Booming economies drive airline growth in India

Dubai Air Show » 2005
December 7, 2006, 5:29 AM

New aircraft orders placed this year from Air India and Indian Airlines should ensure that the government-owned carriers can compete against promising new domestic and international operators on the subcontinent. But strong growth in passenger traffic as well as flights has put increased pressure on congested facilities.

In April, flag carrier Air India chose eight Boeing 777-200LRs, fifteen 777-300ERs and twenty-seven 787-8s over Airbus A340s and A330s. At the end of September, the government approved an Indian Airlines order for 43 Airbus A320-series aircraft for monthly delivery beginning next September to replace aging Boeing 737-300s operated by subsidiary Alliance Air. Last month the government issued its approval for proposed Boeing orders.

Ironically, the new business from India’s government-owned operators has come as the country embraces deregulation and privatization. A booming economy has encouraged the formation of several aspiring carriers, many of them bent on following fashion in other parts of the world by setting up budget services. A raft of orders from new Indian operators announced at June’s Paris Air Show underscored the market’s perceived potential to absorb lots of new aircraft despite the country’s creaking infrastructure.

Since air transport deregulation, Indian Airlines has seen its domestic market monopoly diluted to a one-third share, less than the 43 percent carried by Jet Airways, the principal private operator offering domestic services. Apart from several new and planned start-ups, Indian Airlines already faces domestic competition from new carriers that have cut fares close to prices available on India’s long-established railway system.

According to Australia’s Centre for Asia Pacific Aviation (CAPA), Indian carriers will have signed up for some 200 new aircraft by the end of this year, ahead of recent market forecasts. Indeed, CAPA claimed that Airbus has had to update its most recent 20-year market predictions, issued in December 2004. “Airbus had projected just 4-percent average annual growth in the domestic Indian subcontinent market, compared with 8.7 percent in domestic China and 5.9 percent for the rest of Asia. Airbus increased its forecast of [Indian] sales from 220 (by 2019) to nearly 400, making India Asia’s third-largest market, behind China and Japan,” the report noted.

CAPA forecasts that traffic in India will rise by five million passengers annually over the next 10 years. Collectively, domestic and international markets will expand by up to 30 percent this year, to around 20 million passengers each, it projects. “The added stimulus of new low-cost carriers (LCCs) and India’s rapidly liberalizing market will ensure strong growth continues,” said CAPA managing director Peter Harbison. “Expansion of international operations will add to this momentum.”

Major factors driving growth include rising income levels in India and increasing trade links with regions such as the Middle East. Many cities on the subcontinent also show the potential to support higher levels of inbound tourism, especially when new Indian airlines start to serve increasing numbers of overseas points. Last year India received 3.4 million overseas visitors–almost 25 percent more than in 2003, and tourism revenue rose by more than a third, to $4.8 billion. Overall, arrivals in 2005 could exceed such growth, according to CAPA.

But accommodating the predicted growth will require significant investment in aviation and tourism infrastructure. The Indian government has estimated that the aviation sector could absorb $55 billion of project financing over the next 10 years just to raise it to international standards.

Initial examples of planned development include major “greenfield” projects to construct new airports to serve Bangalore and Hyderabad, which received approval earlier this year. Meanwhile, continued traffic growth increases pressure on existing airports, while India’s plans to privatize airport ownership appear likely to extend to Chennai and Kolkata (Calcutta) as well as Delhi and Mumbai (Bombay).

In many respects, the scale of the industry’s growth is a product of Indian demographics: the 20 percent of Indian citizens now estimated to occupy the “middle classes” number some 200 million potential travelers (even though today only one person in a 100 has flown). As one new start-up airline aiming to attract rail travelers has pointed out, “Five percent of train passengers comprise 800,000 people a day. Just five percent of that would mean 40,000 seats a day.”

In the first few months following its launch of services this May, SpiceJet recorded average load factors as high as 93 percent. Two years after its August 2003 launch and a year after carrying its first million passengers, Air Deccan expects to carry four million passengers this year and to double that volume to eight million next year.

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