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REFORMS IN AVIATION SECTOR

Presentation Summary
1. 2. 3. 4. 5. 6. 7. 8. 9. Industry Overview History Major players Effects on Indian Economy Government Initiatives FDI in Aviation Reforms in Aviation Analysis and Interpretation of Findings Future Scope

INDUSTRY OVERVIEW
India is Worlds 9th largest market Comprises of Domestic Airline, Air Cargo and Airports. Scheduled services available from to/fro 82 airports Bilateral with 104 countries. Worlds 4th Domestic air passenger. Enhanced connectivity 72 foreign airlines of 49 countries. 14 scheduled airlines operating exclusively in passenger sector. Presently it contributes 0.5 % of GDP and it is expected that by 2030 it will contribute 5 % of GDP

HISTORY
The history of civil aviation in India started with its first commercial flight on February 18, 1911. It was a journey from Allahabad to Naini made by a French pilot covering a distance of about 10 km. Since then efforts were on to improve the health of India's Civil Aviation Industry. The aviation industry in India gathered momentum after three years with the opening of a regular airmail service between Karachi and Madras by the first Indian airline, Tata Sons Ltd. However this service failed to receive any backing from the Indian government. In 1932, J.R.D. Tata founded Tata Airline, the first Indian airline.

PRE1993
The two government airlines Air India and Indian Airlines were the only Indian carriers. Both carriers operated with relatively old aircraft and inefficient work practices, from airports which were functional at best. There was no focus on developing traffic and the market grew at uninspiring single digit rates.

19931995
Deregulation of Aviation Sector . Govt. protecting state-owned carriers. Only Jet Airways and Air Sahara survived beyond the initial couple of years.

19952003
After the failure of the deregulation experiment, the industry fell into dormancy. No new carriers entered the market and Air India and Indian Airlines continued to be starved of capital. Despite the fact that the broader economy performed well during this period, aviation continued to show limited growth.

20032006
Arrival of Ministers of Civil Aviation recognised the importance of aviation for the development of business, trade and tourism. Domestic open skies policy which saw market entry by several carriers. The arrival of the low cost airline model in India with the launch of Air Deccan, and subsequently SpiceJet, IndiGo and Go Air Placement of orders for 111 new aircraft for Air India and Indian Airlines. Increased foreign direct investment caps in certain sectors of the industry.

Traffic ( in millions)

20062007
During this period,

traffic continued to accelerate further, to levels approaching 40% in 2007. Costs were increasing because of the poor state of airport infrastructure and a shortage of human resources. There was a mismatch between supply and demand, the rate of growth was simply too great for the industry to handle from a management and capital perspective.

In a period of global boom, demand for skilled personnel such as pilots and engineers also outstripped supply, leading to a sharp escalation in wages.

20082009
Oil reached close to US$150/barrel. As costs spiraled upwards, carriers were forced to raise fares, and with a simultaneous slowdown in the Indian economy, there was resulting decline in traffic of around 1012% yearonyear.

200910
Indias GDP growth slowed from over 9% in 2007/08 to 6.1% in 2008/09. However, given the contraction globally, this was a relatively a good result. The economy recovered earlier than expected, with GDP growth of 7.9% in the last quarter, ahead of expectations.

Year over Year (YoY) growth of Domestic Passengers

2010 ONWARDS:

Major Players (Market Share)

MAJOR Reforms
Major liberalization reforms in 1991 Independent aviation regulator appointed Bilateral and multi-lateral agreements at government level Modernization of airports Setting up of privatized and Greenfield airorts 100% FDI in existing airports 49% in domestic airlines under domestic route

Effects on INDIAN Economy


10 years back there were just 2 airlines. Both state owned . But In the last 10years the economy has opened up. India has experienced growth rate of 8% per year. The main factors which effect the Indian Economy are:- 1. Increased no. of domestic airlines 2. Low cost airlines 3. India's improving economy The other factors are: Increased in number of business travellers to different countries, Increased number of incoming tourist and business enterprises

PASSENGER FLOW

GOVERNMENT INITIATIVES
Merger of AI and Indian Airlines to optimize fleet acquisition and to leverage the asset base. 100% FDI is permissible for existing airports; approval required for FDI beyond 74% 100% FDI under automatic route is permissible for Greenfield airports. 100% tax exemption for airport projects for a period of 10 years.

INITIATIVES CONTD.
Foreign carriers allowed to make strategic investments (up to 49% stake) in Indian Carriers While the domestic airlines have not been able to attract foreign investors, foreign airlines may be interested in taking strategic stakes due to their deeper business understanding, longer investment horizons and overall longer term commitment towards the global aviation industry.

Modernization of Airports
(AAI) is undertaking the development and modernization of all 35 non-metro airports in the country Two green-field airports at Bangalore and Hyderabad are being developed under PPP format. With the developments in aviation infrastructure, we may also see some airports making money not purely on passenger traffic, but also by means of cargo, logistics, SEZs and real estate projects being developed adjacent to airports

LCC OPERATIONS IN INDIA


India's first low-cost airline, Air Deccan started service on August 25, 2003. Success of Air Deccan has spurred the entry of more than a dozen low-cost airlines in India. Air Deccan now faces stiff competition from other low-cost Indian carriers such as Jetlite, SpiceJet, GoAir and Paramount Airways. Within 8 years of operations in India, LCCs have taken the domestic market share of 49%

FACTORS FOR LCC SUCCESS


Low Entry barrier Attraction of Foreign Shores Increased permitted Foreign Equity Rising income levels and demographic profile, have contributed significantly to the unprecedented growth of LCCs in India.

Major Timelines
1912: Indian State Air service and Imperial Airways, UK collaborate to ply on first domestic route, between Delhi and Karachi.

1932: Tata Aviations establish ed. It goes to Colombo in 1938.

1953: Indian Airlines Corporation formed through Air Corporation Act, 1953, by nationalizing Air India and Indian National Airways.

2003 Entry of low cost carriers. Air Deccan, Spice Jet, Go Air, Indigo.

1915: Tata Sons start airmail service between Delhi and Madras.

1948: Designated as flag carrier under the name Air India Internationa l with 49% govt. control.

1994: Air Corporatio n Act. 1953 repealed and thus allowed private players to come.

Analysis and Interpretation of Findings


The current condition of the Indian aviation industry can be attributed to a number of factors: Rising Fuel Prices

Congestion
High Airport Charges Lack of skilled manpower Land Acquisition

Rising Fuel Prices


Aviation Turbine Fuel (ATF) prices in India are higher than the international market. The ATF price accounts for nearly 45% of the operational expenses.

A 10% increase in fuel price would push up costs by at least 4%,


In India there is no direct import of ATF and the ATF supplied by the Indian oil companies is from imported crude refined by them.

The various taxes imposed on procurement of ATF include:


An import duty of 20% An add on of 16-49% towards marketing margin and contingencies on the refinery transfer

price
An excise duty of 8% levied by the central government. A local sales tax ranging from 4% to 39% levied by the various state governments which on

an average works out to be around 25% countrywide.

Reforms
Reduce the excise duty to 4%

Remove the disparity in the state levied taxes. This can also be done by putting ATF
under Declared Goods category

Allowing airlines to import ATF may help in reducing the cost by almost 25% than what the airlines are paying to the oil companies. Airlines however will have to consider the logistics of importing fuel, including warehousing.

Investigate and report on how reductions in state level ATF taxes can lead to state governments reaping economic benefits of local job creation within the sector, growth of businesses associated with the sector, as well as economic development resulting in more business and leisure traffic to the State.

Congestion
Congestion leads to a huge wastage of fuel.

It is estimated that if a flight hovers in the sky for an additional half an


hour due to delay in allocation of landing slot, it can consume between 25 to 30 per cent extra fuel thereby increasing the operational cost of the

airline by over Rs. 50,000 / Assuming 40 flights operating in a day from Delhi to Mumbai with an average circling time of 30 minutes the loss amounts to Rs 40 lakhs The congestion also affects the turn around time of the aircraft and reduces the average aircraft utilization.

Reforms
The airports which have been closed on account of development of

new airports in various cities may be used for other facilities like
MRO, aircraft parking and air taxi services. These airports can be mainly used for short routes and mainly for the LCC aircrafts. Deployment of latest technology for air traffic management to reduce congestion, rapid exit taxiways, keeping the size of airport and aircraft fleets in proportion to avoid further congestion

High Airport Charges:


The airport charges payable at the International airports are higher

than those payable at the airports designated as Domestic airports


for domestic flights. As a consequence, the domestic airlines in India are incurring additional costs at the international designated airports without enjoying or utilizing any additional facilities. In addition, the airport charges levied by the Indian airports are stated to be amongst the highest amongst the Asian and the Gulf countries.

Reforms
Setting of airport charges with reference to the net costs of running the

airport, taking into account other revenues arising at the airport, loosely
called non aeronautical revenues Providing access to the carriers to a Route Development Fund by providing

incentives to carriers to initiate new routes in the form of package


discounts on airport charges and marketing support.

Lack of skilled manpower


There is a shortfall in the skilled manpower available in the country, to

occupy the jobs which are available across the Aviation spectrum pilots,
engineers, technicians, cabin crew, flight dispatchers, customer services, sales, marketing, HR, finance, IT, cargo and security. Similarly the demand for Aircraft Maintenance Engineers and Air Traffic Controllers would rise with the increasing number of flights and the new airports

Reforms
DGCA on its part has undertaken certain measures to facilitate availability of more Chief

Flight Instructors (CFI), Flight Instructor In-charge (FII) by redefining eligibility criteria and also
by obtaining Qualified Flight Instructors from Defence. A Civil Aviation Requirement (CAR) has also been issued, which permits pilots holding Flight Instructors Rating to impart training up to the age of 65 years. The government is setting up various training institutes and has started upgradation and modernization of infrastructure at the India Gandhi Rashtriya Udaan Akademi to enhance its training capacity from 40 to 100 pilots and reduce the training period. The dearth of flight instructors is largely due to the relatively low paying nature of the job. To retain Flying Instructors at these flying schools, compensation and other benefi ts need to improve.

Land Acquisition
Of late, a number of large projects are facing extreme opposition from

landowners and the cumbersomeness of the land acquisition process has


recently come to significant highlight. It has been observed that the lack of coordination between administrative

departments of the state and central government agencies is the major


cause of delay for the infrastructure projects.

Reforms
The land would preferably be acquired in advance by the government

before the contract is awarded to the concessionaire


Project implementing authorities must commence the land acquisition process at the planning stage of the project rather than at the

implementation stage.
The government has recently come up with the National Rehabilitation and Resettlement policy to address the interest of the land owners and

others affected by land acquisition. The policy stresses on minimising


displacement, land for land, making land owners stakeholders and a job per family of Project Affected People (PAP).

FUTURE SCOPE
The boom in the aviation sector is likely to generate nearly 3 lakh jobs by the year 2013.

The study says that the civil aviation sector is also set to become a Rs. 35,000-crore
industry by the same time. Scheduled Aircraft - The total aircraft fleet is likely to reach 1000 by 2020,including replacement of the current fleet of 312 aircraft, with an estimated value of US$80bn +

The growth of Indias aviation sector has the potential to absorb up toUS$120 billion of
investment by 2020. Air Traffic - CAPA research projects that domestic passenger traffic will reach 150-180 million by 2020, with international traffic in excess of 50million.

Airports US$ 30 billion plus investment requirement by 2020(Included 9billion already committed)

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