In 2014, India accounted for nearly 83 million air passengers (including both domestic and international air travellers). The current size of the Indian civil aviation industry is about US$ 16 billion and contributes 0.5% to the country’s GDP.
India is also one of the largest and fastest growing aviation markets worldwide. Considering the year-on-year growth, in 2015 the domestic air passenger traffic in India grew at roughly 25%, followed by the US at a mere 9% growth. In these terms, the Indian aviation market has high growth potential.
Few of the factors that mainly led to the transformation in the Indian aviation industry are:
• Entry and growth of LCCs
• Development of modern airport infrastructure
• Government policies to develop transportation, and tourism
• Foreign direct investments
• Emphasis to develop regional connectivity
In the 11th five year plan, the government also prioritized the development of airports via ‘PPP’ (Public Private Partnership) model. Currently, there are around 450 airports in India. AAI (Airport Authority of India ) manages 125 airports of which 11 of them are the international airports, 8 are customs airports, 81 domestic airports, and 25 civil enclaves at defense airfields.
However, still many of the Tier 2 and Tier 3 cities in India do not have airport infrastructure. Tier 2 and Tier 3 cities currently contribute only 30% of the total air passenger traffic.
Despite the so called ‘potential’, the Indian aviation industry has not been able to live up to the growth projections. Except for Indigo, almost all other airlines are in loss.
One of the major reasons for the lack of profitability is the high operating cost of airlines in India. Because of high fuel prices along with high taxation, fuel constitute around 35-45% of the total operating cost of an airline in India. Considering the global average, fuel constitutes only about 20% of the total operational cost of an airline.
Indian Oil Corporation Ltd. And Bharat Petroleum Ltd. are the two major oil providers in India, which charge around 16-30% sales tax on fuel, resulting into high prices. In addition, there are certain taxes laid by the government.
Furthermore, high airport charges in the major airports such as Mumbai and Delhi also contribute to the high operating costs.
Despite such high operating costs, airlines in India are required to reduce airfare due to overcapacity, so as to attract customers. The extremely competitive pricing from LCCs have even forced the FSCs (full service carriers) to reduce their air fare, despite a higher cost structure.
Furthermore, the government policy regarding social obligation of airlines to fly uneconomic routes and interference in the pricing have made the situation much worse.
In addition, getting aviation license in India is a huge hurdle for airlines to enter the market. The procedure of getting license is slow and cumbersome.