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The Indian aviation industry is presently at a critical junction in its learning curve. As the market progresses towards maturity, the most critical challenges faced by airlines have always been the high cost of operations, high oil prices and high taxation. But as per industry analysts, even though these issues bring new opportunities and avenues for growth in unconventional ways, there needs to be complete restructuring and alignment of regulatory policy framework. “The other issues that need to be addressed include developing a long term infrastructure plan both for air and ground and prepare skill development across value chain,” feels Vishal Bhadola, associate manager, CAPA India, adding that, there are expectations from the new administration to initiate structural reforms and work towards stabilisation of the sector and remove negative fiscal regime on a priority basis. On the expected performance of the sector, Peeyush Naidu senior director, Deloitte Touche Tohmatsu India opines,“With the significant market growth potential, and industry potentially focusing on newer market segments like regional routes, one can hope that the industry would capitalise on the same and turn around.” However, Naidu adds that, growth in aviation in India may well be a function of growth in regional domestic markets. This could be through incentivising newer business models for air services and supporting the same through low-cost airport infrastructure.
Taking a closer look at these intricacies, and with an aim to boost civil aviation sector as a major growth driver, recently finance minister Arun Jaitely, under the NDA government, in his Union Budget 2014-15 speech informed that the Budget has taken note of a healthy increase of 5.2 per cent in domestic passenger traffic at Indian airports during April-March 2013-14. In the budget 2014-15, Rs 9474 crore has been allocated for the civil aviation ministry, including investments in public enterprises for the financial year 2014-15, up from revised estimate of Rs 8,502 crore in fiscal 2013-14. The government has earmarked Rs 6,500 crore for equity infusion in Air India and a plan allocation of Rs 569 crore, taking the total allocation to the state-owned air carrier to Rs 7,069 crore. Meanwhile, the Airport Authority of India has been provided with a budgetary support of Rs 79.70 crore, of which Rs 22 crore has been earmarked for its project at Pakyong, Sikkim.
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Adrian Terron
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Further, in the budget it was also stated that the government will develop airports in metros and non-metro cities through public-private partnership mode to enhance air connectivity. India plans to build 200 low-cost airports in the next 20 years to connect tier-II and tier-III cities. The government also plans to construct 15 additional airports under the Greenfield airport policy by identifying the most suitable low cost viable model. Budgetary support of Rs 50 crore has been provided to Directorate General of Civil Aviation to pursue their plan scheme. A provision of Rs 40 crore has been made for Bureau of Civil Aviation Security for meeting expenditure towards their plan schemes. Analysing the budget, Adrian Terron, executive director, Nielsen India states, “Introduction of foreign direct investment in the aviation sector in India, and an overall improvement in infrastructural facilities will have immense impact on growth of air traffic in India. Connectivity through low cost, no-frill airports in tier-II and tier III towns, which are largely untapped markets with less than a three per cent penetration, will be the natural next step and one that will be instrumental in expanding air travel penetration to smaller towns. Possible policy reforms, such as relaxation of the 5/20 rule will encourage airlines to expand their footprints. Modernisation of bigger airports, encouragement of private sector participation, and changes in regulatory structures will bring transparency and efficiency in the sector – ultimately benefiting consumers.”
New entrants
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Vishal Bhadola
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With the aviation sector in India currently dominated by low cost carriers, can the entry of AirAsia and TATA-SIA add a new piece to the puzzle? Opining on the same, Bhadola states, “Entry of proven LCCs like Air Asia will be positive for existing LCCs because it drives them to further enhance operational capability which will increase their overall productivity especially in areas like aircraft utilisation and lower distribution costs. Focus on ancillaries will boost revenues. International operations will be key for Air Asia but we could expect a much calibrated and rational approach to international operations by the incumbent LCCs till they start receiving A320 Neos/ B737 Max especially the earlier arrival for A320 Neos could allow more network flexibility due to its enhanced range and fuel efficiency.”
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Peeyush Naidu
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However, according to Naidu, international operations can always be important for airlines to develop profitable route networks – over which they can connect passengers between regional markets. However, besides regulatory aspects, airlines would also have to contend with demand-supply dynamics – especially for regional international routes. “AirAsia is already very well established in the ASEAN market and Singapore Airlines would be looking to leverage its large hub / base for connections to various international markets,” he adds.
So could there by continuous price wars? Terron states, “Low prices will definitely be an attraction for first time or new flyers, however frequent flyers are looking for ‘value’ over cost when selecting the airline to fly. Factors such as connectivity, convenient timings, and consistency of services play a more critical role. Discounts and promotions will continue to be important, however the brand will need to deliver ‘value’ and excel on the basic requirements of convenience , connectivity, and reliability, to sustain.” According to Naidu, it will be interesting to see how TATA-SIA target / develop routes especially with respect to linkages with international routes. But for CAPA, Bhadola replies, “We expect fare interventions on limited scale especially limited to Air Asia’s route network but remain concerned about the larger potential fare war in the second quarter which will be due to a weak traffic period and need to raise cash by some airlines.”
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Is ‘hybridisation’ in?
As airlines try to make their operations profitable, ‘hybridisation’ may well be observed on a number of parameters. “It could be easier to do so on fare structures while more difficult to do on operations,” says Naidu. But with hybridisation being inevitable for Jet Airways, and not for Air India, Bhadola feels that, the key is to continue providing a service level in the front-end but with a low cost back-end matching productivity level in terms of aircraft utilisation and labour productivity. The cost structure should be closer to a LCC which will allow a yield difference to contribute positively.
But do India’s FSCs lack clear strategies for handling their domestic business models?, to which Bhadola replies, “Indian FSCs have an outdated business model which is not relevant in the market. Costs are much higher and fares are more or less closer to LCCs. It is not a workable model. Hence a FSC model is an unviable business model.” From a customer’s point of view, Terron states, “Consumers today don’t differentiate between low cost and full service airlines. With fares of LCC and FSC being comparable (sometimes even lower for FSC), provision of Business/Luxury class, inclusion of meals in fares, and access to certain airport privileges (separate check-in, lounge access) were the only possible differentiators. However, growing popularity of web-check in, exclusion of meals for short-distance flights in FSC carriers, provision of access to luxury lounge at additional charge, are blurring the line between FSC and LCC carriers to the extent that most flyers (especially the new flyers) see no real difference between the two. FSC carriers need to identify opportunities to better differentiate their offerings and build a strong and attractive value proposition for flyers seeking exclusive and premium service for their air-travel.”
Expected growth story
At the outset, Indian civil aviation’s growth story looks positive, starting with increased air travel penetration and connectivity. “We also expect greater efficiency, new entrants, and more innovative offerings by airlines in the near future. There will be continued change in consumer behaviour and expectations with consumers looking for complete, as well as personalised and simplified travel solutions,” believes Terron. Passenger growth over the next five years could be influenced by regional (domestic) connectivity and increasing tourist and business traffic. “We could also see market segmentation and evolution of newer air service business models in response to growth coming from regional centres. There could be enhanced focus on proper utilisation of airport infrastructure including for enhancing commercial revenues while focusing on efficient and lower cost aeronautical facilities. However, fundamentally the growth would depend on economic growth – contributing to air travel demand as well as making it more affordable for a larger population base.” CAPA forecasts airport passenger size to reach 450 million by FY 2023. This is almost three times the current size. International growth is expected to be more stable than the domestic traffic growth at least in the near term.
