Indian economy bids for progress through better aviation

Indian economy's bid for progress through aviation

Home to 18% of the world's population, India has all the makings of what a booming aviation market should look like. The growing middle class, which currently accounts for 3.5% of the global total (according to the Credit Suisse Global Wealth Report) is one of the key predictors put forth in the IATA passenger demand forecast model. On the whole, the travel market is projected to grow at around 11.5% at present, hitting $48 billion by 2020.  

The Indian Railways, which is a monopoly owned and operated by the Government of India, reports an annual revenue of $25 billion (INR 1.68 trillion) as of 2015-16, and corners as many as 8.1 billion passengers in the same time frame. It is a more popular alternative (by volumes, but not total fares) to aviation for towns/villages which do not have commercial aviation facilities, and presumably for the cost-conscious customer. However, there has been a marked dip in railway passenger volumes over the past few years, probably indicating a shift in demand towards air travel. Taking cognizance of this trend, as well as the potential of aviation to drive job creation and accelerate economic activity, the Government has begun taking steps to boost the supply side.  

The newly introduced UDAN program by the Government of India aims to serve more effectively the existing and upcoming demand for air travel in the underserved markets. This is being implemented in association with the Airport Authority of India to improve the infrastructure in these areas, as well as by incentivising airline companies for making air travel affordable for a larger segment of the population. According to the Indian Brand Equity Foundation, a sum of $375 million (representing a 25% increase) is being set aside for capital expenditure to expand capacity at 12 airports in 2017-18. Apart from this, the Government has a four step plan to make regional aviation more profitable for the suppliers:

    1. Tax on aviation turbine fuel reduced from over 20% to 3%
    2. Elimination of navigation and landing charges from airports under the program
    3. Exclusivity granted to some operators on certain routes
    4. Government support to cut financing risks and hence reduce leasing costs on aircraft

A report from Business Standard specifies that as many as 500 new aircraft have been added to the order books, of which around 10% is being delivered annually. India's top LCC has already announced an infrastructure expansion worth $1.3 billion towards participating in the program, representing around 35% of the current fleet size.

However, several airlines currently operating in tier-I cities have expressed concerns with the capacity currently available in domestic airports, as well as how the planning activities are carried out ahead of capacity allocation. Mumbai and Delhi, the busiest airports in the country responsible for 35% of the domestic traffic in the country, reportedly lack enough runways to enable proper servicing of the demand placed on them. An unnamed senior executive of a "leading Indian carrier" is cited in the same report, claiming that a 15% growth is easily achievable for them in passenger carrying capacity, but the airports are currently overloaded and hence not capable of allocating any new operating windows.

Distributed airport model: One of the possible solutions?

Land acquisition remains one of the core issues preventing expansion in these busy cities; after all, the population density of India is as much as 8 times the global average, and many of its tier-I cities figure among global leaders in that metric! Therefore a broader distribution of capacity, or embracing new concepts like "distributed airports" would be the practical solution. Clearly, aviation can act as a vehicle of progress for the Indian economy – and that is what it really needs from such programs, although short term goals like cheaper airline tickets is an easier dream to sell to the public. A redistribution of air connectivity, over the long term, will make the newly connected cities viable for better investment and thereby job growth prospects. Bold steps are being taken, but it is just too early to write a verdict just yet. 

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Saturday, 22 June 2024

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