Developing Remote and Regional Connectivity · in India in the near future. The Government of India is taking several measures to enhance connectivity within the country, particularly

Developing Remote and Regional Connectivity

Knowledge Partner

Civil Aviation

YEAR October, 2014

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TITLE Civil Aviation - Developing Remote and Regional Connectivity

AUTHORS

The Associated Chambers of Commerce and Industry of India

D. S. RawatSecretary General

5, Sardar Patel MargChanakyapuriNew Delhi - 110021

Tel : +91 11 4655 0555Fax : +91 11 2301 7008/9Email : [email protected] : www.assocham.org

Corporate Finance (CF) Group, YES BANK

Public and Social Policies Management (PSPM) Group, YES BANK

No part of this publication may be reproduced in any form by photo, photoprint,

microfilm or any other means without the written permission of YES BANK Ltd. and ASSOCHAM.

This report is the publication of YES BANK Limited (“YES BANK”) and ASSOCHAM and so YES BANK and ASSOCHAM has editorial control over the content, including opinions, advice, statements, services, offers etc. that is represented in this report. However, YES BANK and ASSOCHAM will not be liable for any loss or damage caused by the reader's reliance on information obtained through this report. This report may contain third party contents and third-party resources. YES BANK and ASSOCHAM takes no responsibility for third party content, advertisements or third party applications that are printed on or through this report, nor does it take any responsibility for the goods or services provided by its advertisers or for any error, omission, deletion, defect, theft or destruction or unauthorized access to, or alteration of, any user communication. Further, YES BANK and ASSOCHAM does not assume any responsibility or liability for any loss or damage, including personal injury or death, resulting from use of this report or from any content for communications or materials available on this report. The contents are provided for your reference only.

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The reader/ buyer hereby disclaims and waives any right and/ or claim, they may have against YES BANK and ASSOCHAM with respect to third party products and services.

All materials provided in the report is provided on “As is” basis and YES BANK and ASSOCHAM makes no representation or warranty, express or implied, including, but not limited to, warranties of merchantability, fitness for a particular purpose, title or non – infringement. As to documents, content, graphics published in the report, YES BANK and ASSOCHAM makes no representation or warranty that the contents of such documents, articles are free from error or suitable for any purpose; nor that the implementation of such contents will not infringe any third party patents, copyrights, trademarks or other rights.

In no event shall YES BANK and ASSOCHAM or its content providers be liable for any damages whatsoever, whether direct, indirect, special, consequential and/or incidental, including without limitation, damages arising from loss of data or information, loss of profits, business interruption, or arising from the access and/or use or inability to access and/or use content and/or any service available in this report, even if YES BANK and ASSOCHAM is advised of the possibility of such loss.

Maps depicted in the report are graphical representation for general representation only.

I am happy to learn that ASSOCHAM in association with YES BANK has prepared a

'Knowledge Report' which will be released at the International Conference on Indian thCivil Aviation on the 8 October 2014. The Civil Aviation Sector is poised for a robust growth

in India in the near future. The Government of India is taking several measures to enhance

connectivity within the country, particularly in Tier 2 and Tier 3 cities, with a view to promote

industrial growth and development of tourism. Steps are also being taken to develop a

number of 'no frill airports' across the country and to engage State Governments to reduce

VAT on Aviation Turbine Fuel. These measures will encourage airlines to provide affordable

airfare and to increase operations. Development of Air Cargo is very important and there is a

need to harness the significant potential in this sector. Steps need to be taken to reduce the

'dwell time', on par with best international standards. Towards this end, dedicated cargo

terminals, air freight stations are being planned along with reduction of time taken in

procedural formalities. The Government is also planning to bring out a Civil Aviation Policy

which will seek to promote significant and harmonious development of the Civil Aviation

Sector in the country. I am sure the Conference will deliberate on all the important issues and

will come forward with meaningful suggestions.

MESSAGE

P. ASHOK GAJAPATHI RAJUMINISTER OF CIVIL AVIATION

GOVERNMENT OF INDIA

ASHOK GAJAPATHI RAJU PUSAPATI

The Indian Civil Aviation sector has been at the forefront of economic and regulatory

transformation over the last decade. A slew of policy initiatives such as Open Skies Policy, FDI

promotion in aviation and airport infrastructure amongst others have helped fuel the impressive

growth of the Indian Aviation sector. Expected investment of USD 12.1 billion during 2012-17 in

the aviation sector will improve remote and regional connectivity with industrial hubs through

establishment of no-frill airports, thereby transforming the Nation's structural landscape and

significantly contributing towards realizing the vision of 'Make in India'.

Indian Aviation is set for a quantum leap in the coming years and has the potential to become the rdworld's 3 largest aviation market by 2020. Rising income and increasing affordability of the

middle class has ushered in a spectacular transformation in the last six years, with air movement

having more than doubled during this period. However, this has created immense pressure on

existing infrastructure, thereby resulting in increased congestion, higher operating costs, greater

environmental impact, potential safety implications and compromise on passenger experience.

Developing airport infrastructure is a capital-intensive process, requiring significant resources to

fund land acquisition, airfield development, terminal development and supporting infrastructure

to successfully meet requirements of airlines as well as service demands of passengers. A total

investment of USD 98 billion is estimated to be required for airport infrastructure development by

2030-31. This infrastructure challenge has to be escalated to a priority agenda for realizing growth

in the Aviation industry.

The next phase of growth of Indian Aviation is expected to be fuelled by Tier II and III cities. The

share of non-metro airports in air traffic is expected to increase significantly in the coming years.

Hence, low-cost approach for developing airport infrastructure is the need of the hour and an

optimal route to quickly build a network of regional airports for connecting remote and regional

destinations. Public Private Partnerships have already delivered airport infrastructure of

international standards and should be the model for development of low-cost and no-frills airports

along with required policy support.

I am pleased to present the ASSOCHAM - YES BANK Knowledge Report 'Civil Aviation –

Developing Remote and Regional Connectivity' that outlines the future roadmap for

transforming the Indian skies through a comprehensive development policy over the next 20

years. I am confident that the contents of the knowledge report will provide important insights

for further debate and help in achieving the transformational vision set forth for the Civil Aviation

Sector.

FOREWORD

Thank you.

Sincerely,

Rana Kapoor

President

Managing Director & CEO

thIt gives me great pleasure to note the 7 International Conference on Indian Civil Aviation a

special topic on “Developing Remote & Regional Connectivity”. Considering the fact that India is rdaiming to reach 3 position in the global Civil Aviation by 2020, it is very important to improve

the Air connectivity for which “Developing Remote & Regional Connectivity” is most relevant

and appropriate. Current Air Traffic can be improved with the new initiatives like providing better

Remote & Regional Air Connectivity which requires strong support from Central & State

Government’s.

To promote and encourage this Remote & Regional Air Connectivity both Central & State

Government’s are taking lot of initiatives with need based support. Therefore, ASSOCHAM thconsiders this is the most appropriate timing to focus on this important aspect in the 7

International Conference involving all the Stakeholders so that Industry can come out with

suggestions as to how to take this important issue for the effective implementation and

achieving the desired objective.

MESSAGE

K. Narayana Rao

Chairman

ASSOCHAM National Council on Civil Aviation

High disposable incomes and growth of low-cost airlines in India will lead to a rise in domestic

travel. Increase in the number of people travelling by air, both for business and travel, along with

new trade opportunities has led the Government's focus on infrastructure including the (No-Frills

Airports), which will result in various development projects. Indian aviation sector is likely to see

investments of up to US $150 billion in the future.

ASSOCHAM, India's Apex Chamber for Commerce & Industry in India is organizing the Annual th7 International Conference on Civil Aviation with this year's theme “Developing Remote &

Regional Connectivity”. We are confident that this Annual Conference will deliberate on the

challenges and the emerging opportunities for developing the Civil Aviation Sector further in the

country.

The Background Paper prepared for ASSOCHAM, by YES BANK the Knowledge Partner, tries to

re-examine the Civil Aviation Sector for a better understanding, which will help us in creating a

road map for a robust growth in the future.

I convey my very good wishes for the success of this Conference.

MESSAGE

D.S. Rawat

Secretary General

1. Overview 1

1.1 Demographics 4

1.1.1 Sector Size 5

2 Industry Landscape 7

2.1 Key Statistics 8

2.2 Industry Ecosystem 11

2.2.1 Scheduled Airlines 11

2.2.2 Air Cargo 14

2.2.3 Air Charter 15

2.2.4 Airport Infrastructure 16

2.2.5 Maintenance, Repair and Overhaul (MRO) 20

2.3 Key Developments and Initiatives 21

3 Developing Remote and Regional Connectivity 23

4 Investment for Developing Infrastructure in terms of 31

Creating New Airports and No-Frills Airports (NFA)

4.1 Aviation as an Enabler to Tourism Industry 33

4.2 Developing Low-Cost Airports 34

4.3 Public - Private Partnerships in 36

Financing Low-Cost Airports

5 Key Recommendations and Way Forward 39

TABLE OF CONTENTS

Overview | 1

Civil Aviation is an essential part of India’s national infrastructure as it provides enormous

impetus to economic growth and employment generation while being the most time efficient

than any other mode of transport. Indian Civil Aviation sector has been at the forefront of

economic and regulatory transformation over the last decade. A range of policy initiatives such

as Open Skies Policy, Foreign Direct Investment promotion in aviation and airport infrastructure,

direct Aviation Turbine Fuel (ATF) imports, amongst others have helped fuel the impressive

growth of Indian Aviation sector as a whole.

Over the past decade, Indian Civil Aviation sector has observed healthy growth in passenger

and cargo traffic, rapid increase in inflow of investments in the airport infrastructure, growth in

the number of aircrafts and operational airports in the country and significant modernization and

augmentation of ancillary infrastructure capacities at both metro and non-metro airports.

Despite the healthy growth, India is still one of the least penetrated aviation markets with 0.04 1

trips per capita per annum as compared with 0.3 in China and 2 in the US .

rdIndian aviation sector is set for a quantum leap in the coming years and is set to become the 3

largest aviation market by 2020. The total passenger traffic is expected to increase to 450 million 2by 2020 and total freight traffic is expected to reach 11.4 million tonnes by 2032 . This growth

would largely be driven by the following factors:

üRobust demand fuelled by an expanding Indian middle class and rising working population

üRise in GDP as the economy picks up steam would raise the per capita income levels in the

country resulting in increase in air penetration levels in India

Indian Aviation Sector is poised for growth

1 World Bank, Directorate General of Civil Aviation (DGCA), KPMG

2 Airports Authority of India (AAI), ADB, Aranca Research, India Brand Equity Foundation (IBEF)

2 | Civil Aviation - Developing Remote and Regional Connectivity

1. Overview

Figure 1: Direct Correlation between Development of an Economy and Air Travel Penetration

thSource: Report of Working Group on Civil Aviation for formulation of 12 Five year plan

ü3

from USD 119 billion in 2012

üGrowth in economy which would boost country’s trade volumes with rest of the world

thüEstimated investments of USD 12.1 billion in Indian Airports during the 12 Five Year Plan 4(2012-17)

üGrowing private sector participation essentially through Public Private Partnership (PPP)

models

While the fundamentals for growth of the Indian Aviation Sector are sound, the sector is

constrained by issues like pricing policies, taxation structure of Aviation Turbine Fuel (ATF) which

continues to put strain on profitability of most of the scheduled airline operators, high airport

charges, limited connectivity / infrastructure in Tier II and Tier III cities and remote areas and

infrastructure bottlenecks amongst others.

Growth in travel and tourism industry which is expected to grow to USD 271 billion in 2023

Challenges faced by the Indian Aviation Sector

3 World Travel and Tourism Council, Aranca Research, IBEF

4 Industry Sources, IBEF

Civil Aviation - Developing Remote and Regional Connectivity | 3

3

2.5

2

1.5

1

0.5

0

0 10000 20000 30000 40000

IndiaChina

Brazil

Malaysia

Australia

USA

Air

Tri

ps

per

cap

ita

GDP per capita (USD)

50000

Policy Initiatives

Given the long term growth potential of the Indian Aviation Sector and the challenges being

faced, it is imperative that dynamic, progressive and thought-through policy initiatives are

undertaken by the Government, envisaging a collaborative approach between the Industry and

citizens at large. Recent initiatives like the scheme for development of regional and remote

areas connectivity including no-frills airports, direct import of ATF, 49% FDI in Indian carriers,

proposal for setting up Essential Air Services Fund (EASF) to address financing challenges,

encouragement to PPP models for airport infrastructure development, introduction and

expansion of visa on arrival facility amongst others are positive steps to provide impetus to the

sector.

While the domestic passenger traffic in India has grown at a CAGR of 12.5% over FY06 and

FY13, international passenger has grown at a CAGR of 9.8% over the same period. Total freight

traffic registered a CAGR of 6.6% over FY06 and FY13. This has made India one of the fastest th

growing aviation and currently the 9 largest civil aviation market in the world. While the total

passenger traffic stood at 159.3 million in FY13, total freight traffic stood at 2.19 million tonnes

in FY13.

1.1 Demographics

Figure 2: Growth in Passenger Traffic

* FY14 (April – September)

Source: AAI, MoCA, Aranca Research, IBEF


180.0

160.0

140.0

120.0

100.0

80.0

40.0

40.0

0.0

20.0

50%

40%

30%

20%

10%

0%

-10%

-20%

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14*

International (million)Domestic (million)

Growth-international (%) Growth-domestic (%)

Figure 3: Growth in Freight Traffic

Source: AAI, Aranca Research, IBEF

1.1.1 Sector Size

As per the data collected by the working group on civil aviation sector, the estimated gross

revenue of the sector is ~ USD 16.7 billion, excluding the revenue of international airlines

having operations in India, which as per industry sources is around USD 3.6 billion.

Approximately 60% of the gross revenue is from the airline sector, 21% from the air cargo and

express industry and the balance 19% revenue is split mainly across Airports (12%) and

Maintenance Repair and Overhaul (MRO) (4.3%). Scheduled Airlines contribute 58% to the

gross revenue of the Civil Aviation sector.


2.5

2.0

1.5

1.0

0.5

0.0

25.0

20.0

15.0

5.0

0.0

-5.0

-10.0


10.0

Freight traffic handled (million tonnes)

Growth (%) - right axis

Table 1: Estimated Gross Revenue earned by sub-sectors of Indian Civil Aviation Sector for FY12-13

Sub-Sectors

Gross Income (USD Bilion)

Airlines

Scheduled

9.8

Non-Scheduled

0.3

Total

10.1

Airports

AAI

1.3

Private

0.8

Total

2.1

Maintenance Repair and Overhaul (MRO)

0.7

Air Cargo and Express Industry

3.5

Ground Handling

0.3

Aviation Academics 0.05

Total 16.7

Source: Planning Commission, Respective Annual Reports, Industry Sources, Analysis: MoCA

| Industry Landscape 2

2.1 Key Statistics

Total Aircraft Movement

Total aircraft movement in the sector recorded a CAGR of 8.4 % between FY06 and FY13. The

same stood at 1.48 million in FY13. This growth is primarily fuelled by liberalization in aviation

policies resulting in growth in number of airline operators, passenger traffic, and freight traffic.

Figure 4: Total Aircraft Movement (FY6 – FY14)


Trends in Key Operating Parameters of Indian Aviation Industry

Key operating parameters of the Indian Aviation Sector have been steadily improving over the

years owing to improving industry dynamics supported by liberalization of the policies.


1,800

1,600

1,400

1,200

1,000

800

600

400

200

-

35.0

30.0

25.0

20.0

15.0

10.0

5.0

-

(5.0)

(10.0)


2. Industry Landscape

Parameters 2005- 2006- 2007- 2008- 2009- 2010- 2011- 2012- 2013-

(In millions) 06 07 08 09 10 11 12 13 14

Available Seat

Kilometers 35,077 48,702 60,590 59,159 61,091 68,216 78,581 75,662 80,346

(ASKM)

Revenue

Passenger 23,709 33,519 41,718 37,704 43,959 52,707 59,085 56,485 58,952

Kilometers

(RPKMs)

Passenger

Load Factor 67.6% 68.8% 68.9% 63.7% 72.0% 77.3% 75.2% 74.7% 73.4%

(%)

• ASKM is a measure of a flight’s passenger carrying capacity. It is equal to the number

of seats available multiplied by the number of kilometers flown.

• RPKM is a measure of traffic for a flight calculated by multiplying the number of

revenue paying passengers aboard the aircraft by the distance traveled.

Source: DGCA, AAI, ICRA, YES Bank Analysis

Growth in GDP and Per Capita Income

With the economy picking up steam, it is expected that per capita income in India is

expected to grow at CAGR of around 6% between 2009 and 2014

Source: IMF, World Travel and Tourism Council, Aranca Research, IBEF


4,500

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

0

12

10

8

6

4

2

0

2007 2008 2009 2010 2011 2012 2013E 2014E

Per-capita GDP (PPP, current USD)

Real GDP growth (%) - right axis

Figure 5: Growth in GDP and Per Capita Income

Table 2: Trends in Key Operating Parameters of Indian Aviation Industry

Growth in Travel and Tourism Spending In India

Improving tourism infrastructure, growth in the economy and trade volumes over the years has

resulted in steady increase in travelers (both business and leisure) in the country. This has

bolstered travel and tourism spending in the country.

Source: World Travel and Tourism Council, Aranca Research, IBEF

Growth in Exports and Imports

India's exports grew at a CAGR of 12.9% between FY08 and FY13 to reach USD 300.4

billion. During the same period, imports grew at CAGR of 14.3% reaching USD 490.7 billion

Source: Ministry of Commerce, Aranca Research, IBEF


Figure 6: Travel and Tourism Spending in USD

Figure 7: Export and Import (USD billion)

600.0

500.0

400.0

300.0

200.0

100.0

0.0

251.7

163.1185.3

303.7

178.8

288.4

251.1

369.8

306.0

489.3

300.4

490.7

122.7

72.4

FY08 FY09 FY10 FY11 FY12 FY13 FY14*

Exports Imports

90.0

80.0

70.0

60.0

50.0

40.0

30.0

20.0

10.0

0.0

2007 2008 2009 2010 2011 2012 2013

42.1 46.2 48.7

60.9

69.3 68.7

77.8

22.1 24.4 18.6 22.325.5 26.4

30.9

Leisure Travel and Tourism Spending Business Travel and Tourism Spending

CAGR: 10.75%

CAGR: 5.74%US

D

Year

2.2 Industry Ecosystem

2.2.1 Scheduled Airlines

There are eight major domestic scheduled airlines operating in the country:

ü

February 2011 post merger between Air India and Indian

airlines along with their subsidiaries.

üNational carrier airline of India owned by Air India Limited

(AIL), a Government of India enterprise

üOperates flights to more than 100 domestic and international

destinations across Asia, Europe and North America

üHas a fleet size of 124 aircrafts comprising of both Airbus and

Boeing airplanes. The airlines fleet of Boeing 777 and 747 is

used for flying on international destinations

Founded as Tata Airlines in 1932, later named as Air India in

Commenced operations in August 2006

üOperates around 581 flights daily to 31 domestic and 5

international destinations including flights to Muscat, Dubai,

Kathmandu, Singapore and Bangkok

üHas a fleet size of 78 leased aircrafts. The carrier`s entire fleet

comprises of Airbus A320s-200 with a standard seating

capacity of 180 passengers, which are used for its domestic

and international operations

ü

Commenced operations in August 2005

üOperates 340 flights daily to 40 destinations across India and

to 7 international destinations

üHas a fleet size of 53 aircrafts. Boeing 737-800s is used for

domestic routes, and 737-900ER aircrafts for flying to

international destinations. Smaller Bombardier Q400 aircrafts

are added to meet the growing demand and enhance

connectivity to Tier II and Tier III cities

ü


Commenced operations in 1993 as a taxi operator

üOperates flights to 21 international destinations and 47

domestic destinations

üHas a fleet size of 112 aircrafts out of which only 1 aircraft is

owned by the airline. Short-haul destinations are served using

Boeing 737 Next Generation while long-haul routes are

served using its Airbus 330 and Boeing 777- 300ER

ü

Jet Airways acquired Jet Lite (earlier known as Air Sahara

which was incorporated in 1991) from the Sahara India

Pariwar in April 2007. The company was thereafter renamed

as JetLite

üJet Airways consolidated JetLite and Jet Airways Konnect

under the Jet Konnect brand, as part of a rebranding exercise

üOperates around 251 flights daily to 46 destinations within

India. It had shut down its international operations in

December 2012

üHas 12 leased aircrafts belonging to the Boeing 737 family

ü

Commenced operations in November 2005

üOperates around 100 flights daily to 21 destinations across

India

üHas a fleet of 18 leased aircrafts. The airliner only uses Airbus

A320-200 aircrafts for all its operations

ü

An Indo-Malaysian low cost carrier. It is a JV between Air

Asia Berhad, Tata Sons and Telestra Tradeplace

üCommenced operations on June 12, 2014

üOperates a fleet of Airbus A320-200 aircrafts

ü


Commenced operations in November 2005

üAn Indian regional airline based in Vijayawada, Andhra

Pradesh

üOperates a fleet of 18 aircrafts comprising of Embraer E-

170 and E-190

ü

Source: YES Bank Analysis, Industry SourcesCrisil Research,

Figure 8: Market Share of Scheduled Domestic Airlines

Source: DGCA, YES Bank Analysis

Figure 9: Passenger Load Factor of Scheduled Commercial Airlines

Source: DGCA


100

90

80

70

60

50

40

30

20

10

0

Air India Jet

Airways

JetLite Spicejet Go Air IndiGo Air Costa Air Asia

69.6

70.3

64.2 70.9

63.6 7

1.3 7

9.4

82.5

69.7

81.

3

67.

0 74.8

65.5

65.8 69.8

73.0

July-14 Aug-14

Pax L

oad

Fact

or

(%)

Air India

Jet Airways

Jet Lite

Spice Jet

Go Air

IndiGo

Air Costa

Air Asia

19%

31%

9%

19%

4%

17%

0.8%0.2%

2.2.2Air Cargo

With rapid growth in trade volumes aided by economic growth, Air Cargo has assumed a critical

role in seamless transportation of goods, especially high value commodities and perishable

goods. The major advantages offered by air transport are:

üReduction in delivery time leading to higher frequencies of trade

üReduction in high inventory carrying costs

üMaintenance of quality of perishable goods owing to faster transfer from the production

center to the end consumer

5The Air Freight sector in India has been growing at a CAGR of 11.36% between 2006 and 2011 .

During the last five years, handling of international cargo accounted for nearly two-thirds of the

total cargo handled. The majority of the cargo was handled at major airports at Mumbai, Delhi,

Hyderabad, Bangalore and Chennai.

Figure 10: Growth of Air Cargo in India

Source: AAI

5 Industry Sources


1,600

1,400

1,200

1,000

800

600

400

200

-

in T

ho

usa

nd

To

nn

es

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

Domestic International

Key Drivers for Growth of Air Cargo in India

ü

üIndia’s growing capabilities in the IT / ITeS segment, large scale liberalization and

globalization of trade

Rapid growth of international trade and merchandise export

ü

the country have undergone a vast change

Indian Air Cargo Sector still lags behind

üInfrastructural bottlenecks with respect to cargo handling capacities in the country;

cargo handling capacity at major Indian airports India still lags far behind airports like

Hong Kong, Memphis, Shanghai, Incheon and Anchorage

üLack of transparency in the procedural aspects of the industry which results in lack of

cost competitiveness over other modes of cargo transportation

6üAir Cargo ratio in India is less than 1% of the overall cargo moved

üLack of development of 'Hub' concept primarily owing to no national airline operator

having any significant global network to support the 'Hub' model

Air charters, over the years, have emerged as widely used medium of transportation for

frequent high profile business travelers as it saves on their productive time, which otherwise

is wasted in travel related wait, check-in formalities and flight delays.

Current Scenario

üAir Charter market in India has been making a gradual recovery since the economic

downturn of 2009, and the subsequent voluntary austerity drives initiated by the

politicians, with businessmen and corporate leaders of large corporations resuming their

travel plans which were put on hold during the recession

üIn addition to high charter demand from major Tier-I cities like Delhi, Chennai and

Hyderabad, there has been a greater demand from smaller Tier-II and Tier-III cities all

across India

üWith the economy picking up steam and growing aspirations of its young population,

India is witnessing rise in millionaires who are comfortable spending hefty sums for a

comfortable and time efficient travel

üThere is also a high demand for larger jets that carry 25 - 75 passengers, although such

aircrafts are currently in short supply in the Indian market

üSome of the popular aircrafts used in the Indian Charter business are Beechcraft, Cessna

and Falcon

üSome of the major players in this sector are Air Charter Services Private Limited, Taj Air,

Span Air Limited, Air Charters India, Jet Charter, Ligare Voyages, India Flysafe amongst

others.

The purchasing power and the consumption patterns of the middle class population in

2.2.3 Air Charter

6 Industry Sources


2.2.4 Airport Infrastructure

Airports are the foundations on which the airlines industry of a country is based. Although

intertwined, both these industries follow quite dissimilar business models. The airlines

industry can react quickly to changing market dynamics by increasing or decreasing their

capacities by selling or buying / leasing aircrafts. However, airport infrastructure requires a

much longer time period to plan and develop, at times ranging from 20 to 30 years.

Last couple of decades has witnessed phased deregularization in the airport infrastructure

resulting in entry of Public Private Partnership (PPP) models. Airports have thus evolved from

being Government controlled infrastructure providers to profit-oriented service providers.

Regulatory Framework of Indian Airport Infrastructure

The airport infrastructure in India is governed by the Ministry of Civil Aviation (MoCA), which

is the apex body that is responsible for forming policies. There are four regulatory bodies that

operate under the ministry - Directorate General of Civil Aviation (DGCA), Bureau of Civil

Aviation Security (BCAS), Airports Authority of India (AAI) and Airports Economic Regulatory

Authority (AERA) (Figure 11).

Source: Crisil Research


Figure 11: Regulatory Framework of Indian Airport Infrastructure

DGCA AAI BCAS AERARegulatory

Bodies

Functions

• Regulation of air transport service

• Enforcement of civil air regulations, air safety and air worthiness standards

• Creating, upgrading, maintaining and managing civil aviation infrastructure both on the ground and airspace in the country

• Review and approve tariff structure for aeronautical services

• Regulator of civil aviation security in the country

• Monitor preset performance standards

Ministry of Civil Aviation

ATC CISF

Figure 12: Typical Business Model of an Airport

Source: Crisil Research


Investment in airportinfrastructure at

existing siteGrowth in traffic

Growth in aerorevenue

Investment in connectivity by Governmentand investment in real estate, hotels

commercial development in and aroundairport

Investment in greenfield airport

Increased economicactivity

Growth in non-aerorevenue

Indian Airport Infrastructure – Key Trends and Facts and Figures

üThere are 449 airports and airstrips in India out of which 125 are owned by Airports

Authority of India (AAI)


Airports and

airstrips in India

(449)

AAI managed

(125)

Non-AAI airports

and airstrips

(324)

Non-Operational (31)

Operational (68)

International (11)

Customs airports

(8)

Domestic airports

(49)

Civil Enclaves

(26)

üAs on FY12, there were 146 operators in India with a combined fleet of 406 aircrafts 7

with demand for non-scheduled airlines rising owing to rise in business activities

üThere are 6 major airports in the country at New Delhi, Mumbai, Chennai, Kolkata,

Bengaluru and Hyderabad

Figure 13: Indian Airport Infrastructure

7 IBEF

üPrivate sector participation in the airport infrastructure in India has been increasing

since the advent of liberalization policy. At present, 5 international airports in India

(Mumbai, Delhi, Cochin, Hyderabad and Bengaluru) have been successfully

completed under PPP mode

üParticipation from private operators have resulted in steady revenue growth due to a

combination of increased traffic, higher aeronautical charges and the development of

non-aeronautical revenue opportunities which have not been adequately leveraged

by the AAI in the past. Figure 15 shows the comparison between non - aeronautical

revenues earned by AAI and 4 PPP airports (Delhi, Mumbai, Bangalore and

Hyderabad)



Figure 14: Passenger Traffic at Major Airports in India

BengaluruPassenger traffic handled in

FY12: 12.7 million; FY13 : 11.99 million

Mumbai

Passenger traffic handled in

FY12 : 30.74 million; FY13: 30.21 million

ChennaiPassenger traffic handled in

FY12: 12.92 million; FY13 : 12.77 million

Delhi

Passenger traffic handled in

FY12: 35.9 million;

FY13 : 34.37 million

KolkataPassenger traffic handled in

FY12 : 10.30 million; FY13 : 10.06 million

HyderabadPassenger traffic handled in

FY12 : 8.44 million; FY13: 8.30 million

thüPrivate sector investment is expected to increase to USD 9.3 billion during the 12

8Five Year Plan from USD 5.5 billion in the previous plan

üAt present, only 40% of the airport traffic is managed exclusively by AAI. 60% of the 9aircraft traffic is handled under PPP mode

üTrend of increasing use of User Development Fee and Airport Development Fee at

the airports to fund maintenance and expansion related activities

üVarious fiscal incentives on offer like 100% FDI under automatic route for Greenfield

Airports and through Foreign Investment Promotion Board (FIPB) approval for

Brownfield airports; 49% FDI in aviation for foreign carriers; 100% tax exemption for

airport projects for 10 years

üBudgetary support of USD 58.3 million to AAI to develop airport infrastructure in the

North-Eastern States of India. Over 30 airport development projects are under 10

progress across various regions in North-East India

üAAI is aiming to make 250 airports operational across the country by 2020 and has

been successful in developing and upgrading around 23 airports in metro cities over 11the last 5 years

üAAI plans to develop around 20 airports in Tier II and Tier III cities and spend USD 1.3 12billion on non-metro airport projects over next 5 years

8 AAI, IBEF9 AAI, IBEF, Industry Sources10 AAI, IBEF11 AAI, IBEF12 AAI, IBEF


Figure 15: Comparison between Non Aeronautical Revenues earned by AAI and PPP airports

Source: CAPA, AAIAAI Airports PPP Airports

30

25

20

15

10

5

0

FY08 FY09 FY10 FY11 FY12 FY13 FY14

No

n-a

ero

Reven

ue (

INR

billio

n)

üEmphasis is being witnessed on 'Aerotropolis' model to enhance revenues,

especially from non-aeronautic avenues like retail, advertising and vehicle parking

Aircraft MRO caters to aircraft maintenance and repair, as well as inspection and testing

services. With significant increase in passenger traffic and number of aircrafts expected to

occur over next few years, it is imperative for India to have a strong domestic MRO market.

Current size of Indian MRO market is around USD 700 million and is expected to grow to over 13

USD 1.5 billion by 2020 . However, India constitutes only around 1% of the global MRO

market which is estimated at approximately USD 49.2 billion according to a market research

conducted by Visiongain in 2013.

2.2.5 Maintenance, Repair and Overhaul (MRO)

13 MRO Monitor, KPMG14 KPMG, Other Sources, YES Bank Analysis15 KPMG, Other Sources, YES Bank Analysis

Key Issues facing Indian MRO Sector

üUnfriendly tax regime on import of spares into India makes Indian MRO players 30 -

40% more expensive as compared to their international counterparts. As a result, an

estimated 5-10% of MRO related work for domestic scheduled airlines is performed 14

in India, rendering Indian MRO sector uncompetitive.

üIndian airline companies spend around 13–15% of their revenues on maintenance, 15

which is the second-highest cost component after fuel

üRegulatory challenges with respect to approvals for setting up MRO business. There

are also procedural delays with respect to import of spares parts, components and

even movement of foreign MRO sector experts into India


Source: MRO Monitor, Ascend Database, KPMG

Figure 16: MRO Marketsize in India (USD billion)

$0.10 $0.20

$0.30 $0.30

$0.40

$0.60

$0.10

$0.20

$0.30

$0.10

$0.10

$0.30

2011 2015 2020

Airframe Engine Components Line Maintenance


üLack of availability of hangar space at key international airports. This limits the ability

of Indian MROs to tap into the larger potential market of Aircraft's operating within

5–6 hours of flying distance from India

Modernization of Existing Airports and Development of Low-Cost Airports

The Ministry of Civil Aviation will be fast-tracking the process of awarding airport management

contracts to bring in efficiency and improve the facilities at existing airports. They have identified

existing airports at Chennai, Kolkata, Lucknow, Guwahati, Jaipur, and Ahmedabad for awarding

contracts to private companies. Further, 8 Greenfield airports are slated for development in Navi

Mumbai, Juhu, Goa, Kannur, Pune, Sriperumbedur, Bellary and Raigarh.

Airports Authority of India (AAI) has also drawn out plans to develop low-cost airports in Tier II

and Tier III cities to promote regional and remote area connectivity, and in part to promote the

tourism industry and other economic activities. It has identified 50 existing airports across the

States of Andhra Pradesh, Jharkhand, Bihar, Punjab, Uttar Pradesh, Arunachal Pradesh, Assam,

Madhya Pradesh, Odisha, Rajasthan and Maharashtra. These airports are to be developed on no-

frills model, having only essential services required to operationalize air service without

compromising on safety or security.

Sharing of Aviation Turbine Fuel (ATF) Infrastructure

The Empowered Group of Ministers (EGoM), during February 2012, had approved direct import

of Aviation Turbine Fuel (ATF) by the airlines. Considering nearly 40-45% of operating

expenditure of airlines constitutes of ATF, this could lead to 10-15% savings on the operating

cost of the airlines. However, the aviation companies had to go slow on the proposal due to the

high costs involved in building up the storage and transport network and the reluctance from oil

companies for sharing their infrastructure. Ministry of Civil Aviation is now working on a proposal

to push the oil companies to share their infrastructure, which will reduce the operating costs of

the airline companies.

Establishment of Dedicated Freight Stations

The concept of Air Freight Stations was first introduced in Chennai in 2005 to enable customers

to take delivery of cargo in one or two days. The Ministry of Civil Aviation has now fast tracked

the creation of similar air freight stations (AFS), an off-airport common user facility, to handle air

cargo across the country. These dedicated freight stations are expected to eliminate the undue

strain on the existing terminal facilities created at the airport premises and decongest the cargo

terminals at major airports. It will also help in increased penetration of international air cargo

activities into manufacturing and consumption clusters located in the hinterland.

Remote and Regional Air Connectivity Policy

Ministry of Civil Aviation had drafted a policy for the promotion of regional and remote area air

connectivity. The objective of the policy is to encourage airlines to operate in remote and

2.3. Key Developments and Initiatives

regional areas of the country, where airport infrastructure has been developed and the regions

are strategic for Tourism. The airlines will be offered concessions or viability gap support for

operating on these routes. The Ministry has also encouraged State Governments to offer similar

incentives at airports owned by them and be active partners in promoting regional connectivity.

Corporatization of Air Navigation Services

Air Navigation Services operated by Airports Authority of India needs to revamped urgently to

meet global standards. The Ministry of Civil Aviation is working on a proposal to create a

separate Air Navigation Services Corporation to provide good governance and enhanced air

navigation services. Corporatization will not only make air navigation more efficient, but also

ease the process of raising funds required for upgrading the infrastructure and equipment. A

separate body will also be able to provide good governance and enhanced performance through

focused attention, faster decision making and improved service quality.

Corporatization will not only make Air Navigation more efficient, but also ease the process of

raising funds required for upgrading the infrastructure and equipment. A separate body will also

be able to provide good governance and enhanced performance through focused attention,

faster decision making and improved service quality.


Developing Remote and Regional Connectivity 3

Air travel is one of the most time efficient modes of transportation having the capability to

connect economic centers to even the remotest and under-served areas of the country. Air

connectivity can not only aid in development of new economic centers thereby contributing to

overall economic development but also bring in incremental traffic. This aids in a more uniform

and equitable growth in economic activity across the country. In India, given its vast

geographical expanse, varied terrain and uneven population spread, regional and remote area

air connectivity can play a critical role.

Equitable and Balanced Economic Growth

üAdditional employment opportunities created from airline industry development and

ancillary businesses in a specific region

üCatalytic effect leading to a positive impact on other localized industries in terms of its

ability to move and make available key raw materials

Seamless Movement of Goods

üGrowth in production and trade of commodities like perishable goods thereby offering

broader market base

Social Bonding and Cohesion

üEasy and time effective movement of masses between regions; particularly important

for India because of varied topographies

üConnectivity between regional centers and remote off-shore areas

üPopulation of a town or city

üEconomic potential and traction in a town or city indicating sustainability of the

requirement for developing air connectivity. As per Boeing’s long-term assessment of

aviation market, as illustrated in Current Market Outlook 2021-2031, economic growth

rate is the best explanatory variable for air transport demand and around 60-80% of air

transport demand is attributed to economic growth. Further, the report also states that

air travel revenues consistently average about 1% of GDP in countries around the world,

regardless of the size of the national economy.

Importance of Establishing Regional and Remote Air Connectivity

Key Drivers for Development of Regional and Remote Air Connectivity


3.

Developing Remote and Regional Connectivity

ü

market for relevant stakeholders. Certain tourist destinations can attract more numbers

if they are properly connected by air. Some of these destinations could include wildlife

parks and sanctuaries which are still beyond the reach of surface connectivity and are

time-taking and inconvenient for tourists to reach.

üRequirements to connect with remote areas of strategic importance from defense and

availability of natural resources perspective

Inadequate Growth of Regional and Remote Air Connectivity in India

üDespite the robust growth of the Civil Aviation sector in India, regional and remote

connectivity has remained grossly uneven

üSeveral Tier II and Tier III cities have remained under-served or unconnected despite the

steady increase in the passenger traffic over the years

üNearly 93% of the total seat deployment by scheduled airline operators is over routes

between Metro and other towns and cities and only 7% is over routes connecting Tier II 16

and Tier III towns and cities

Tourism potential of a town or city indicating a destination for travelers and a potential

Figure 17:

Indian States – 2012-13

Distribution of Population, Passengers and Air Traffic Movement (ATM) across

Source: AAI, Population Census 2011 data, KPMG

16 Deloitte Research


25

20

15

10

5

0

% of total population % of total passenger flown % of total ATMs

Mah

aras

htra

Delhi

Tam

il Nad

u

Karna

taka

Andhr

Pra ad

esh

eW

st Ben

glaK

rala

eGuja

rat

Goa

Rajasth

an

Uttar P

rade

sh

Mad

hya P

rade

sh

Punjab

Jam

mu

and

Kashm

ir

Orrisa

Bihar

Chhatt

si garh

Tripu

ra

Man

ipur

Assam

Jhar

khan

d

Issues and Challenges

Based on the latest 2011 Census, India has a total of 4,041 Statutory Towns out of which

presently only 75 towns have airports with scheduled air connectivity. Seats offered by airlines

are perishable commodities, which is why airlines have to always focus on minimizing the

wastage of this perishable commodity.

üAvailability of Alternate Modes of Transportation: While airlines are the quickest

mode of transportation, they also tend to be more expensive than other modes such as

roads and railways

17üDecrepit State of Existing Airports: There are around 449 airports and airstrips in India

primarily owned / managed by armed forces, AAI, State Governments, State Owned

PSUs, private players and under PPPs. However, owing to lack of maintenance and

infrastructural developments, there exists significant number of non-operational

airstrips of AAI and around 160 airports owned by State Governments most of which 18remain in a dormant state

üFinancial Viability of Regional and Remote Airports: Currently, owing to lack of policy

reforms, creation and operation of regional and remote airports is financially unviable.

Revenue generated out of operating small and remote airports is not even sufficient to

meet the operational expenditure, let alone recovering capital expenditure incurred and

generating profits. This forms a significant bottleneck towards creating and operating

regional and remotely located airports viable for private sector

üStringent Regulatory Requirements: Restrictions on scheduled regional operators

such as minimum number of aircrafts to be deployed, maximum certified takeoff mass,

trading of capacities with other scheduled operators to meet Route Dispersal Guidelines

(RDG) , make it difficult to develop regional and remote areas connectivity

üChoice of Adequate Size of Aircrafts: Air transport services currently in India are being

predominantly provided by aircrafts with more than 100 seats (narrow body aircrafts)

across all categories of routes. Current status of deployment of aircrafts in metros, Tier I,

Tier II and Tier III cities is presented in (Figure 18).

Figure 18: Aircraft Deployment over Regional Routes

Source: Deloitte Research


17 IBEF

18 Deloitte Research

0%0%

2%

98%

>100 Seater70 Seater40 Seater<20 Seater

Metro - Metro

100 Seater70 Seater40 Seater<20 Seater

Metro - Tier 2

97%

3%

0%0%


84%

Metro - Tier 3 Tier 3 - Tier 3

0%1%

15%9% 6% 0%

85%

Tier 3 - Tier 3



70%

4%12%

14%

This may not be economically and commercially viable for all routes. Also, issue of using

an appropriate aircraft size for a particular route is complicated owing to various factors

like fleet size limitations, market assessment, cost-benefit analysis and optimization,

route development strategies and competitive landscape.

üUnder Developed Maintenance Repair and Overhaul (MRO) Industry: In spite of

significant market potential of this industry in India, there is a shortage of indigenous

third-party MRO service providers because of huge taxation implications amongst other

factors. This puts Indian MRO players in an inferior position compared to the foreign

MRO players which results in Indian airline operators taking their aircrafts to overseas

destinations for MRO services. Currently, for a regional scheduled operator, these

options along with setting up an in-house capacity are not financially viable.

Key Initiatives and Developments for Regional and Remote Air Connectivity

thüAs per the 12 Five Year Plan (2012-2017), improving air connectivity in Tier II and Tier III

cities in India is one of the key priorities of the Government

üCentral and State Governments are taking steps to bolster Regional and Remote Air

Connectivity in respective regions and states

üOne of the key policies of the Government for promotion of regional and remote area air

connectivity is Route Dispersal Guideline (RDG)

The Route Dispersal Guidelines (RDG), introduced in 1994, made it mandatory for domestic

scheduled carriers to deploy a certain proportion of their capacity to regional and remote

airports. Route categorization was based on traditionally surplus generating routes (Category I),

loss making routes (Category II) and the remaining routes (Category III). The Category I routes

were largely inter-metro routes and generated surplus that cross-subsidized losses largely on

Category II routes which served regions of difficult terrain and destinations in remote areas.

Route Dispersal Guidelines (RDG)


Mumbai – Bangalore

Kolkata – Delhi

Mumbai – Kolkata

Kolkata – Bangalore

Mumbai – Delhi

Kolkata – Chennai

Mumbai – Hyderabad

Delhi – Bangalore

Mumbai – Chennai

Delhi – Hyderabad

Mumbai – Trivandrum

Delhi – Chennai

Category I Routes None

Categorization of

RoutesRoutes Covered

Capacity to be

deployed

Category II and IIA

RoutesCategory II: At least 10% of the

capacity deployed in routes in

Category I

Category IIA: At least 10% of

the capacity deployed in routes

in Category II

Routes, which connect

stations in North-Eastern

region, Jammu and Kashmir,

Andaman and Nicobar and

Lakshadweep

Category III Routes At least 50% of the capacity

deployed in routes in Category I

Routes other than those in

Category – I and

Category – II

Source: Deloitte Research


Table 3: Route Dispersal Guidelines (RDG)

The DGCA monitors compliance with Route Dispersal Guidelines on a monthly basis. In the

event of non-compliance, airlines are required to make up any shortfall during the subsequent

period. The data regarding status of compliance of scheduled domestic airlines for the month of

August 2014 is presented in Table 4.

Source: DGCA

It is evident from the table above that airlines are in adherence to the requirements under Route

Dispersal Guidelines which is also primarily because of increase in air transport services on

Category I routes, making it commercially viable for airlines to increase operations in specific

routes in Category II and Category III.

Rohit Nandan Committee on Route Dispersal Guidelines (RDG)

The Ministry of Civil Aviation constituted a Committee in April 2011 under the Chairmanship of

Shri Rohit Nandan, Joint Secretary to review the Civil Aviation Requirement on Regional

Scheduled Operations (RSOP) and other air connectivity issues. The committee as a part of its

terms of reference also reviewed the Route Dispersal Guidelines. As per the committee report,

though RDG have significantly contributed to the enhancement of regional connectivity in the

country, it has not been successful in doing so beyond the State capitals. RDG being a licensed

based scheme has created market distortions and stopped serving the required objectives in

certain cases. For instance the policy may be inadvertently hindering the emergence of

specialized airlines with appropriate aircrafts to cater to the regional and short-haul routes.


Table 4

AirlineASKM Deploymnet (%) of Category I

Cat III Cat IIA Cat II

Air India + Alliance Air

Jet Airways + Jetlite

Spicejet

Go Air

IndiGo

Minimum Capacity Requirement in accordance with RDG (As % of Capacity Deployed in Category I)

• Category II - 10%

• Category IIA - 1%

• Category III - 50%

92.6

87.5

78.7

154.0

114.1

1.70

1.36

1.36

1.80

1.70

20.8

13.1

26.3

60.4

24.1

Key Recommendations of the Committee Report

üInstead of abolishing RDG, it should be restructured such that routes with high and medium

Passenger Load Factor (PLF) subsidize each other and routes with low PLF be supported by

establishing a Regional Air Connectivity Fund (RACF)

üAdditional routes should be included in Category I (including Goa, Pune) and some of the

Category-III airports (Pantnagar, Kangra, Dehradun, and Gaya) should be brought under a

separate category of RDG to improve respective air connectivity and traffic growth

üA dedicated fund may be setup by levying cess on domestic passengers through ticket

sales by airlines. A portion of the fund should also be used for establishment and running of

low cost airports, heliports and helipads; the State Governments should also contribute to a

portion of the fund

üSupport should be provided to operators for an assured minimum period so that they can

develop sustainable routes


Investment for Developing Infrastructure in terms of Creating New Airports and

No-Frills Airports (NFA) 4

Globally, economic growth has always driven the growth in air traffic demand. However, while

air traffic demand has increased as economies have grown, air transportation itself can be a key

cause and facilitator of economic growth. Greater connections to the domestic and

international air transport network can boost the productivity and growth of economies by

providing better access to markets, enhancing links within and between businesses and

providing greater access to resources. In spite of these wider economic benefits from air

transport, this sector is often overlooked in policy and investment appraisals.

Figure 19: Wider Economic Benefits of Air Travel

The impacts on regional economies derived from air transport activity can be broken down into

three main classes:

Direct Effects which correspond to the increase in employment in activities directly related to

air transport, such as airlines, handling, maintenance and catering companies, airports,

shopping within airports and parking facilities. It is estimated that 1,000 jobs are created for

every million passengers through an airport

Indirect Effects which correspond to the increase in employment and economic activity in the

region as a result of the increase in flows of people, for tourism and business purposes

Catalytic effects which correspond to the attraction and retention of incoming investment and

the stimulation of tourism. The increase in commercial activity enhances a region’s

competitiveness by attracting leisure and business passengers, which ultimately leads to

sustainable growth in incomes and employment


4. Investment for Developing Infrastructure in terms of Creating New Airports and No-Frills Airports (NFA)

Source: International Air Transport Association (IATA)

Greater Access to the Global Air Transport

Network

Facilitates efficiency improvements

Fosters greater competitiveness

Access to a wider base of suppliers

Access to now production

techniques

Increases inward and outward investment

Ability to explo it economies

of scale

Widens the available market

Higher Revenues

Higher Potential returns from investment

Low-cost Airlines (LCA) activity produces similar positive effects in the regions where they

operate. Globally the LCA’s business model leads these companies to choose regional airports,

which are, in many cases, located in underdeveloped economic regions but with a strong

potential for development.

Firstly, by offering low fares, LCAs induce an increase in air travel and consequently the number

of people passing through the region, with inherent positive effects. Even in well developed

regions when competing with the established companies, LCAs lead to an overall reduction in

fare prices, which further induces air travel to the region. To support this advent of new LCAs or

the extension of existing LCAs to remote and regional locations of the country, a network of low-

cost airports has to be developed and linked to regional hubs. Such low-cost airports will be able

to offer lower charges to LCAs, thereby further lowering of overall fares of operating on these

routes viable.

Secondly, the development of low cost carrier services frequently results in traffic demand

being newly generated, rather than diverting demand from existing services. This is because low

cost airline pricing is often so low that it creates new demand for air travel.

Thirdly, low cost carriers have, in a number of cases, created traffic flows on entirely new routes

which were not previously served from hub airports. As they have a significant share of

passenger travel for leisure purposes, the main economic sector to benefit is normally tourism.

Moreover, these regions are commonly unknown for most populations, and by flying to them

and advertising them in their websites, LCAs improve regions’ visibility.

Aviation is a major driver for development of tourism. While deregulation in the aviation industry

has not only boosted inbound traffic, the emergence of the low cost carrier (LCC) sector has

proven beneficial in promoting domestic tourism, with increased affordability complementing

the increasing demand for leisure travel. Even though domestic tourism has seen positive

growth in the last few years, the state of airport infrastructure at many tourist destinations still

remains a concern.

The Ministry of Tourism and the Ministry of Civil Aviation are working together closely to

effectively position India as a preferred tourist destination. In the year 2012, a MoU was signed to

promote synergies between the two Ministries to promote tourism effectively on the following

lines:

ü“Incredible India” branding at airports and promotional films on Indian carriers. The Civil

Aviation sector is also very synergetic to the new campaigns launched under this banner

which aim to ensure equitable distribution of tourist arrivals in the country and also promote

the lesser known remote destinations

üParticipation in road shows and events

üMinistry of Tourism aims to promote some of the newly upgraded airports such as

Aurangabad, Udaipur, Varanasi and Madurai

üCollaborate to take the 'Clean India' campaign forward

4.1 Aviation as an Enabler to the Tourism Industry


A country's tourism and foreign income earnings are intrinsically related to its Air Service

Agreements. India has entered into several bilateral Air Service Agreements, and adopted a

liberal Air Transport Policy relating to international inbound tourist charter operations. Operators

can operate any number of international tourist charter flights by any type of aircraft to

designated international airports. Although the policy on inbound charters is relaxed, operators

do face some challenges with airport infrastructure, slots and delays in obtaining permissions

from DGCA and other bodies. This has a direct impact on tourist activity.

In the backdrop of tourism, the hub and spoke model is a very important strategy for a country

like India with a huge area and varying topography. Considering the fact that even top

destinations like Agra do not have regular flight connections, it becomes increasingly important

to not only upscale connectivity, but also improve the country's image from a marketing and

promotional perspective.

Sensing the need to cope with the increasing volume of activity and improve connectivity to

regional and remote regions of the country, Ministry of Civil Aviation has identified 50 small

airports in remote areas of Tier II and Tier III cities under the management of AAI and State

Governments to be developed on a low-cost, no-frills model.

4.2 Development of Low-Cost Airports

Andhra Pradesh

Vijaywada

Arunachal Pradesh

Tezu

Nellore Momdila

Kurnool Along

Kadapa

Assam

Silchar

Tirupathi Jorhat

Anantapur Tezpur

TelenganaNizamabad

Madhya Pradesh

Gwalior

Karimnagar Singrauli

Jharkhand

Dhanbad Burhanpur

Bokaro Khandwa

Hazaribagh Jabalpur

Punjab

Ludhiana Sidhi

Jalandhar Shahdol


State Locations State Locations

Table 5: Identified Locations for Low-Cost Airports

Source: MoCA


Firozpur

Odisha

Brahmpur

Bihar

Muzzaffarpur Rourkel

Chapra Kendujhar

Sasaram

Rajasthan

Ajmer

Uttar Pradesh

Agra Kota

Allahabad Bhilwada

Moradabad Alwar

Saharanpur

Maharashtra

Kolhapur

Meerut Nasik

Aligarh Jalgaon

Muzzaffarnagar Solapur

BijnorAmrawati

Azamgarh

State Locations State Locations

Further, new locations for developing airports will be identified in the Tourism circuit and areas

with future economic potential. These Greenfield airports will also be developed on a low-cost

model and make it viable for the budget airlines to run their services without compromising

safety or security. These low-cost airports will be connected to regional hubs as part of the

'National Hub' policy for passenger and cargo services.

Developing airport infrastructure is a capital-intensive process, requiring significant resources

to fund land acquisition, airfield development, terminal development and supporting

infrastructure to successfully meet the demands of the airlines and the service demands of

travelling individuals. This infrastructure challenge has to be escalated to a priority agenda for

realizing the growth in the air travel industry. Low-cost approach for developing airport

infrastructure is the ideal route to quickly build a network of regional airports.

Low-cost Airport Business model is distinct from that of the traditional major airports. Low-cost

airports emphasize profitability through operational efficiency and by offering minimal frills. The

core focus for a low-cost airport is in providing air connectivity to passengers than creating an

experience.

Table 6: Comparison of Services between Traditional and Low-cost Airports

Traditional Airports Low-Cost Airports

Grandiose buildings designed by signature architects

Single shed simple design

Infrastructure

Buildings

Vast space providing for various amenities

Minimal space since no waiting period

Interior Space

Multiple Aerobridges No AerobridgesAerobridges

Supports all types of aircrafts

Supports small aircraftsAirport Runway

Elaborate automatic baggage handling system

Direct baggage collection at the aircraft

Baggage Handling

Wide array of retail stores, including duty-free shops

Limited to basic amenitiesRetail Space

Source: YES BANK Analysis

4.3 Public - Private Partnerships in Financing Low - Cost Airports

Investment in airport infrastructure is a capital-intensive with significant concomitant risk and

long payback periods. Though the investment required for developing low-cost airports is

substantially lower as compared to traditional airports, there is still a significant investment

required to develop infrastructure, particularly to meet the safety and security standards. It

should be appreciated that if such capital expenditure is to be sustained, it should be adequately

remunerated.

Financing Sources for Airports

Airports in general should make reasonable

returns not just to cover the cost of capital for

the investors or lenders, but also allow for

the provision of high quality of service to

passengers. Public Private Partnerships

have already delivered airport infrastructure

that is internationally comparable. In fact,

these infrastructure projects were built on

time and within the budget, even going by

the usual benchmarks for these projects.

Private investors generally bring in very low

equity into PPP airport projects and thus the

debt-to-equity ratios are extremely high,

sometimes reaching 80:20 proportions.

Such a debt-equity structure translates into


Figure 20: Sources for Airport Financing

Regulated

revenue

and tariffs

Government

grants

Debt

Financing

Equity

Injection

fixed cash outflow in the form of huge interest repayments. This results into long payback

periods to equity investors. The revenue-sharing models as a part of the Joint Venture

arrangement are also a departure from the international norms. Operators of airports developed

under joint ventures have expressed concerns that their commitments for high revenue share

could potentially affect their viability unless there are alternative sources of raising revenue to

airports. Raising the level of non-aeronautical revenue is also limited by the scope of activities for

commercial exploitation.

Taking into account these experiences of PPP airports in India, the development of low-cost

airports should follow a different approach to PPP model. Low-cost airports are based in small

and remote locations with relatively lower passenger traffic, thus making them unviable, purely

from revenue point of view. The revenue generated out of operating these airports will not be

sufficient to meet the operational expenditure, let alone making profits out of the business.

Therefore, any proposal for building these airports via the PPP route should include Central

Government grants for setting up infrastructure and State Government assistance by sharing

operational cost funding to make such airports viable.


Recommendations and Way Forward 5


1. Policy Measures by State Government to Enhance Regional and Remote Area

Connectivity

üSetting up of dedicated agencies in each State for policy making, implementation

and monitoring purposes

üAdequate support for providing necessary infrastructure including land, roads and

utilities (power and water connections) for development of low-cost no-frills

airports

üFiscal incentives including exemption of stamp duty, property tax and electricity

duty in a 10 year period

üReduction of sales tax on ATF, as this constitutes around 40-50% of operational 19

costs of an airline . This has to be reduced and aligned as closely as possible with

the global standards

üSeat underwriting mechanism between Government and the scheduled regional

operators

2. Favourable Regulatory Environment for Scheduled Regional Operators

üRemoval of restrictions on Scheduled Regional Operators with respect to

operations in only one designated region – North, South, West, East and North-

East

üImplementation of Code Sharing/Available Seat Kilometers (ASKMs) trading

between scheduled airlines and scheduled regional airlines with respect to

Category II /Category IIA routes

3. Fillip to Domestic MRO Market

üRationalizing of the taxation policy with respect to import duties, service tax and

VAT to make domestic MRO players cost effective for airlines

üSimplifying and easing the policies pertaining to grant of regulatory approvals and

licenses for setting domestic MRO operations. Swift clearances to foreign MRO

experts to travel to India leading to reduced lead time in MRO related activities

üIncentivization and fiscal support to airlines for establishing and developing MRO

hubs in India in partnership with domestic MRO players

19 Industry Sources, YES Bank Analysis

5. Recommendations and Way Forward


4. Benchmarking and Development of Low Cost No Frills Airports

üEstablishment of a criterion for classification of No-Frills Airports based on regional

dynamics. This criterion should entail coordination and inputs from Government

and the Private Industry players

üEvaluating and incentivizing PPP models for developing no-frills airports with

adequate financial viability

üHub and spoke model could be an important strategy for a country like India with a

huge area and varying topography. Considering the fact that majority of the new

low-cost airports may not attract a large number of passengers initially, connecting

these locations with regional hubs will make it an economically viable proposition

for the airlines

5. Strengthening of Air Navigation Services (ANS)

üThe navigation infrastructure in India has not been able to keep pace with the

growing number of aircraft movements putting ANS under considerable pressure.

There is an urgent need to strengthen the capacity along with technological

improvements to cater to the present situation. AAI is the sole provider of ANS

services in the country to all airports (including private airports). A separate and

independent body should be formed which would be responsible for management

and augmenting the ANS capacity.

6. Development of Ancillary Functions

üImpetus to creation of world class infrastructure for apt human resource

development with optimal training and skills set development

üIncentivizing and encouraging development of cutting edge IT solutions for the

aviation sector

üDevelopment of infrastructure to support all weather landings at all major airports

in the country

YES BANK, India’s fourth largest private sector Bank, is the outcome of the

professional & entrepreneurial commitment, vision & strategy of its Founder Rana

Kapoor and his top management team, to establish a high quality, customer

centric, service driven, private Indian Bank catering to the Future Businesses of

India.

YES BANK has adopted international best practices, the highest standards of

service quality and operational excellence and offers comprehensive banking and

financial solutions to all its valued customers. YES BANK has a knowledge driven

approach to banking and a superior customer experience for its retail, corporate

and emerging corporate banking clients. YES BANK is steadily evolving its

organizational character as the ‘Professionals’ Bank of India with the

uncompromising Vision of “Building the Best Quality Bank of the World in India by

2020!”

ASSOCHAM, acknowledged as the Knowledge Chamber of India, has emerged as

a forceful, pro-active, effective and forward looking institution playing its role as a

catalyst between the Government and Industry. Established in 1920, the Chamber

has been successful in influencing the Government in shaping India's economic,

trade, fiscal and social policies which will be of benefit to trade and industry.

ASSOCHAM renders its services to over 4,00,000 members which include

multinational companies, India's top corporates, medium and small scale units

and associations representing the interest of more than 400 Chambers and Trade

Associations from all over India encompassing all sectors.

ASSOCHAM has over 100 National Committees covering the entire gamut of

economic activities in India. It has been acknowledged as a significant voice of the

Indian industry especially in the fields of Corporate Social Responsibility,

Environment & Safety, Corporate Governance, Information Technology,

Agriculture, Nanotechnology, Biotechnology, Pharmaceuticals, Telecom, Banking

& Finance, Company Law, Corporate Finance, Economic and International Affairs,

Tourism, Civil Aviation, Infrastructure, Energy Power, Education, Legal Reforms,

Real Estate, Rural Development etc. The Chamber has its international offices in

China, Sharjah, Moscow, UK and USA. ASSOCHAM has also signed MoUs to set

up partnerships with Business Chambers in more than 75 countries.

NOTES

NOTES

NOTES

Documents

Developing Remote and Regional Connectivity · in India in the near future. The Government of India is taking several measures to enhance connectivity within the country, particularly