Indian aviation boom The myth and reality

Pankaj Narayan Pandit For the aviation sector to work, needed is a support system of airports and their infrastructure, trained manpower, passenger amenities, networks of travel agents and Internet penetration for the travellers. More important, there has to be a rise in the per capita income to make air travel affordable. AT THE recent Paris Air Show, airlines from India wowed the aviation industry with orders for 250 aircraft. In the last six months, private and public sector airlines from India have placed orders representing more than a 170 per cent increase from present fleet strength of 158 aircraft. Though the Indian aviation market has long-term potential, can it justify such sudden increase in capacity? Can you spot a serious player?: Amidst the many new entrants to the airline sector, how can we differentiate between serious players and the casual entrants?

Whenever any new sector such as telecom or aviation hitherto under regulation is liberalised, there is a tendency to overestimate the short-term returns, and underestimate the long-term potential. As always, among the new entrants, a few may be motivated only by money and the glamour of the airline sector, and others have visions of changing that world. The founders of successful Low Cost Carriers (LCC) like Ryan Air, Southwest and Air Asia, had a bit of the `change the world' passion in them. For the aviation sector to work, needed is a support system of airports and their infrastructure, trained manpower such as pilots, cabin crew and maintenance engineers, passenger amenities such as hotels,, ATF (aviation turbine fuel)

availability on a par with international prices, networks of travel agents and Internet penetration for the travellers. More important, there has to be a rise in the per capita income to make air travel affordable.
Why the rush for domestic skies?

Foreign equity allowed: Foreign equity up to 49 per cent and NRI (nonresident Indian) investment up to 100 per cent is now permissible in domestic airlines without any government approval. However, the government policy bars foreign airlines from taking a stake in a domestic airline company. Low entry barrier: Today, venture capital of $10 million or less is enough to launch an airline. Private airlines are known to hire foreign pilots, get expatriates or retired personnel from the Air Force or PSU airlines, in senior management positions to run the show. Further, they outsource such functions as ground handling, check-in, reservation, aircraft maintenance, catering, training, revenue accounting, IT infrastructure, loyalty and programme management. Airlines are known to take on contract employees such as cabin crew, ticketing and check-in agents. Attraction of foreign shores: Domestic airlines in India, such as Air Sahara and Jet Airways, that were set up more than five years ago, have now been allowed to use India's unutilised bilaterals for mounting flights to all parts of the world, except the Gulf region. Jet and Sahara have gone international by starting operations, first to SAARC countries, and then to South-East Asia, the UK, and the US. After five years of domestic operations, many domestic airlines too will be entitled to fly overseas by using unutilised bilateral entitlements to Indian carriers. Rising income levels and demographic profile : Though India's GDP (per capita) at $3,100 (on Purchase Power Parity terms) is nowhere near the Europe's levels of $7,000, and which corresponds to 0.05 trips per person, "India is shining", at least in metro cities and urban centres, where It and BPO industries have made the young generation prosperous. Demographically, India has highest percentage of people in age group of 20-50, among its 50 million strong middle class, with high earning potential. All this contributes for the boost in domestic air travel, particularly from a low base of 18 million passengers. Untapped potential of India's tourism: Currently India attracts 3.2 million tourists every year, while China gets 10 times the number.

Tourist arrivals in India are expected to grow exponentially, especially due to the open sky policy between India and the SAARC countries and the increase in bilateral entitlements with European countries, and the US. The increase in number of international tourists will percolate down to increase in domestic passengers. Glamour of the airlines: No other industry other than film-making is as glamorous as the airlines. Airline tycoons from the last century, like J. R. D. Tata and Howard Hughes, and Sir Richard Branson today , have been idolised by the Page 3. Airlines have an aura of romance around them, and high net worth individuals can toy with idea of owning an airline. All the above factors seem to have resulted in a "me too" rush to launch domestic airlines in India.
Domestic market

According to the Directorate-General of Civil Aviation statistics, the total size of the domestic market was 18 million in 2003. All scheduled domestic airlines in India carried 42,590 passengers a day in 200304, which was 11 per cent more than the previous year's carriage of 38,222 per day. The average load factor, an indicator of passenger demand and efficiency of the airlines' sales and marketing efforts, was 58 per cent, a slight improvement over the previous year's average of 56 per cent. The new entrants on the domestic scene need to probe reasons for the low load factor ; is it high fares or the limitation in number of air travellers? As per DGCA statistics, for the first time in 2003-04 (see Chart 1), domestic airlines were able to record revenue per kilometre (RPKM) higher than costs, with a positive operating margin of 3 per cent, against a negative margin of 3 per cent in previous years.

Pre-requisites for survival

Low debt-equity ratio: Airline is a cyclical industry with alternating short periods of growth and longer periods of recession. It is the staying power of equity that gives an airline the capital to stay afloat during periods of recession. Ideally the debt-equity ratio for new airlines should be less than or equal to 1. Appropriate aircraft type: An airline's most expensive assets are aircraft and having an average aircraft utilisation higher than 11-12 hours per day is crucial for its survival. Thus selecting an aircraft that is economically suited for the sectors identified, having adequate number of pilots, as well as maintenance facilities and spare parts is vital. Aviation value chain: Chart 2 shows low operating margins of airlines against high margins of their monopoly suppliers such as IT providers, airports, aircraft manufacturers. "Airlines do the flying and others make money out of them", says Mr Giovanni Bisignani, Director-General of IATA (International Air Transport Authority).

Second time lucky?

Indian aviation is witnessing a mushrooming of new airlines, however, this time they seem to be on safer grounds, with better funding of equity, and more optimism thanks to the success of Air Deccan. It is likely that aircraft manufacturers, airports, aviation training institutes (for pilots, cabin crew, and ground staff), airline IT providers, oil companies supplying ATF, aircraft maintenance centres, and air travellers will benefit from the rush of new airlines in Indian skies. While the party is on, for the air traveller looking for bargains, airline promoters are advised to tighten their seat belts to avoid the shock from hard landing.

International Expertise in Aviation Law Intense competition is a fact of life in the airline industry, leading to unprecedented demands on industry leaders and startup carriers alike. Since 1987, the Kelsey Law Group has provided counsel and representation to airlines conducting business worldwide, including American International Airways, Transcontinental Airlines, Murray Aviation, and the Kitty Hawk companies. Our attorneys have guided startup airlines through the legal complexities of establishing a presence in the highly regulated aviation fieldand advised industry leaders on matters ranging from deicing, ground handling, and fueling agreements to the purchase or sale of a single aircraft or an entire fleet. On behalf of our clients, weve negotiated agreements with such major international companies as Boeing, British Airways, Japan Airlines, Hong Kong Aircraft Engineering, Israeli Aircraft Industries, Lufthansa, Varig, and Mobile Aerospace. Our relationships with a global network of experts ensure that our clients receive comprehensive legal supportwherever their business takes them. For more information please feel free to email our firm at: kelsey@kelseylaw.com