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W H I T E P A P E R

Indian Civil Aviation Sector

W H I T E P A P E R

2

Table of Contents

Indian Civil Aviation Sector................................................................................................... 1

1.0 Overview........................................................................................................................... 3 1.1 Evolution of Indian Civil Aviation Market: .............................................................................. 3

2.0 Current Market Dynamics .................................................................................................... 4 Market Dynamics ..................................................................................................................... 7 Indian Economic Boom ........................................................................................................... 10 ii.Evolution of Indian Civil Aviation Market: .............................................................................. 11 Government policies:.............................................................................................................. 13 Aircraft Deals: ....................................................................................................................... 15

Disclaimer:.......................................................................................................................... 16

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1.0 Overview

Not so long back air travel in India was limited to few. Its not that things have changed now, but they

are different. Now also a large part of Indian population can not afford air travel and for most of the

Indians, railway remains the preferred mode of transportation. In 2005, Domestic Air traffic accounted

for mere 0.5% (Source: Zinnov Analysis) of the railway traffic. It will take many more booming years

for Indian civil aviation industry, before air travel can even be compared with railways. Economic

barriers and the lack of aviation infrastructure have emerged as the two most important constraints

for the growth of aviation industry in India. Despite of these limitations and constraints aviation

industry has hogged the lime light in past few years and is expected to do so in future

Indian Aviation Industry (2005-06)

Current Indian Population: 1.2 Billion

Annual Airline Passengers 37 million (0.5 % of Railways)

Annual Railways Passengers 5.4 Billion

Airlines traffic growth (2002-05) 15%

Railways traffic growth (2002-05) 3%

Airlines operating (from India) 11

Expected Air travelers by 2020: 262 Million

1.1 Evolution of Indian Civil Aviation Market:

Initial years of Indian civil aviation sector were marked by monopoly of state owned airlines –Air India

and Indian Airlines – which led to poor service offerings and high cost of traveling. These factors

largely discouraged the air travel in India, restricting air travel to the ultra elitist Indians. Post 2000

scenario changed rapidly led by entry of almost eight private players. Most of the new airline

operators had low cost carrier (LCC) model which ensured budget flying and competitive services.

Phase-I The beginning: History of Indian civil aviation history goes back to 1932 when Air Indian

was started as a freight liner. In 1933 TATA airline (later called Air India) became the first Indian

passenger airline, next two decades showed a lot of consolidation in Indian skies and Indian airlines –

the domestic carrier- emerged as a result of nationalizing eight airline companies. In 1957 World Bank

approved a loan of USD 5.6 million for including Boeing 707 in Indian fleet. Till late 80’s there was no

competition in the Airline market and national airlines were the only players in Indian skies. The lack

of competition ensured public sector monopoly, it resulted in low service standards and high prices.

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Phase-II Entry of Private sector: In 90’s Indian skies started opening up, in 1990 open sky policy

for air cargo was announced. In 1994 air corporation act was revoked which paved the way for

establishment of Jet Airways and Air Sahara, first big private players since TATA’s in 1933.

Phase-III Indian Aviation Boom: In early 2000 Indian aviation sector started integrating with

global industry, there were many noticeable shifts in the Indian civil aviation policy (more of this is

discussed later) which led to:

– Because of liberalized policies, as many as five budget airlines started operation in span of

2 years

– Private airlines with 5+ year of domestic flying experience were given the permission to fly

on international routes

– Increased landing rights were provided to international flights

– Extensive route sharing agreements with more than 30 countries

– Low cost carriers made flying economical

2.0 Current Market Dynamics

Indian Civil aviation is on fast lane with passenger traffic growing with healthy CAGR of above 6%

since 2000 and 25% since last one year. 5 new airlines have started operations in last two years

Increase in the passenger traffic: While the world air passenger traffic has recovered in last few years

it’s Indian counterpart has witnessed a phenomenal growth in the same period. Zinnov expects Indian

market to maintain the pace till 2015.

Compared to world average of 5.3% Indian domestic passenger traffic has increased by 25% over last

year and overall (international + domestic) traffic increase of 6% over last 6 years.

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In last five years the domestic to international passenger ration has increased form 1.1 to 1.5, sign of

a maturing industry.

Airlines operating from India have increased: Three years back a domestic passenger has three odd

flight operators to choose from. Since then India has come a long way with ten odd airlines operating

in Indian sky, with couple of more waiting to get license. Its been a two way approach, growing

passenger demands have brought in the new players and the lucrative and budget flying has further

boosted passenger growth. Going ahead Indian government has liberalized its policy to cater the need

of the passengers and the airline companies.

Y ea r

Air lin es Op er ati ng fr om In dia

Numb

er of A

irlines

Y ea r

Air lin es Op er ati ng fr om In dia

Numb

er of A

irlines

0

2

4

6

8

10

12

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006

Regular Airline Low cost carriers

Year

Airlines Operating from India

Num

ber

of

Airlin

es

0

10

20

30

40

50

60

70

80

90

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

International Domestic

Air Traffic Passenger Growth (Millions)

(2000-16)

0

10

20

30

40

50

60

70

80

90

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

International Domestic

Air Traffic Passenger Growth (Millions)

(2000-16)

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The numbers of airlines have increased from four in 1995 to 11 in 2006, majority of new additions –

five out of six- being low cost carriers.

India vs. World market: Growth of Indian aviation market has outperformed the world average and is

projecting itself as the new hub of civil aviation. Boeing and Airbus have projected India to be the

second most important growing market in the world after China.

Zinnov expects India to add 50 million more air passengers by 2015

India’s 0.02 trips per capita is one third of China’s 0.06 and far below the world average of ~0.2 trips

per capita. Air trip is a function of GDP and measure of economic prosperity of a country, in developed

country air trip is considered as just another mode of transportation and not luxury. With Indian

economy growing with an eighth plus growth rate, there will be a sharp increase in the total air

travelers. Considering India’s huge population 0.06 trips –which India is expected to reach by 2015 -

will mean an addition of around 50 million more passengers. This way India will surpass the UK, other

European countries, North and South American countries except United States, becoming the third

largest aviation hub after US and China.

Canada

France

Germany

Japan

NetherlandsUK

Australia

Hong Kong

Italy

United States

Korea

Greece

Spain

New Zealand

Saudi

Arabia

Malaysia

Mexico

Brazil

Turkey

China

Philippines

Indonesia

India

0.01

0.1

1

10

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

GNI/Capita (2002 USD)

Passenger Trips vs. GNI/Capita – 2002

Air T

rips p

er

Capita

(200

2)

(Logarith

mic

scale

)

W H I T E P A P E R

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Market Dynamics

Structure of industry: Indian domestic aviation sector is governed and driven by the low cost carriers.

Although a new entrant in the market this breed has made a place for them and are growing fast,

threatening the market share of regular players.

Overall LCCs account for more than 25% of the total passenger share in the Indian domestic market.

Air Deccan the pioneer of LCCs in India has captured 15% market share, Jet Airways remains the

number one airline company at 35% followed by Indian (previously Indian Airlines). Kingfisher

another budget airline – with services of regular airline – has created a niche market for itself and is

growing its share rapidly. There are other new entrants who are coming up with low fares promise

better services Indigo airline being one such player which started their operation in October 2006.

Indian the state owned airline is losing out to the private players, it’ market share has gradually come

down from 57% in 1996 to 35% in 2006. Recently there have been talks to merge the Indian with Air

India the state owned international carrier. This will help add more muscle to the company, to fight

the emerging players.

Total*= 25,050,000Total*= 25,050,000

Domestic Air Travel Passenger Traffic Market Share

(2005-06)

Jet Airways

(35%)

Air Deccan

(15%)

Indian

(28%)

Spicejet

(5%)

Rest

(3%)

Air Sahara

(12%)Kingfisher

(6%)

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The low cost model of the Indian industry is reflected by a sharp increase in the number of available

seats but a relatively slow growth trend foe the revenue per kilometer.

India Domestic Air Passenger Market Share

(1996 – 2005)

Perc

enta

ge

4339 38

54 5660 63 65

5761 62

5751

46 4440 37 35

4349

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1996 1997 1998 1999 2000 2001 2002 203 2004 2005

% Carried by Private Airlines % Carried by Public Airlines

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Business Models of Indian Low Cost Carriers:

Represent a hybrid between low cost carriers and traditional carriers. Make tradeoffs

involving complexity of their business model and cost such as developing a network route

structure rather than point to point and forming alliances with other carriers code-sharing

and inter-lining.

Maintain cost conscious approach but provide a more sophisticated product that often

includes frills such as the larger seats, in-flight entertainment and business class seating.

Brand is based on customer experience, while pricing reflects value versus other similar

product offerings in the market place.

Build brand based on an “every day low price” concept and offer a basic product. Utilize

low fares to stimulate new demand, but profitability is driven predominantly by air travel

as opposed to ancillary revenues.

Demonstrates a single focus on managing cost and being the lower cost player in the

market they serve. Offers a highly basic product and rely on very aggressive low fares to

stimulate demand. Rather than targeting specific customer segment, these carriers seek

to attract a broad base of customers through low fares. Developing ancillary revenues

(on board sales, fees for baggage) are critical for building profitability and further

subsidizing even low fares

Description

Gol

jetBlue

Southwest

Rynair

Global

Prototype

Kingfisher AirlineTransitional

ParamountUpscale Pure

plays

Spice Jet, Go AirPure Plays

Air DeccanAdd on retailers

Indian ExampleBusiness Model

Low Cost Carrier Business Models

Represent a hybrid between low cost carriers and traditional carriers. Make tradeoffs

involving complexity of their business model and cost such as developing a network route

structure rather than point to point and forming alliances with other carriers code-sharing

and inter-lining.

Maintain cost conscious approach but provide a more sophisticated product that often

includes frills such as the larger seats, in-flight entertainment and business class seating.

Brand is based on customer experience, while pricing reflects value versus other similar

product offerings in the market place.

Build brand based on an “every day low price” concept and offer a basic product. Utilize

low fares to stimulate new demand, but profitability is driven predominantly by air travel

as opposed to ancillary revenues.

Demonstrates a single focus on managing cost and being the lower cost player in the

market they serve. Offers a highly basic product and rely on very aggressive low fares to

stimulate demand. Rather than targeting specific customer segment, these carriers seek

to attract a broad base of customers through low fares. Developing ancillary revenues

(on board sales, fees for baggage) are critical for building profitability and further

subsidizing even low fares

Description

Gol

jetBlue

Southwest

Rynair

Global

Prototype

Kingfisher AirlineTransitional

ParamountUpscale Pure

plays

Spice Jet, Go AirPure Plays

Air DeccanAdd on retailers

Indian ExampleBusiness Model

Low Cost Carrier Business Models

0

5

10

15

20

25

30

1995 1996 1997 1998 1999 2000 2001 2002 2003 2005

Available Seat Kilometers (Billions) Revenue passenger Kilometers (Billions)

Growth Trends

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Key Drivers for Indian civil Aviation Industry

While railway figure dwarfs the Indian aviation statistics, the growth in latter has been phenomenal,

especially in last couple of years. While railway passenger growth has declined and is creeping at 3%,

air passengers are growing with a CAGR of 15% (2002-05) (Source: Zinnov Analysis). Indian aviation

sector is growing, with push coming from multiple directions. Some of the key drivers being:

i. Indian economic boom

ii. Evolving civil aviation market

iii. Conducive environment for the aviation sector

Indian Economic Boom

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Since last few years India is consistently clocking a GDP growth in excess of 7%. Thanks to great

Indian IT boom which has decimated the distance between the major Indian cities, at the same time

ever increasing salaries in Indian service sector have empowered the large section of population with

economic freedom. While the GDP/capita is still low at USD 722 but the PPP value for same is USD

3580. Some other indicators of rising prosperity in Indian middle class are:

• Median house hold income has increased by 50% in last 5 years.

• With USD 3580, GDP per capita (PPP) stands very high

• By 2008 46% of the Indian population will be earning in excess of USD 3000/Annum

Emergence of a competitive market and economic boom clubbed with liberal government

policies and better aircraft deals has fueled the growth in Indian civil aviation sector.

ii. Evolution of Indian Civil Aviation Market:

Particularly the changes in Indian skies over the last couple of years have taken national and

international watchers by surprise. Both Boeing and Airbus had to revise the forecast for Indian

W H I T E P A P E R

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aircraft demand by 2020.According to the revised estimates India will need 650 odd more aircrafts in

next 14 years Low Cost carriers (LCCs) or budget airlines fueled the growth, and brought the air

travel within the reach of Indian middle class (700 plus million). It all started with Air Deccan-the first

LCC in Indian skies- which operated on the no frill and cheap ticket business model. The business

model of Air Deccan is high volumes & low fares.

• 20 years back India had 2 Airline companies, one International and one private

• Market share of public sector companies have come down from 57% to 35% in last 10 years

• Number of airline companies increased from 4 to 11 in last 5 years, 2 more Airlines are

waiting approval

• Private airlines have stirred the market with better services smart pricing and more options to

fly.

Cost/KM Air Travel vs. Railways ( in cents)

2.2

2.4

2.12.0

3.0

1.8

2.3

1.9

1.5

1.31.2 1.2

3.8

1.9

3.5

1.4

2.3

0

0.5

1

1.5

2

2.5

3

3.5

4

BLR- Hyd BLR -

Mumbai

Delhi-

Mumbai

Delhi-Hyd Delhi-BLR Delhi-

Chennai

Average Ist AC Average Airline Ticket Average IInd AC

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• Out of last seven new airline companies which entered Indian aviation market five were low

cost carriers (LCCs). This is an indicator of the bandwidth available in budget airways which can tap

the huge Indian middle class.

• Emergence of low cost carriers has brought the air ticket price closer to railway prices. On

busy routes (see the figure) an average air ticket price costs less than the railway ticket.

Government policies:

• Private Indian airlines with five plus years of experience were given the permission to fly in

international skies

• Investments in airport infrastructures –

Number of Airlines Operating from India

1 1

2 2 2 2 2 2 2 2

4 4

11

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2006

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1. Two Greenfield airports at Bangalore and Hyderabad with combined capacity of 90 million

passengers annually, largest in India.

2. Brownfield expansion of four metro airports ( Delhi, Mumbai, Kolkata, Chennai)

3. FDI limit on airport infrastructure to be hiked to 49%

• Focus in Tier-III cities (small cities):

1. Thirty five tier-III airports to be modernized in phased manner. In first face ten airports will be

modernized

2. Total budget of USD 1.8 billion for modernizing the Tier-III airports

Major Government Initiatives

• Liberalization

1. Liberalization of entitlements with US, UK , Australia and France will boost growth in Civil

aviation

2. Private players are welcome to invest in Airports and fly on national and international routes

3. Tier –III cities will get ready for the traffic

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Aircraft Deals:

• India has emerged as the biggest buyer at all major air shows

• Indigo airlines a new kid in Indian skies has placed an order for 100 Airbus

• Boeing and Airbus are wooing India by offering attractive offset plans. e.g. Airbus plans to set

up a training centre for pilots in India with an investment of $75 million as part of the offset deal the

Government

Airline Planes Ordered

Air India 68

Indian Airlines 43

Jet Airways 50

Air Deccan 62

GoAir 50

Kingfisher Airlines 78

Paramount Airways 5

Spice Jet 20

MagicAir 20

East-West 40

Indigo 100

Indus 10

Air One -

Total 546

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