Ready for take-off (Part-II)

The future growth of the domestic aviation sector in India will depend to a large extent on the availability of quality infrastructure.

In the last Torchlight column, we commenced a discussion on the potent Indian aviation sector. In this column we turn the torchlight onto the factors that could further fuel, as also hamper the continued growth of this sector.

The growth story in numbers
The domestic Indian aviation sector growth fuelled by a fast growing economy and rising consumerism, has been relatively resilient, as compared to other countries, to international events like September 11 and SARS.

It has maintained a compounded annual growth rate (CAGR) of 8.90 per cent over fiscal 2002 to fiscal 2004. This has been approximately the same as growth in the international sector, which grew at a CAGR of 10.50 per cent over fiscal 2002 to fiscal 2003.

It is estimated that the total number of passengers carried by scheduled domestic airlines in India was 15.25 million in fiscal 2004 and 8.80 million in the six months ended September 30, 2004.

The growth in demand has been matched by the growth in domestic capacity. The Indian aviation sector grew at a rate of 7.7 per cent over fiscal 2001 to fiscal 2003 in terms of available seat kilometers (ASKM).

The Road ahead
Growth in air transport (both passengers and cargo) is closely associated with growth in GDP, both internationally and nationally. For a one per cent increase in Indian GDP, domestic passengers are expected to increase by 1.10 per cent.

For international passengers, this sensitivity is about 1.30 per cent. The policies and program of economic liberalization followed since the early 1990s, which have stimulated GDP growth and foreign investment, may be considered as major factors contributing to the growth in domestic air travel between 1993 and 2004. The outlook for the Indian economy remains favourable with India projecting a six per cent to 6.50 per cent growth rate in fiscal 2005.

The aviation market in India consists of two principal groups - leisure travellers and business travellers. Leisure traffic tends to be more price-elastic.

While historically, business travellers have formed the majority of the domestic air travel in India, with increasing income levels and the emergence of flexible fare schemes, a shift is likely in the travel habit of the middle to high income groups from premium class travel in trains to air traffic.

In contrast to 15.25 million airline passengers in fiscal 2004, the Indian railways carried approximately 52 million passengers in its premium class products, i.e., air conditioned and first class coaches.

The Indian tourism market has been growing at a significant pace over the last few years, with the government giving impetus to the industry through various schemes and organized events.

Inbound tourist traffic into India increased by 13 per cent from 2.4 million in fiscal 2002 to 2.8 million in fiscal 2003. Travel and tourism expenditure in India is expected to achieve an annualized real growth of 8.8 per cent over the 10-year period from fiscal 2004 to fiscal 2014.

Potential hurdles
Despite the recent growth in air passenger traffic, India continues to have gross under-penetration of air services with an average air travel of 0.014 trips per person per year as compared to an average of 2.02 trips per person per year in the United States.

On the positive side, this signals the level of potential demand which may be generated as the economy grows and air travel becomes more affordable for a larger population, which otherwise uses road or rail transports.

The domestic aviation sector in India experiences higher input costs in terms of fuel charges and airport related charges. Domestic airlines generally have to pay higher charges than those paid by international airlines procuring fuel within India since such international airlines are exempt from paying excise duty and sales tax. Also, landing and navigation charges at Indian airports are higher than at airports in neighbouring countries such as Bangladesh, Sri Lanka and Nepal.

The domestic aviation sector in India continues to be highly regulated. However, the government is considering replacing these guidelines by a 'subsidy structure' although it is uncertain if or when such guidelines will be amended.

The domestic aviation sector is also characterized by entry barriers in terms of limited availability of parking bays and slots. The future growth of the domestic aviation sector in India will depend to a large extent on the availability of quality infrastructure, particularly airport infrastructure.

Overall, the positives do outweigh the negatives, and that is perhaps what is fuelling the surge of new entrants into the Indian aviation space. While saturation of the market may be some time away, a consolidation could well be on the cards, and sooner than expected. Till then, sit upright, fasten your seat-belts and enjoy the take-off.

(Ashok Kumar heads Lotus Knowlwealth in Mumbai, India and can be contacted at ceolotus@hotmail.com )