Liberalization key factor in soaring success of aviation

After independence, the aviation sector in India was exclusively run as a government monopoly. With the liberalization of the aviation sector, the industry has witnessed a transformation with the entry of privately owned full-service airlines and low-cost carriers.

Revolutionized by liberalization, the aviation sector in India has been marked by fast-paced changes in the past few years. From being a service that few could afford, the aviation sector has emerged as a fiercely competitive industry with the presence of a number of private and public airlines and several consumer-oriented offerings.

The higher demand for air transport in India comes as a result of a range of factors including a growing middle class and its purchasing power, inexpensive airfares offered by low-cost carriers, the growth of the tourism industry in India, increasing outbound travel from India and the overall economic growth of the country.

FDI in aviation

In February 2006, 100% foreign direct investment (FDI) was allowed in greenfield airport projects under the automatic route, subject to sectoral regulations notified by the Ministry of Civil Aviation.

FDI in existing airport projects up to 100% was also allowed, subject to Ministry of Civil Aviation regulations, but prior approval was required for investments beyond 74%.

For air transport services, which include domestic scheduled passenger airlines, non-scheduled airlines, chartered airlines, cargo airlines, and helicopter and seaplane services, the FDI cap was 49% generally, but 100% for non-resident Indians (NRIs). However, a ban was enforced on direct or indirect equity participation by foreign airlines.

In March, 28 airports were opened for FDI in areas of operation and airport maintenance. FDI up to 100%is permitted for greenfield airports through automatic approval. For existing airports, FDI up to 74% is permitted through automatic approval and up to 100% through special permission from the Foreign Investment Promotion Board.

In relation to helicopter, ground handling and maintenance services, FDI up to 100% has been permitted through automatic approval.

Growing at a rate of 18% annually, the Indian civil aviation sector holds great promise for potential investors. International no-frills budget carriers, especially Asian low-cost carriers, are also making a beeline for India.

Airport infrastructure

India currently has 80 fully functional airports handling scheduled commercial, charter, and defence services and 368 landing strips that function as makeshift airports. According to a report by the Centre for Asia PacificAviation, India’s Civil Aviation Ministry has a target of 500 operational airports within the next 12 years.

Over the next five years, the Airport Authority of India (AAI) has planned a substantial investment of US$3.07 billion. Of this amount, 43% will be allotted to three metro airports in Kolkata, Chennai and Trivandrum, and the rest will go into upgrading other non-metro airports and modernizing existing aeronautical facilities. India’s largest and most well-known airports – Mumbai and New Delhi – have recently been privatized.

Given an unprecedented 40%growth in domestic air traffic during the first nine months of 2007, 100 more airports will be operational by 2008, with at least 500 small and big airports created across India.

The government envisages an investment of close to US$9 billion, with the private sector contributing aboutUS$5.92 billion and AAI to allocateUS$2.96 billion in a bid to develop about 100 greenfield airports during the11th Plan period (2007-2012).

Flight into the future

It has been predicted that India’sdomestic traffic will grow at 25% to 30% a year until 2010, while international traffic is expected to rise to 15%, taking the overall market to more than 100 million passengers by the end of this decade. Indian carriers have 480 aircraft on order for delivery by 2012, which compares with a fleet size of 310 aircraft presently operating in the country.

The International Air Transport Association believes India is a driving force behind the world’s civil aviation business, which is globally expected to grow from US$5.1 billion to US$5.6 billion in 2008, according to recent estimates.

The liberalization of FDI in the aviation sector and other government initiatives has helped accelerate India’s civil aviation passenger growth which, at 20%, is among the highest in the world. The aviation sector is predicted to cruise far ahead of other Asian giants like China or even strong economies like France and Australia. The number of passengers who will be airborne by 2020 is a phenomenal 400 million.

Ravi Singhania is the managing partner at Singhania & Partners. The firm is headquartered in Noida and has offices in New Delhi, Mumbai, Bangalore and Hyderabad.