulted dues of various airlines and suspended fights. According to Business Today, the Indian aviation sector suffered a loss of approximately INR 20,000 crores during the financial year 2021 and 10% of the jobs were lost. Demand for travel skyrocketed after the lockdown was lifted. To save the customers from exorbitant prices as a result of very high demand, the government introduced airfare caps on 25th May, 2020 when the flight operations resumed. This set a lower and upper limit on the price of the tickets the airlines could set. After a period of 27 months, the government then finally decided to remove the air-fare caps in order to facilitate the recovery of the loss-making aviation sector.

Presently, a general trend of higher airline ticket prices has been observed. According to Outlook, domestic flight tariffs have risen 20% in 2022 whereas according to The Hindu, international airline ticket prices have risen to up to 50%. 

 

Another reason for this sharp rise in price is due to the Russia-Ukraine war, which has led to an increase in the price of fuel all around the world, including the Airline Turbine Fuel (ATF). In the last six months, ATF prices have witnessed a cumulative increase of 50%, going from about 53,000 INR per kilolitre to now about 1,41,000 INR per kilolitre. Earlier, the ATF constituted 20% of the cost of operations of an average airline, now, it constitutes 38% of the same. The direct impact of the hike is being faced by the passengers, as a result of increased costs. In the past few months, this price has reduced 12% to about 1,16,000 INR per kilolitre. Another major burden on the airlines is the VAT on ATF. The aviation minister, Jyotiraditya Scindia has stated that air-fare caps cannot be reintroduced to curtail this situation as the aviation sector is currently going through a recovery phase. At the same time, he has requested states to reduce the VAT on ATF. As a result of persistent efforts, 16 states of India have reduced their VAT to 1-4% (previously ranging from 20-30%), as pronounced by Jyotiraditya Scindia in a recent Business Today conference. This has led to control of ticket prices even at the time of high fuel prices as prices have not increased in the same proportion as the costs of the airlines. This general rise in prices of the tickets has ceased to affect the demand for flying. According to the Economic Times, Indian airlines last month carried 1.14 crore passengers which was 10% higher than the previous month. 

The development of the aviation industry has proved to be a result of effective steps taken by the government and increased market competitiveness of the Indian airlines. 

The airline industry is extremely capital intensive, and additionally requires huge amounts of working capital for operational costs. The most important aspect of an airline is to be sustainable. Due to the lasting effects of the pandemic, the net loss of the aviation industry for the financial year 2023 amounts from 15,000 crore to 17,000 crore INR as reported by Economic Times. Even though this is a negative indicator, numerous positive aspects indicate the sustainability of the aviation industry. The passenger traffic has increased to about 57% on an yearly basis and the growth in passenger traffic is forecasted to be about 52-53%. According to Zee News, even though more than 15 airlines exited the market, airlines like Akasa Air bring a new hope by providing world class services at affordable prices. Some major milestones have been the highest number of women pilots, paperless boarding and development of world class airports. The development of the aviation industry has proved to be a result of effective steps taken by the government and increased market competitiveness of the Indian airlines. 

Keywords 

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Aviation, Indian Aviation Industry, JRD Tata, Star Alliance,UDAN Yojana,New Economic Policy, Codeshring, National Civil Aviation Policy,Small Aircraft Scheme, Jyotiraditya Scindia

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The views published in this journal are those of the individual author/s and do not necessarily reflect the position or policy of the team behind Beyond Margins, or the Department of Economics of Sophia College for Women (Autonomous), or Sophia College for Women (Autonomous) in general. The list of sources may not be exhaustive. If you’d like to have the complete list, email us at beyondmarginssophia@gmail.com

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