Table of Content
Sr. No. Particulars
I. Acknowledgement 2
II. Declaration 3
III. Executive Summary 4
IV. Introduction to Aviation Industry 6
V. Indian Aviation Industry 14
VI. Unlocking the Indian Aviation Sector 21
VII. State Government Initiative 31
VIII. The Way Forward 48
IX. Bibliography 51
I would like to thank all people who made a major contribution to our EMDM Project on
Aviation Industry of India 2014. My Professors, Colleagues and associates at “Indian
Institute of Planning and Management (IIPM)”.
I would also like to thank the Professor of EMDM-II, for supporting us in all areas. Whenever
I required help regarding this project, he helped us every time.
I would also like to thank all members of 5onn group and their contribution towards project.
I believe that the credit goes to all who knowingly and unknowingly have supported me during
my internship period.
I hereby declare that all the information has been collected, analysed and
documented for the project is entirely authentic. I would also like to mention
categorically that the work done here have not been purchased or acquired by any
other unfair means or from any external sources. The data and information
presented in this report are accurate.
However, for the purpose of the project, information, already compiled in many
sources has been utilized.
The Indian civil aviation industry is on a high growth trajectory, albeit with minor hiccups.
India has a vision of becoming the third largest aviation market by 2020 and is expected to be
the largest by 2030.
Despite facing a reduced growth rate in the past few years, the Civil Aviation Industry in India
has ushered in a new era of expansion driven by factors such as Low Cost Carriers (LCC),
modern airports, Foreign Direct Investments (FDI) in domestic airlines, cutting edge
Information Technology (IT) interventions and a growing emphasis on regional connectivity.
Simply going by the market size, the Indian civil aviation industry amongst the top 10 in the
world with a size of around USD 16 billion.
However, in order to achieve the vision of becoming the third largest aviation market by 2020,
a lot more needs to be done.
The Asia Pacific region along with other emerging economies of Latin America and Eastern
Europe are projected to lead the growth of the global aviation sector in the next few decades.
Steady economic development of China and India would lead to higher spending power and
increased need to travel. With one third of the world's population residing in these two nations,
there is a huge untapped potential. As per the 12th Five Year Plan (2012-2017), improving air
connectivity in tier-2 and tier-3 cities in India is one of the key priorities of the government.
This expansion will not only add a much needed boost to the industry, but also increase the
viability of new trends like low cost airports and airlines in the country. With the unfortunate
downgrade of India to Category 2 by USA's Federal Aviation Administration (FAA), expansion
in the global routes may be constrained. That too will lead to greater focus on the domestic
market in the short run. All this will have a multiplier effect in terms of higher growth of local
economic activities, tourism and employment.
India sells one of the costliest Aviation Turbine Fuel (ATF) in the world, nearly 60% costlier
than competing nations in the Middle East and ASEAN regions. This is thanks to myopic tax
policies at the central and state level. The raw material - ATF – accounts for nearly half of the
operating cost of Indian carriers. This explains why domestic flight tickets in India are often
costlier than a 3 days weekend package in Thailand and Malaysia' No wonder tourism traffic
in India is a fraction of its immense God-gifted potential.
The irony is that the common man in whose name high taxes are imposed on ATF, is himself
prevented from flying due to high travel costs! According to a rough estimate, nearly 99.5
percent of the world's third largest economy, have NOT seen the insides of an aircraft. Most
Indian carriers therefore are facing financial ruin and are hoping for a white knight to bail them
Some recent initiatives such as allowing import of ATF are a step in the right direction but
more proactive measures are needed in order to make industry more competitive and investor
friendly. The positive Indian airlines are slowly becoming evident. Removal of unwritten ban
on A380s will help bring down cost of travel and increase tourist arrivals. The 5/20 rule and
other regulatory other hurdles in approval of new airlines and import of aircraft need to be
abolished at the earliest.
The regulatory regime governing Maintenance, Repair and overhaul (MRO) of aircrafts is
another classic case of tax and procedural overkill. Not a single commercial aircrafts of Indian
carriers undergoes repairs in India. Empty aircrafts are flown to MRO facilities in our
neighboring countries and paid for in foreign exchange. The loss of revenue, foreign exchange,
employment and direct taxes is immense. All this is thanks to the short-sighted policies
regarding indirect taxes (service Tax and VAT) and cumbersome customs procedures regarding
import of aircraft parts and consumables.
With the growth of air traffic in the region, focused efforts to upgrade the Air Navigation
Services (ANS) has become imperative. Segregation or ANS directorate from Airport
Authority of India (AAI) into a world class organization with latest infrastructure and well
trained professionals is key. Government is expected to decide on the matter soon.
In pursuit of becoming a strong aviation player; India perhaps did not put the right emphasis
on development of human capital and regulatory frameworks. The FFA downgrade has been
fallout of the same. India needs to put its act together to address these issues. The creation of a
financially and operationally independent Civil Aviation Authority (CAA) and the National
Aviation University (NAU) need to be undertaken on a war footing.
There is a large untapped potential growth in the Indian Aviation industry due to the fact that
access to aviation is still a dream for nearly 99.5 percent of its large population, nearly 40
percent of which is the upwardly mobile middle class. It is critical for the industry stakeholders
to engage and collaborate with policy makers to come up with efficient and rational decision
that will shape the future of Indian Civil Aviation Industry. With right policies and a relentless
focus on quality, cost and passenger interest, India would be well placed to achieve its vision
of becoming the third largest aviation market by 2020 and the largest by 2030.
Introduction to Aviation Industry
Air transportation services have evolved into a crucial building block for the world's socio-
economic growth. In the last four decades, the air travel across the world has grown by more
than 1000% and the air freight has increased by over 1400% while the national economies have
grown only three to four times. This phenomenal growth is due to a combination of three key
global drivers, namely, increase in disposable incomes, accelerated globalization and
deregulation of the aviation industry.
Key Global Drivers of Aviation Industry
Increasing competition, technological advancements and improved operational efficiencies
have enabled the cost of air travel to remain relatively low despite severe volatility of global
fuel prices and leading currencies.
Socio-economic benefits of Air Transport Services
Air transport is essential for global business and tourism because of the
growing value of time and money. Aircrafts transported around 3.1 billion passengers and over
51.6 million tonnes of freight in 2013'. Over 35%oof the inter-regional exports of goods by
value and 51% of international tourists are served by air transport services.
The development of air transportation services and socio-economic
development are highly correlated. According to the International Civil Aviation Organization
(CAO), an additional dollar invested in air transport leads to a benefit of around three dollars
to the local economy. Moreover, every additional job created in the air transport results in
creation of over six new jobs in the local economy. Figure 2 describes the distribution of
employment generated by aviation services around the world.
Distribution of global employment in the aviation sector
Trends in Aviation Industry
Year on Year (YoY) comparison of key parameters for the global aviation industry are
represented in following table.
Global Passenger and Cargo growth trend (2013 v/s 2012)
The growth in passenger traffic has been led by a strong progress made by the Middle East
countries supported by the other emerging economies of Latin America, Africa and Asia-
Pacific. The developed economies of North America and Europe lagged behind in terms
of growth in passenger traffic.
The cargo traffic growth rate has recovered from a decreasing trend during 2012. While
Middle East nations have managed a strong growth during 201-3, Asia Pacific and North
America showed a decline. The details regarding regional passenger and cargo traffic are
presented in the following table.
Regional international passenger and cargo traffic growth trends (2013 vs. 2012)
It has been observed that during economic upswing, airline traffic grows roughly around twice
the rate of growth of GDP. The following figures display the trend of scheduled passengers
and cargo during the last decade. The recession caused by the Global Financial Crisis in 2008
has led to a negative growth in both passenger as well as cargo traffic.
Global scheduled Air Passenger Traffic, 2004-2013 (in Million)
Global Air freight tonnage, 2OO4-2O13 (in Millions)
As the economies develop, especially in the Asian region, the
expected aerospace industry is expected to continue on its growth path. This is reflected in the
order books of the aircraft manufacturing companies. The global passenger aircraft fleet is
expected to grow from the existing size of 16094 (in 20L2) to 33,651 (in 2032). The number
of dedicated freighters is expected to grow from 1645, to 2,905 over the same period.
While some of the existing passenger aircrafts will be
reconfigured as dedicated to be freighter, 871 new freighters are projected to be introduced.
Around 28,355 new aircrafts are expected to be added to passenger fleet. The following shows
the breakup of new deliveries by region and by type of aircrafts.
Global Aircraft Deliveries by aircraft type
29,226 New deliveries globally during 2013-2032 by aircraft type
Regional distribution of aircraft deliveries
Regional distribution of 29,226 new deliveries during 2013-2032
The distribution of the new aircraft deliveries, showcased in the figures above, strongly
Support the expected trend in the aviation sector. Middle income groups in emerging
economies increasingly want to travel by air. During the period of next 20 years. The RPK in
these countries is expected to grow at a rate of around 6%, while it is expected to grow at a
rate of 4% in the advanced economies of western Europe' North America and Japan. While
large aircrafts would be required to serve the routes between pairs of cities with heavy
passenger and cargo traffic, smaller aircrafts are expected to grab the lion's share.
TheAsiaPacificregionisexpectedtoemergeasthelargestaviationmarketby2032. Middle East and
Latin America are expected to enhance their share at the cost of North America and Europe.
Forecasted change in pattern of region wise distribution of RPK
The proportion of the new deliveries of the aircraft in Asia Pacific region is in line with the
global trend where single aisle aircrafts having a share of over 60%. The share of the smaller
aircrafts is increasing due to the growing dominance of Low Cost Carriers (LCC). LCCs have
driven the growth of the aviation market in this region through low fares, introduction of new
routes and periodic discount offers.
India and china, accounting for around one third of world’s population are well poised to
contribute to and benefit from growth of aviation sector. The following figure displays the
projected 20-year GDP growth rate of various region across the world. This highlight the high
growth in aviation expected in the two Asian giants.
Regional GDP Growth – 20 year CAGR
Indian Aviation Industry
The Indian aviation sector is experiencing a mix of exciting and challenging times.
On one hand, mounting losses of domestic airlines, high cost of ATF, show growth in passenger
and cargo traffic, rising fares, high airport charges, pitiable state of the MRO sectors, etc. are
crippling industry growth. On the other hand, the long term growth prospects of the industry are
attracting international prayers to invest in India.
The size of Indian civil aviation industry is amongst the top ten in the world at USD 16 billion.
Despite market fluctuations especially with regard to ATF prices, the Indian aviation sector is
growing, albeit slowly. Indian carriers plan to double their fleet size by 2020 to around 800
In order to cope up with the growing demand of air travel, India’s Ministry of civil Aviation
(MoCA) has introduced some far-reaching reforms. These include:
1) Handing over airport management of leading airports to private players on a PPP
2) Foreign airlines allowed to invest up to 49% in Indian carriers. This would not only
facilitate funds infusion, but will also bring in global best practices and synergy
3) In addition to the Greenfield airports at Navi Mumbai, Goa, Kannur and
Kushinagar, six MI airports have been identified for handover to private
management under the PPP route following the successful implementation of PPP
models like Delhi, Mumbai, Bangalore, Hyderabad, and Cochin. There are reports
of another 14 AAI airports being considered for PPP
4) All Indian carriers are now allowed to fry to foreign locations subject to the 5/20
Rule. The discriminatory 5/20 Rule itself is likely to be abolished. This has led to
an increase in share of Indian carriers in the growing international traffic to and
5) 51 new low-cost airports in tier 3-4 cities have been planned in order to improve
6) Direct import of ATF to offset the high sales tax imposed on it.
7) Introduction of 24x7 customs facility at the cargo terminals at reading airports.
8) Extension of duty-free period for parts and testing equipment imported for
Maintenance, Repairs and Overhaul (MRO) from three months to one year.
9) Maintenance, Repairs and overhaul operations included under the airport
infrastructure category, in a view to facilitate external commercial borrowings (ECB)
for the sector
However global comparison of air travel penetrations shows that India (at 0.04 air-trips per
capita per annum) stands far behind the developed countries like US and Australia (2 air-trips
per capita per annum). China’s air travel penetration is five times the size of India's despite
having a population around 10 percent higher.
As India's economy grows, disposable income rise and the value of time increases, the air
travel penetration is expected to grow exponentially.
Evolution of Indian Aviation Industry: -
In the last decade, India has made a significant growth in aviation. As
per data from Airports Authority of India (AAI), passenger throughout grew to 159 million
(FY 13) and cargo throughput to 2.19 MT (FY 13) registering an impressive growth of 13%
and 10% CAGR respectively for the period FY 03-13.
In the last five years, the passenger handling capacity of airports in
India has risen from 72 million to 233 million. This capacity growth has been possible because
of the proactive step taken by the government and the private sector. India is poised to be
among top three aviation markets by 2020, from its ninth position currently.
Investments worth 50 billion USD envisaged
Key highlights of the expected investment over the next five years are mentioned below:
1. Airlines: Indian carriers plan to increase their fleet size to reach 800 aircrafts by 2020
2. Airports: Private operators expected to contribute more than three-fourth of the
investment in next 5 years ;including investment in cargo handling and other non-aero
3. ATC: Investments in CNS / ATM/ Meteorology equipment up gradation;
augmentation of training infrastructure, induction of satellite navigation GAGAN
(GPS aided geo-augmented navigation) to harmonize with leading global initiatives as
SESAR and NextGen
4. General Aviation: USD 4.3 billion investment planned to augment the GA
infrastructure.300business jets, 300 small aircrafts and 250 helicopters expected to be
added to the current fleet in next 5 years.
Expected investment in Aviation Industry of India ($ Billion) 2012-2017
Passenger Traffic Growth: -
In FY13, Indian aviation industry witnessed a contraction in passenger
traffic, due to combination of general slowdown in the economy and high prices of air tickets.
The total passenger traffic in FY2013 was l59 million as compared to 162 million in FY2012.
Despite the contraction in domestic air traffic, international traffic to and from India has been
strong, growing at a GAGR 9% between FY2010 and 2013. According to MoCA, overall air
traffic is expected to grow at an annual average growth rate of 10.1percent in this decade.
Domestic traffic is expected to grow at 11.4 Percent and international traffic is expected to grow
at 9.5percent for the next ten years.
It has been observed that during economic upswing, airline traffic grows
roughly around twice the rate of growth of GDP. The following figures display the trend of
scheduled passengers and cargo during the last decade. The recession caused by the Global
Financial Crisis in 200g has led to a negative growth in both passenger as well as cargo traffic.
Growth in passenger traffic (millions) handled at Indian airports, 2008-2013
Cargo Traffic Growth: -
The total cargo throughout for the FY13 was 2.19 mmtpa as compared
2.3 mmtpa in Fy2012. While the domestic cargo traffic has increased by 7.2% CAGR from
FY06 to FY13, international cargo traffic has grown by CAGR of 6.2% over the same period.
Growth in air cargo volume (million tons) at Indian Airports,
The corresponding number of air traffic movements (ATMs) has been as displayed in
Increasing share of low cost carriers in the Indian market
The airline landscape in India has transformed radically in recent
years. In 2003, there were just 4 carriers - Air India, Indian Airlines, Jet Airways and Air
Sahara, all operating full service models. The private carriers in those days were limited to
operating domestic routes only. In 2013, there are five airlines namely - Air India, Jet Airways
(including Jet Lite), IndiGo, SpiceJet and GoAir. All carriers except GoAir fly on international
The most significant development in the Indian domestic market is
the growing dominance of the low-cost carrier model, which in FY 2013 accounted for almost
70 percent of the domestic capacity. Some full service carriers plan to shift more seats to their
low cost offerings in line with market trends.
Market share of key domestic airlines (October-2013)
Thus, overall the sector outlook is promising. However certain progressive policy decisions
by the government are the need of the hour. These include:
a) Enhancing Regional Connectivity
b) Rationalization of ATF taxes
c) Elimination of discriminatory taxation policy for domestic MRO players
d) Segregation of ANS functions from AAI
e) Abolition of the 5/20 Rule
f) Human Resource Development
Unlocking the Indian Aviation Sector
Enhancing regional connectivity: -
The growth of civil aviation in India has not led to a homogenous
increase in air connectivity. Despite the doubling of the passenger traffic over the last five
years, several Tier 2/3 cities are unconnected or underserved by airlines.
With the existing economic centres reaching a saturation point,
business activities are bound to move to newer destinations. Air connectivity to these new
economic centres will not only provide a fillip to the local economy but also bring in
incremental traffic to existing airports.
Analysis of ATMs operated in 21 leading states of India vis-a-vis
total state population and total passenger flown is stated in the figure below. It highlights the
disparity in air connectivity especially in North, East and North East regions of India.
Distribution of population, passengers & ATMs across all Indian States,
Air connectivity: -
Most places in North-East India are inaccessible due to inadequate road/rail facilities. The only
viable means of transportation in many areas is by air: The flight frequency per week available
to and from 9 airports in the North-Eastern Region by domestic scheduled carriers is shown in
the figure below:
Air connectivity across North Eastern States,
(2012 - 2013 vs. 2013 - 2014)
From the above figure, this has been observed that the leading airports in the North East airport
are experiencing nearly double the frequency in FY 2014 as compared to the previous year.
Dimapur, Jorhat and Shillong are still underserved. Data reveals that Air India, Jet Airways
and Indigo aggressively expanding their services to North East.
Regulations for Regional Airlines: -
DGCA has laid down separate guidelines to operate regional
air transport service in India. Although many airlines received a no-objection certificate from
the government to operate regional services in the past few years, none of them have been
able to take-off. Paramount, MDLR and Air Mantra are some examples. Air taxi operator
Ventura is Struggling and Deccan Shuttles closed down within months of starting.
The recently launched Air Costa Connects southern cities like
Hyderabad, Chennai, Bengaluru and Vijayawada to Ahmedabad and Jaipur. Some more
regional carriers are on the way.
MoCA has held interactions with industry stakeholders in the
past regarding relaxation on some of the DGCA norms and the existing route dispersal
guidelines (see box below).
The Route Dispersal Guidelines (RDG), introduced in 1994,
make it mandatory for domestic scheduled carriers to deploy a certain proportion of their
capacity to regional and remote airports. These guidelines are being revised. MoCA is also
evaluating a seat-trading system which will allow domestic carriers to do code shares with
regional airlines and use the credits thereof to meet their RDG obligations.
Excess supply v/s lower demand: -
Regional airports suffer from underutilization of existing resources. These include the
Underutilized parking bays
Indian airports allocate parking stands to cater to all types of aircrafts. These airports provide
customized bay to park Boeing, Airbus and ATR aircrafts according to their width and size.
The chart below illustrates the underutilization of the parking stands for the airports in 2013.
Number of parking boys utilized and vacant at airports with watch
hours of 24 hours IST 2Ol3
The minimum runway length in most of the Indian regional or remote airports varies between
1"400 meters to 1700 meters which are capable of handling 40-70 seater aircrafts. Around
eight non-metro airports have a runway length of more than 2300 meters which is sufficient
to handle narrow body aircrafts like A320s and B737s. Around ten non-metro airports have
night landing facility. A20-40 seater aircraft can operate at most of the existing regional
airports. However, as can be seen from the figure below many of these airstrips are either non-
operational or grossly underutilized. They require monetary, fiscal and policy support till they
Maintenance, repair and overhaul services
The unused apron and hangers at regional airports cab be utilized in providing Maintenance,
Repair and Overhaul (MRO) services to airlines. The Airworks facility at Hosur Airport is
one such example. Indian carriers today send their entire fleet out of India at a high cost.
Supported with the favorable fiscal policies, the same MRO facilities can be set up in India
over 5-8 year period. It would be win-win for airlines, regional airports and the local economy.
This requires deep foresight on part of the state governments.
Analysis of fleet and airport infrastructure in regional and
Fleet Analysis: -
Indian domestic scheduled carriers operate ATR, Bombardier and Embraer aircrafts on
regional routes. Till date, there are less than 50 small and medium sized aircrafts in India with
seating capacity between 40-100 seats. The major players flying regional routes are Jet
Airways with ATR 72-500 and Air India with their ATR 42-300 aircrafts. SpiceJet introduced
Bombardier Q-400 aircrafts for flying regional routes. Indigo and GoAir operate their A320s
on regional routes.
Air India Regional with its four Bombardier CRJ700s has been the country's only operator of
regional jets so far. Paramount Airways had used jets earlier on regional routes but could not
continue. Air Costa started serving regional routes in October 2013 with Embraer jets.
Analyzing the opportunity at airports
Due to the congested nature of and high airport charges in metro airports, there is an
opportunity to consider non-metro airports as hubs for new or existing carriers. For instance
the new airline Air Costa is headquartered in Vijayawada and plans to set up an MRO facility
there in future.
Cost advantages of regional routes
Operating regional routes attract various cost advantages on operational, regulatory and
infrastructure front. Regional aircrafts, in general, have a low break-even seat factor and have
a shorter turnaround time due to their smaller size. Indian carriers with aircraft weight below
40 MT are exempt from paying navigation and airport charges. No landing charges are
applicable for aircraft less than 80 seats. The landing and parking charges at Category II and
Category II airports (including non-defense airports in North-East Region, Jammu & Kashmir;
Andaman & Nicobar Islands and Lakshadweep) is reduced by 25 per cent of the current rate
for domestic scheduled airlines. For an airline operating between 2200 and 0600 hrs, the night
parking charges are 50 percent of the existing parking charges at all airports except Chennai
Choice of aircraft for regional air connectivity is the key
As the air travel demand in remote and regional areas is currently low these markets may
require limited frequencies and small sized aircrafts. Deploying larger aircrafts on these routes
may result in losses. One option is to maintain a fleet of two aircraft sizes and alter the fleet
mix based on the market response. The downside is the additional cost of maintaining separate
crews, spares and maintenance infrastructure. In the Indian scenario, on an average, an aircraft
(with seating capacity more than 70) operating around 1l--12 hours day is considered to be
well utilized. The operating hours may reduce while operating a small type of aircraft on the
regional routes due to factors such as airport infrastructure, navigational aids, night flying
facilities, weather patterns and runway operational hours, etc.
Since regional carriers operate on a different business model, it becomes imperative to study
the slot allocation parameters in advance. There have been extensive competitions between
Indian carriers to get their preferred time slot that may affect regional carriers' ability to add
frequencies, especially to metro airports. Airports prefer larger aircrafts since the airport tariffs
are linked to the size of the aircrafts.
Prior to 2007, the slots were allocated according to the International Air Transport Association
(ATA) scheduling guidelines. However certain amendments in the policy have been made and
are likely to be implemented soon.
The new policy gives preference for slot allocation to airlines:
a) With better On-Time performance record
b) Consistency in utilization of slots
c) Clean payment record of an airline with no dues certificate
d) Priority to airline with new frights to connect new stations
e) Priority to airline flying within restricted “watch hour”
MoCA should consider reserving some slots during peak hours for regional carriers under the
category “Priority to airline with new flights to connect new stations”.
Developing own regional aircraft
Owing to the growing regional sector demand, India is realizing the need to develop an
indigenous Regional Transport Aircraft (RTA), a la Brazil and China. RTA-70 aircraft is an
initiative by Hindustan Aeronautics Limited (HAL) and National Aerospace Laboratories
(NAL). Care should be taken that the best talents of India’s private sector are leveraged in a
spirit of PPP, a la the successful space program of ISRO. Care should also be taken that no
wheels are reinvented and we utilize key aircraft parts and technologies that have already been
perfected are available off-the-shelf at a reasonable price. Development of an indigenous low
cost RTA would certainly provide a great fillip to regional aviation in India.
Airport Development Initiative
There are various Initiative taken by MoCA and AAI for the development of
airports in remote areas.
a) Development of 15 low cost airports has been approved by MoCA.
b) AAI has carried out upgradation of 31 non-operational airports in the last four years.
c) Operations and Maintenance of six brown-field airports has been planned to be handed
over to private players on a PPP basis. Of the six brown-field airports, four of them are
d) Another 14 airports of AAI are being planned to be handed over to private operators.
State government initiatives
Various state governments are realizing the importance of aviation and are taking proactive
measures of provide fiscal, monetary and policy support. Some of the reform steps undertaken
A. West Bengal: State government has announced 0% VAT an ATF at Bagdogra and
Durgapur airports and 15% VAT on additional flights starting from Kolkata Airport.
West Bengal is the only state to have 0% VAT at regional airports and 15% VAT on a
metro project. Other states are expected air connectivity in their respective states.
B. Andhra Pradesh, Gujarat and Maharashtra: They have set up a dedicated aviation agency
with objective of promoting intra-state air connectivity in their respective state.
C. Maharashtra: With its dedicated agency Maharashtra Air Development Corporation
(MDMC), Maharashtra is in the process of developing five Greenfield airports in the
D. Gujarat: Formed Aviation Turbine Fuel Trading Company to cut down import parity,
marketing expenses, creating a price advantage for aviation activities in Gujarat.
E. Karnataka: Drafted a Civil Aviation plan to develop the low cost airstrips and Helipads
in the state.
F. Odisha and Jharkhand: Reduced VAT on ATF to 5% and 4% respectively.
G. Madhya Pradesh: Entered into a Seat underwriting arrangement with Non-scheduled
operators to enhance the viability of their operations. Reduced VAT on ATF to 5%.
H. Chhattisgarh: Offered exemption of landing and parking charges on the conditional
operations of flights as per the published schedule. Reduced VAT on ATF to 4 %
Regional connectivity in India-way forward
Many Indian states have started taking pro-active measures to promote air
connectivity in their states. Their initiatives are largely in the field of development of airports,
reduction in VAT on ATF, promotion of flying school and provision of subsidies in airlines.
States have gradually realized that reduction in airlines’ operation costs is the only way to
incentivize the airlines to serve their states.
The actions required to enhance regional connectivity are:
a) State governments have to pray a vital role: state governments need to take the
initiative in the field of development of low cost airports, provision of multi-modal
connectivity to the airport and promotion of flying schools, etc.
Suggested measures to be undertaken by state Governments to facilitate promotion of regional
air connectivity in their states:-
Formation of an independent department for civil aviation
Zero rating of VAT on ATF
Underwriting seats on new routes
Provide security and fire services by local police and fire stations necessary subject to
approvals from Bureau of Civil Aviation security (BCAS) and DGCA.
Make provisions of rand and extension of roads & utilities (power and water
connections) for development of low-cost airports.
Waive off stamp duty, property tax, and electricity duty for a 10 year period.
b) Reduction of sales tax on ATF: since Airline Turbine Fuel (ATF) accounts for 40-
50o/o of an airline operating cost, reduction of sales tax on ATF is considered to be one of
the most critical needs of the aviation industry. As discussed earlier many states have already
done this. Larger states like Delhi, Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu
need to do this on priority, else the ATF uplift will shift to other states anyways.
c) Helipad development throughout the country: Helicopter operation are a cost
effective mode of providing air connectivity. Efforts should be made to develop, heliports in
every district of the country. Heliports can come in handy during natural or man-made
disasters. This may be done through the PPP route in collaboration with other ministries like
home, defence, industry and tourism.
d) Development of low cost airports: The next generation of aviation growth in India
is expected to be triggered by regional airports. At present, there are around 450 used/ un-
used abandoned airports and airstrips spread all over the country. About 225 of them are
owned by state Governments or by private operators. Efforts must be undertaken to activate
these airports through PPP, subject to their long term finance viability.
e) Relaxation on regulation to operate regional air services: As per Directorate
General of Civil Aviation (DGCA) guidelines, Indian carriers looking to commerce regional
air services have to undertake operations in one of the designated regions- north, south, west
or rest/northeast. They are allowed to operate between two metro cities, except in the southern
region. This policy needs to be liberalized.
f) Revising the security service requirement: The regulations laid down by MoCA
and Bureau of Civil Aviation Security (BACS) for the 24 hours of airport security service for
regional airports should be reviewed in order to reduce the operating expenses of smaller
airports. Physical deployment of security guards can be replaced with CCTV based smart
g) Essential Air Services Fund (EASF): The proposed EASF by MoCA needs to be
implemented which can boost tourism and promote tier-2 and tier-3 air connectivity. Greater
private sector investment in airports should be encouraged instead of rerouting heavy fees
collected from privately operated airports for other government operated airports.
h) Code sharing concept to be introduced: Concept of code sharing should be
introduced between regional/ non-scheduled operators and scheduled airlines that will allow
the airlines to leverage each-other's network and marketing strengths. This also prevents
wastage of costly ATF when large aircrafts of scheduled airlines operate on regional routes
with low seat factors, just in order to meet their obligations under RDG.
i) Slot allocation: During slot allocation, slots should be reserved for small aircrafts flying
from regional destinations.
j) Route dispersal guidelines to be restructured: Regional carriers are not permitted
to operate on category-l routes. Further these carriers are not able to operate during night time
at regional airports that lack night landing facilities. This policy needs to be reviewed in order
to ensure higher aircraft utilization per day by regional airlines.
International best practices to promote regional and remote area
In most of the leading aviation markets, air connectivity is promoted by the Government.
Some of the best practices followed are as follows:
a) Supporting airlines by sharing risks to add a new destination to their flight
By providing incentives to the airline for adding new destinations to their routes. These
payments are made by the beneficiary airport operator or the government under a Route
Development Fund (RDF) mechanism
Payment to carriers for marketing the destination (e.g. Singapore Airlines promoting
Australia as a tourism destination).
Offering discounts on airport charges (Indian airports do this).
By sharing demand related uncertainties and providing guarantee for a certain number
of seats per flight.
b) Providing regulatory mechanism to boost regional connectivity
Providing restrictions on number of operators on particular routes
Making it mandatory for airline operators to provide capacity on low traffic routes and
providing them rights to operate on trunk routes in exchange (India does this).
Promoting regional air connectivity through a combination of regulated and deregulated
routes as done in Western Australia.
It is a well-known fact that the Indian aviation industry is overtaxed and this is being reflected
in the industry’s lack of competitiveness on the global level. The proactive steps being taken
by several progressive state governments on the VAT front have been highlighted earlier.
The 12.36% Service Tax on air tickets and services that airlines purchase such as landing and
air navigation, contravenes global norms and handicaps the Indian industry. Domestic fuel
(Aviation Turbine Fuel) attracts 8.24% excise duty and in addition to this state taxes may go
up to 30%. Globally, fuel accounts for around 34% of an airline's cost. In India, the additional
taxes and duties bring up this percentage around 45%.
It is important for India to acknowledge the devastating impact of high taxes. Most domestic
airlines have become loss making ventures and the high cost of connectivity would impose
a penalty in the form of rower growth of economy and employment.
Some of the avoidable taxes/charges that need immediate attention are as follows;
a) Service tax on tickets as well as lending and navigation charges.
b) Taxes on Aviation Turbine Fuel - an excise duty of 8.2% (The average fuel cost is
around 45o/o for Indian carriers which is well above the global average of 33%).
c) Domestic/state charges (20-3oo/o).
d) Taxes on MRO
Redesigning the regulatory landscape:
In 2009, Airport Economic Regulatory Authority (AERA) was set up to determine the tariff
of aeronautical services at major airports, passenger fees to be levied and monitor service
standards. As per the AERA Act 2008, major airports have been defined as the airports
which have or are designated to have an annual passenger throughput of more than one and
a half million. Currently, 15 major airports are under the ambit of the AERA.
However, these are a few fundamental gaps in the functioning of the AERA. While it has
the authority to fix the tariff for major airports, its charter does not mandate it to create an
enabling environment for investment in airport infrastructure. Also the non-major airports
which are not under the purview of AERA, do not currently have any policy for economic
regulation. Hence, the Government has to come up with a philosophy of tariff regulation at
these airports, in order to balance the interest of passengers and investors.
The way forward for the Indian regulatory landscape:
There are different perspectives on economic regulation of airports in India. This is mainly due
to a wide diversity in the airports. While uniformity of policy is necessary to create a level
playing field, it may be noted that each type of airport has unique challenges associated with
it. It is therefore necessary to develop a regulatory approach that addresses these unique
challenges while ensuring financial viability of the airport and public interest. The regulatory
philosophy should encourage the world's best airport developers to invest in India's airports.
Regulatory uncertainties and excessive focus on tariff cutting discourages investors. Excessive
profit booking by investors leads to adverse reactions from users and society at largely may
also jeopardize India's aspiration to become a leading aviation hub.
While airports can be treated as monopoly assets from a geographical perspective, global
experience shows that airports cannot charge tariff to the passenger at their will. The
profitability of airports comes from traffic volumes and the origin-destination traffic does not
suffice. Airports compete with each other to become a preferred hub for transfer and transit
passengers. This gives them additional landing and parking charges, passenger fees and
revenues from retail sales.
Thus, while proposing the regulatory approach for airports, the impact of market forces cannot
be ignored. If airports charge excessively and create an adverse impact on the passenger
throughput, airlines may reduce or stop their flights to the said airport, putting the significant
investments to risk. Companies may cut down on corporate travel and use alternative
approaches like video conferences, etc. Airport owners are cognizant of this threat.
Further, to reduce the impact of the aeronautical charges, the airport operator should undertake
all possible mitigating measures, like lean capital expenditure, lower operating costs,
exploitation of the non-aeronautical revenue streams and enhanced benefits to the airlines and
air passengers in order to achieve higher aeronautical revenue.
According to the ICAO, the regulatory approach for airports should derive from the specific
objectives and situation of each nation. Therefore, India's policy framework for airports should
be aligned to the country's vision of becoming the third largest aviation market by 2020. There
is need for a stable, transparent, predictable and investor-friendly regulatory regime with a
mechanism for time-bound resolution of issues to create a sense of certainty in the sector.
India needs to consider tariff determination on case to case basis. Application of single till
system at an airport may hurt its financial viability and may discourage investments in airport
infrastructure. on the other hand, applying the dual till approach to the airports may not be fair
to passengers who do contribute to non-aeronautical. Revenues accruing from retail,
advertising, car parking, etc.
The hybrid till approach, therefore, appears to be the best suited for India. The extent of cross
subsidization (e.g. 30% in case of Delhi and Mumbai Airports) of aeronautical expenses by
non-aeronautical revenue can be determined through discussions between stakeholders.
Supporting the MRO Industry
India's current MRO market size is estimated to be around USD 700 million. By 2020, the total
Indian fleet would double in number, making it critical to have a strong domestic MRO
industry. As per Boeing, the market is expected to grow at 7% CAGR for the next 8 years to
reach USD L.5 billion by 2020. The figure below shows the break-up of the MRO market in
India. Engine overhaul is the largest segment of the MRO market.
The Indian MRO industry is facing significant challenges which are slowing down the growth
of this industry. Some of these factors include un-friendly taxation structure cumbersome
procedures for import of components and movement of foreign experts, and inadequate
According to industry 5-10% of the MRO work for domestic scheduled carriers is carried out
in India and most of the maintenance activity work is outsourced to third-party service providers
outside the country. This marks a lack of competitiveness in the Indian MRO sector.
It is critical that both the taxation and policy related bottlenecks are thoroughly examined and
addressed to put the Indian MRO industry on a high growth trajectory. One main issue that
needs to be tackled on an urgent basis are the unnecessary taxes on the industry which drive
down the domestic MRO industry's competitiveness and reduce investors' interest in it.
Rationalize value Added Tax (VAT) and Service Tax on MRO
MRO is critical to the growth of the aviation sector in India. It generates employment, revenue
and government taxes. A close collaboration between the government, airlines, airports and
the MRO industry would be crucial for addressing the high taxation in the form of VAT and
Service Tax along with other policy level issues. The following chart addresses some of these
key issues surrounding high taxation of the MRO industry in India.
Key issues surrounding high taxation of the MRO industry in India
The actions required to make India a global MRO hub are as follows:
a) Elimination of discriminatory taxation policy for domestic MRO players:
Due to discriminatory tax policy, Indian MRO players have to suffer an additional tax burden
of nearly 40%o over foreign MROs. These are in terms of import duties, VAT and service tax.
This has led to a strange situation. India carriers prefer to fly their aircrafts and crew at a high
cost to other MRO locations like Dubai, Singapore, Malaysia, Sri Lanka etc., since it still works
out to be more cost-effective than doing the repairs in India.
There is an urgent need for rationalization of this anomalous taxation policy that has only
weakened India's competitiveness as an aviation hub.
b) Abolishing of import duties for spare parts: Due to high import duties, (not
applicable to foreign MROs) local MROs are not able to maintain an inventory of key spare
parts. This, at times, leads to Indian aircrafts being grounded for longer periods. Abolition or
reduction of import duties for spare parts will cut short the timelines for servicing the aircrafts.
c) Treatment as import substitution: Given that the aerospace and MRO industry in
India is in its infancy, and that there is a heavy dependence of Indian carriers on MROs in
foreign countries, the domestic MRO industry should be supported as a means of import
substitution. For instance, manufacturing of power sector equipment for domestic industry is
treated as deemed exports and receives significant tax benefits.
d) Impetus on MRO joint ventures: The Government should incentivize airlines to
consider setting up their dedicated MRO hubs in India through three-way joint ventures with
MRO service providers and airport operators. This assures sustained business for the venture
as well as cost advantage for the airlines.
e) Streamlining of licensing and security clearance procedures: According to
industry players, receiving approvals for an MRO establishment is extremely challenging.
Currently the license is given out as a ground handler instead of a MRO player which suggest
that the authorities are not distinguishing between these two very distinct services.
In case of urgent of a grounded aircraft, requiring foreign specialists to be flown in at short
notice, the amount of time taken for getting security clearance for such experts is highly time
consuming. Their late arrival causes significant losses for the airlines since the opportunity cost
of a grounded aircraft is extremely high. There is an urgent need to streamline clearance
procedures so that there is a reasonable balance between business exigencies and security
Corporatization of Air Navigation Services (ANS)
India has been amongst one of the countries experiencing fastest growing aviation market and
is expected to be amongst the top three aviation markets globally by the end of this decade. As
mentioned in the preceding sections, the number of aircraft movement at Indian airports in FY
2OL2-2013 was around 1.77 million, which is more than double the number of aircraft
movement in FY2002-03.
The navigation infrastructure on the ground has not been able to keep pace with the growing
number of aircraft movements putting ANS under considerable pressure. Immediate actions
are critical to ensure safe operations in the Indian skies. ANS needs to augment capacity along
with technology, training and efficiency improvements.
Focused attention is required to address this situation. AAI today handles a dual responsibility
of ANS along with airport management. Segregating ANS functions into an independent
corporate entity (ANS Corporation of India or ‘ANSCI’) is a critical requirement. This would
also be in line with standards of International Civil Aviation Organization (lCAO) which states
that the primary objectives of ANS and airport operators are different and that ANS functions
should be vested with an independent organization to achieve increased efficiency and reduced
Segregation of AAI and ANS enable the specialized functions of airport operations and air
navigation to be handled by two independent organizations. The two organizations would have
well-defined focus on their respective functions and facilitate timely, strategic, operational and
financial decisions. AAI with its key focus area of airport development and operations would
also be able to focus more effectively on enhancing operational quality at existing airports and
developing greater regional
Abolition of 5/20 Rule
Current rules require Indian carriers to be in operation for at least five years and have a fleet
of 20 aircrafts to be eligible to fly on international routes. This is informally known as the
The 5/20 Rule is an anachronistic, discriminatory and anti-competition policy that the industry
has been opposing for the last several years. This rule works against the interest of Indian
carriers. Today, a one day old airline registered abroad with a one aircraft fleet can fly into
India with no entry barriers. Its removal will add to the attractiveness of the Indian aviation
Abolishing the rule will allow domestic airlines to utilize their aircrafts during the night time
on foreign routes rather than parking them at Indian airports and incurring parking charges.
This way a liability converts into an opportunity to enhance revenues and profits.
Some Indian carriers in the past acquired other carriers in order to get around the 5/20 rule,
resulting in severe financial challenges to themselves.
According to media reports, MoCA has requested the union Cabinet to abolish this
Review of bilateral seat quotas
The bilateral airline seat quotas have their origin in the Chicago Convention of 1944, when
shattered economies needed protectionist policies. Today, seven decades later we need to
question the very relevance of bilateral quotas when we are trying to make India an aviation
and tourism hub. Foreign tourist arrivals in India are an abysmal 7 million per year despite an
unlimited bounty of natural, religious and cultural attractions. Small economy like Singapore
gets L4 million foreign tourists per annum, Malaysia 25 million and China 58 million.
MoCA should consider having an 'open skies policy' for a five year experimental period,
extendable by another five. We can always roll it back unilaterally in case we see 'havoc' being
created. India itself signed an open skies agreement with USA in 2005 giving unlimited seat
quotas to each other. That didn't lead to US carriers decimating Indian carriers. Air India and
Jet do fly to US airports as many times as they want.
If we don't have open skies, then every time we negotiate seat quotas with a foreign country
wanting to introduce more flights to India, allegations fly thick and fast. India's national
interests are better served by having multiple and cheap air connections to India a la the Gulf
and ASEAN region, than by artificially constraining flights into India.
Various sectors that we have opened up, we have seen quality standards improve and prices
fall. Indian companies in turn became world class and many have now started acquiring large
global brands. It's time to question old dogmas and enhance our belief in ourselves. Due to
fears of dirt-cheap fares being introduced by global carriers with sovereign support, there are
enough anti-competition and anti-dumping provisions that can impose effective checks and
Addressing shortages in skilled manpower
The growth in Indian aviation has created significant employment opportunities. However the
supply of skilled human resources has not kept pace with the rapid growth in demand. With
passengers and aircraft fleet likely to double by 2020, the need to strengthen the human
resource development infrastructure is immediate.
As per KPMG estimates, the total manpower requirement of airlines is estimated to rise from
62000 in FY-2011 to 1l7,000 by FY-20L7. This includes the number of pilots, cabin crew,
aircrafts engineers and techniques (MRO), ground handling staff, cargo handling staff,
administrative and sales staff. This is based on benchmarks provided by ICAO for different
classes of personnel (pilot, cabin crew, etc.) per aircraft.
Workforce requirements estimates for Indian Aviation sector, 2011-2017
Foreign carriers have begun to warm up to the opening up of 49% FDI in Indian Airlines but
remain skeptical due to the heavy taxation prevalent in the industry. It is estimated that Indian
aviation will need about 350,000 new employees to facilitate growth in the next decade.
Shortfalls in skilled labor could create safety issues and may see staff salaries' rise.
Robust training programs will be the key to a sustainable future, especially considering that
India will probably continue to provide a significant workforce for foreign carriers. This will
also require further capital expenditure.
The aviation industry is believed to generate indirect and induced employment of nearly six
times the direct employment. With direct employment across airports and airlines to be around
150,000 by FY 20L7, the aviation sector in India is expected to provide an indirect and
induced employment to around L million people by FY 17.
The recent downgrade of India to Category II by Federal Aviation Administration (FAA) is a
stinging example of how lack of trained manpower can undo the good work being done to
strengthen our aviation sector
Key steps that need to be undertaken to address the shortage of
human capital include the following:
a) Encourage foreign investment in training facilities for pilots, engineers, managers and
b) Degrees issued by leading academies in western countries should be made acceptable in
India, subject to adequate background checks by DGCA.
c) Collaborate with Indian Air Force (IAF) to identify training infrastructure that can be put to
use for civil aviation.
d) Give immediate priority to training and capacity building of Air Traffic Controller officers
(ATCOs). Partnership options with international ATC training institutes should be explored to
enhance capacity of civil Aviation Training College (CATC). The enhanced capacity can also
help CATC, in the long run, to earn additional revenue by training foreign ATCOs.
e) Consider the option of allowing private players to set up ATCO training facilities, subject to
adequate supervision by AAI. This may be started in a PPP mode first and thereafter be made
fully open to private sector in the long run.
f) The current plan for development of National Aviation University (NAU) is a significant
leap forward in the development of human capital in this sector Effort should be made to fast-
track the project and replicate the concept at 3-4 locations across the country.
g) MoCA should liaise with National Skill Development Corporation (NSDC) for skill
development programs in the aviation sector especially in areas like ground handling and MRO.
Innovative IT interventions
Indian Airport IT Infrastructure in the Pipeline
The Way Forward
The Indian civil aviation industry is on a high growth path. India has a vision of becoming the
third largest aviation market by 2020 and the largest aviation market by 2030.
In order to become a top aviation market, all round improvements are required-in airports, air
navigation, cargo, MRO and human resource development. India would need to broaden the
base of domestic flyers. Air connectivity in Tier 2/3 cities needs to be developed and the
proposed EASF would help partly address the financing challenges. Government policies and
regulatory framework need to be futuristic, proactive and aligned to stakeholder expectations.
In summary, the key initiatives to be undertaken by the government include the following:
a) Enhancing Regional Connectivity: In India, air travel is still being looked upon as an
'elite' mode of travel and has not permeated across the nearly 400 million strong middle class
sections. There is a need for the government and industry to work together and bring down
ticket costs and hence making air travel affordable for middle class population. The revolution
in the Indian telecom sector converting a perceived 'elite' product to a mass product is an
inspiration for the civil aviation industry.
Given the mandatory fixed costs and lower traffic, the financial viability of Tier 2/3 airports is
a concern. There is a greater need to come up with a 'No-Frills Airport‘(NFA) model without
compromising on safety and security to support regional connectivity.
b) Policy changes on ATF pricing: Allowing direct import of ATF is a positive step but
the best solution would be for the Government of India to notify ATF under the 'declared goods‘
category with a uniform application of 4% sales tax. The other option for progressive states is
to unilaterally bring down VAT on ATF in the range of 0%o-5o/o. The benefits in terms of
increased air traffic, greater economic activity and employment creation could create a virtuous
c) Reforms regarding policy and regulations: There are certain key areas where there
is a diversion of opinion between the AERA and the private airport operators. This is likely to
affect the investor sentiment when we go for other airport projects in the country - e.g. the USD
3 billion Navi Mumbai International Airport. There is need for a stable, transparent, predictable
and investor-friendly regulatory regime with a mechanism for time-bound resolution of issues
to create a sense of certainty in the sector.
d) Elimination of discriminatory taxation policy for domestic MRO players:
Due to discriminatory tax policy, Indian MRO players have to suffer an additional tax burden
of nearly 2O%-3O% over foreign MROs. These taxes in the form of import duties (after the
12 month free period), VAT and service tax should be rationalized to make the MRO industry
viable in India. This will help bring back all the revenue' Foreign exchange and jobs that we
have unfortunately pushed out of the country
e) Segregation of ANS functions from AAI: ANS functions should be segregated from
AAI. This would enable both AAI and ANS perform their duties in a more efficient and
effective manner. This would also be in line with the global best practices and the findings of
many government-appointed committees.
f) Abolition of 5/20 Rule: There are sufficient checks and balances to ensure safe
operations of airline. The 5/20 rule is an impediment in the growth plans of our domestic
airlines and needs to be abolished immediately.
g) Human Resource Development: As the sector is growing, the need to enhance our
training and skill enhancement infrastructure becomes critical. MoCA and the industry need to
work closely. India could actually become an exporter of talent one day.
h) Encouraging global airport acquisition by Indian companies: Indian
companies are increasingly winning bids for airport development and operations
internationally. The government must overtly and covertly support such efforts. Such global
enhance the prestige of India’s aviation sector and create opportunities for other Indian
i) Provisioning of all-weather operations and night landing facilities: A joint
effort between government and the industry can facilitate all all-weather operations and night
landing at airports. This would provide impetus for greater tourist traffic and development of
air-connectivity especially to hilly regions. This would also help enhance the flying hours of
aircrafts that might be busy on trunk routes during normal hours.
j) Evolve innovative funding solution: Given the risk, lenders are cautious when issuing
long term debt to airport operators. Financial support, especially for developers and airlines
serving tier 2/3 cities, is critical. Following ideas can be evaluated:
Allowing airport companies to issue tax free infrastructure bonds
Allowing ECB limits for the sector
Creating an Essential Air Services Fund (EASF) to support air access to Tier 2/3 cities.
This could be on similar lines as the Airport Improvement Program (AIP) in USA, or
the India Infrastructure Project Development Fund (IIPDF) used to support other
infrastructure sectors in India
k) Facilitation by government: A large number of institutional clearances are required
for airports. Support of the government would be absolutely vital for new airport projects. A
case in point is the National Facilitation committee headed by the cabinet secretary, which
played a key role in the timely completion of the modernization of Delhi Airport. Airports
are a part of a holistic infrastructure plan for the city and state as a whole. Airports have a
symbiotic relationship with trade and tourism opportunities in the airport's hinterland, as in,
each feeds off the other. The support from the state governments for the airport's success is
l) Tax incentives: The following fiscal incentives need to be considered in order to
facilitate greater investments in the sector:
• The above measures by the government and industry stakeholders would provide a
strong launch pad for India infrastructure status and income tax exemption under
sector 80IA should be extended to brown-field expansion of airport business
• Benefit under schemes like 'Serve from India scheme' (SFIS) can be made available to
• Income tax exemption should be provided to the surplus of Passenger Service Fee -
Security Component (PSF-SC)
• Service tax should not be levied on Airport Development Fees as it is a capital receipt
and not a revenue receipt.
An aviation to target the next wave of growth and bring the country close to realizing its
vision to emerge as the largest aviation market by 2030.
Following are the resources that I used in making of this
Ministry of Civil Aviation Websites
Airport Authority of India
World Bank, FAA
Airbus Global Market Forecast