First Step in India’s Liberalisation of Its Domestic Air Market but More is Needed

In September 2012 the Indian government opened its domestic air market to foreign investments permitting international airlines to invest 49% in domestic carriers. Although the move is expected to boost competition, these new measures will not be sufficient to address the major issues facing airlines. The urgency of expanding its air transportation network is vital, given that India is expected to overtake China as the world’s most populous country in less than 20 years which will put pressure on air transportation, lead to severe airport congestion and an inability to address consumer demand.

Challenges Outweighing ‘the Positives’

State and Central Government’s huge duties on fuels severely hit the profitability of airlines and brought high operating costs. This in turn is leading to rising ticket prices even among major low cost operators (LCCs). Indeed these duties hit LCCs hardest, as they operate more on price and have less price flexibility.

Where airport infrastructure is improved such as at Delhi International Airport, the high price tag paid for expansion forces airport authorities to charge carriers high airport rentals. For example Delhi Airport charges increased 246% in 2012 in addition to already high landing and parking levies. This forces many operators such as AirAsia X, for example, to pull out from the country, while Lufthansa and British Airways have had to re-evaluate their strategies and route profitability.

Importantly, the high cost of operation prevents Indian airports from becoming major regional transportation hubs, making them less attractive for international airlines and transit passengers.

Regardless of these setbacks, positive steps are being embraced by the country in an effort to ease visa requirements aimed at promoting inbound tourism as well as the changes in corporate ownership within the air segment although it is a long road ahead. In 2011 the government extended the Visa on Arrivals (VoA) scheme to six countries – Cambodia, Indonesia, Vietnam, the Philippines, Laos and Myanmar. However a wider more targeted approach is needed in order to attract travellers from other more economically booming countries such as Brazil and Russia.

Domestic Market on the Radar

The liberalisation of the Indian domestic air market is vital for its competitiveness at a time when better connectivity to neighbouring countries threatens its development. Opportunities can be explored by foreign players in particular relating to second-and third-tier cities where currently competitive airline offerings are very limited.

The government’s decision to allow foreign direct investment in Indian aviation is expected to bring new life to the already financially troubled domestic airlines such as Indian Airlines and Kingfisher that reported huge losses during 2011, by bringing more investment to their operations.

Kingfisher on the Rocks

Kingfisher is currently and still is affected by a strike by its pilots and technical staff which has led to the suspension of more than 40 flights. During the last five years, the carrier recorded a slowdown in revenue and negative profits which intensified its financial problems and inability to pay staff wages for months. This led to the decision of the airline to dissolve Kingfisher Red, its low-cost carrier.

Although the move was aimed at addressing its cash shortage, it would have been financially more feasible for Kingfisher to improve the efficacy of its LCC and consumer offerings in an effort to become the dominant budget airline in India rather than closing its budget arm.

The new governmental regulation is expected to incorporate stipulations clarifying conditions for foreign investment. Among those are requirements such as any investing company in the domestic air sector to be registered in India as well as two – thirds of the directors in the newly established firm to be holders of Indian citizenship. These provisions are not expected to deter foreign operators from entering the market, rather trigger more vigilant tactics by international airlines in an effort to obtain better clarity on the final regulatory framework.

India Still an Attractive Market Despite its Weaknesses

Despite the problems facing air transportation in India, the increasing disposable incomes and a flourishing economy, as well as strong growth from tourists from neighbouring countries such as China, Nepal, and Sri Lanka will sustain the attractiveness of India as a tourist destination.

The long-term potential of the country is recognised by many investors although international airlines are expected to adopt a wait and see approach until the new rules come into force. This, however, is a too cautious an approach given the high growth rate potential of the Indian economy and its tourism sector.

In 2011 airlines grew by 18% in current value terms to generate huge revenue of Rs695.6 billion in India driven by an increase in domestic travel and a rising number of people travelling. It is expected that this growth will continue so that by 2016 constant value sales will increase by more than 18%.

Top Inbound Source Markets for India 2012-2016

Source: Euromonitor International