ANALYSIS OF THE AVIATION SECTOR

Sector Analysis The Indian aviation sector has shown enormous growth in the past decade. This sector is a collection of multiple functions like airports, airlines, ground handling, air traffic control, safety, security, etc. 1 The major challenges faced by the aviation sector is fierce competition, rising fuel prices, and infrastructure bottlenecks. 5 The major players in this sector are Air India, Jet Airways, Kingfisher Airlines, Spicejet, Indigo, GoAir, and Paramount Airways. Out of these; Air India, Jet Airways, and Kingfisher Airlines are full service carriers while the others are low cost carriers. Air India, Jet Airways, and Kingfisher Airlines also offer low cost services. The low cost subsidiary of Air India is Air India Express, while that of Jet Airways is JetLite; and that of Kingfisher Airlines is Kingfisher Red (erstwhile Air Deccan). It all began with Air Deccan introducing rock bottom fares equalling the AC II tier train fares. In response to that, all major leading airlines slashed rates.15 In July 2006, around 3.1 million seats were created, out of which only 2.5 million seats were being occupied. 70 per cent of all those travelers travelled on discounted fares. The result was that all the airlines were bleeding with heavy losses.2 Other reasons for losses were increasing price of Aviation Turbine Fuel (ATF) and other operational costs. Air Traffic Control (ATC) delays are also proving to be very expensive. For a minute of delay by the ATC, an aircraft burns Rs. 2500 worth of fuel. Despite all this, the obligation to keep prices low and competitive still remains.2 The fares have deliberately been kept at low levels to stimulate demand. 3 There was a rapid increase in air travellers in 2007. The number of domestic passengers increased by about 40 percent. This encouraged nearly all the airlines to buy new aircraft, despite the fact that the losses amounted to around Rs. 2000 crores on account of rising ATF prices and payments of aircraft. Due to increase in the number of planes, coupled with the increase in the number of passengers, immense pressure was exerted on the aviation infrastructure. The Ministry of Civil Aviation handled this situation through policies that encourage private or merchant airports.5 An example of this being the new Rajiv Gandhi International Airport in Hyderabad, which was developed by GMR. When ATF prices did fall in November 2008, it did not, however, result in low passenger fares. The airlines claimed that they were still making losses, and this was an opportune time to make good their losses.4 But due to the economic slowdown and the terror attacks in Mumbai, passenger occupancy was on a record low.8 In December 2008, when Air India reduced fares, other airlines had to follow suit due to mounting pressures from all quarters. 6 The fare cuts were expected to boost passenger occupancy. In January 2009, the increase in bookings was not proportionate with the reduction in fares. Though the

move has increased flight occupancy from 60 per cent to 65 percent, industry experts opined that the industry has to achieve more than 70 percent to break even. 7 By the end of 2009, passenger traffic was up by 6 to 7 per cent. 8 Passengers carried by domestic airlines from January-April, 2010 were 162.82 lakhs as against 133.41 lakhs in the corresponding period of year 2009 thereby registering a growth of 22.05%. The total domestic passengers carried by the scheduled airlines of India in the month of April, 2010 was 41.88 lakhs.1 India as a country is cost conscious, and hence Indians prefer low cost carriers over full service carriers. Hence, full service carriers are facing a greater challenge in terms of passenger occupancy.14 Paramount Airways, Indigo and Spicejet have posted profits this year while all others have posted losses.12, 13 Indias civil aviation sector is ranked ninth in the world. It is set to be among the top five in the world in the next five years. 9 Airline-wise details of market share of scheduled domestic airlines for the month of April, 2010 are as follows: (Source: Directorate General of Civil Aviation (DGCA))