DR.

RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY

ECONOMICS PROJECT ASSIGNMENT

THE AVIATION SECTOR IN INDIA- AN ANALYSIS

2017-18

SUBMITTED TO: SUBMITTED BY:

Dr. Mitali Tiwari Priyanka Preet
Assistant Professor 170101176
Department of Economics Sec. B, Sem. I
Dr. RML National Law University B.A.LLB (HONS.)
 Economics Project Assignment 2017

TABLE OF CONTENTS

DECLARATION ............................................................................................................................ 3

ACKNOWLEDGEMENT .............................................................................................................. 4

INTRODUCTION .......................................................................................................................... 5

A BRIEF HISTORY OF AVIATION ............................................................................................ 7

I. INDIAN PERPECTIVE ................................................................................................... 7

BENEFITS OF AVIATION ........................................................................................................... 9

I. AVIATION’S ECONOMIC FOOTPRINT ..................................................................... 9

II. CONSUMER BENEFITS FOR PASSENGERS AND SHIPPERS........................... 10

III. ENABLING LONG-TERM ECONOMIC GROWTH .............................................. 11

FOREIGN DIRECT INVESTMENT IN THE AVIATION SECTOR ........................................ 12

I. GOVERNMENT INITIATIVES ................................................................................... 13

CHALLENGES FACED BY AVIATION INDUSTRY .............................................................. 16

CONCLUSION ............................................................................................................................. 17

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DECLARATION
I hereby declare that the project work submitted by me is original. Its legality and relevance with
special reference to India submitted to Dr. Ram Manohar Lohiya National Law University
Lucknow, is a record of an original work done by me under the guidance of Dr. Mitali Tiwari,
Assistant Professor at Dr. RMLNLU. The results embodied in the project have not been
submitted to any other university or institute or in any kind of seminar. The project is original
and has been carried out with the help of certain articles and books as well whose reference have
been mentioned too.

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ACKNOWLEDGEMENT
I would like to extend my thanks to my teacher Dr. Mitali Tiwari Ma’am for giving me such an
interesting topic for this project and also for her unwavering support, guidance and constant
encouragement throughout the course of this thesis.

I also express my heartfelt gratitude to Prof. Dr. Gurdip Singh, Hon’ble Vice Chancellor and
Dean (Academics), Prof. Dr CM Jariwala for their enthusiasm towards scholarly pursuits of their
students.

I thank my seniors in the college for their cordial support, valuable information and guidance,
which helped me in completing this task through various stages.

I am obliged to the staff members of the Madhu Limaye Library, for the timely and valuable
information provided by them in their respective fields. I am grateful for their cooperation during
the period of my assignment. Lastly, I thank almighty, my family and friends for their constant
encouragement without which this assignment would not have been possible.

Priyanka Preet

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 Economics Project Assignment 2017

INTRODUCTION
Aviation is considered to be the greatest wonder of modern science. There has been tremendous
growth in the aviation sector all across the world since 1903 when the first plane took flight in
America. Today aviation includes not only civil aviation but also military aviation and by that we
refer to the high speed supersonic jets and fighter planes.

In India, too the growth has been unprecedented. Currently, India stands among the top 10 civil
aviation markets. The airlines industry in India has reported to have served about 16 million
customers in 2013. With such a large consumer base at play, India is poised to be the top 5 civil
aviation markets by 2020 and top 3 by 2030. India has become the world’s fastest growing
domestic travel market for the 22nd time in a row, recording a 26.6 per cent year-on-year growth
in January 2017, according to the IATA.1

To make the understanding of this project easier, it is important to understand what constitutes
the aviation industry, at the very outset.

Aviation industry (also aviation sector) refers to the industries and organizations, engaged in the
various aspects of aviation, such as airlines manufacturing, airlines flying,
operating, maintenance, ground-handling, training centers, airports and regulatory bodies.2

Thus aviation constitutes a wide array of activities pertaining to the airlines directly and
indirectly and therefore its contribution becomes all the more important to the economy from the
perspective of employability.

Today India houses many airline companies in the civil aviation sector. It is important to note
their presence since they are benefitting heavily from foreign investment and reaping immense
profits.

 Air India
 Sahara Airlines (now Jetkonnect) became operational in 1993. It was founded in 1991.

1
Airports Authority of India, Indian Aviation Industry, (September, 2017) < (India, 2017)> accessed 17th October,
2017.
2
Pawan Srivastava, Aviation Industry in India: History, Growth, Challenges, FDI and Future (June 24, 2015)
<www.importantindia.com/15745/aviation-industry-in-india> (Srivastava, 2015) accessed 17th October, 2017.

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 Jet Airways began its operation in 1993.

 GoAir started its operation in 2005.
 SpiceJet became operational in 2005.
 Indigo became operational in 2006.
 Air Costa commenced scheduled operation in 2013.
 Air Asia India commenced its operation in 2014.
 Vistara (joint venture between Tata Sons and Singapore Airlines), Fly Easy, TruJet, and Air
Pegasus became operational in 2015.

Indigo is the market leader currently, with a market share of about 38.4% in the aviation sector
with the total profit of the aviation sector being US$ 122 million in fiscal 2016.3

The industry stakeholders should engage and collaborate with policy makers to implement
efficient and rational decisions that would boost India’s civil aviation industry. With the right
policies and relentless focus on quality, cost and passenger interest, India would be well placed
to achieve its vision of becoming the third-largest aviation market by 2030.

3
DNA India, Indigo Leads, Jet Airways and Air India follow (Apr 22, 2016, 10:55 AM IST, PTI)
<http://www.dnaindia.com/money/report-indigo-leads-with-384-market-share-jet-airways-air-india-follow-in-
march-2204915> accessed 17th October 2017. (India D. , 2016)

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A BRIEF HISTORY OF AVIATION

In 1799 it was Sir George Cayley set forth the concept of the modern airplane as a fixed-wing
flying machine with separate systems for lift, propulsion, and control. There are many
competing claims for the earliest powered, heavier-than-air flight. Sir Clement Ader for one,
claimed the invention of the first heavier-than- air, self- propelled flight in France.

However, the Wright brothers made the first successful powered, controlled and sustained
airplane flight on December 17, 1903 in America.

Later in the 1920s and 30s great progress was made in the field of aviation when the first trans-
Atlantic flight by Alcock and Brown took place. By the beginning of World War II, many towns
and cities had built airports, and there were numerous qualified pilots available. The war
brought many innovations to aviation, including the first jet aircraft and the first liquid-
fueled rockets. After World War II, especially in North America, there was a boom in general
aviation, both private and commercial, as thousands of pilots were released from military
service and many inexpensive war-surplus transport and training aircraft became available.
Manufacturers such as Cessna, Piper, and Beechcraft expanded production to provide light
aircraft for the new middle-class market. The arrival of solid-state electronics, the Global
Positioning System, satellite communications, and increasingly small and
powerful computers and LED displays, have dramatically changed the cockpits of airliners and,
increasingly, of smaller aircraft as well.

On June 21, 2004, SpaceShipOne became the first privately funded aircraft to make
a spaceflight, opening the possibility of an aviation market capable of leaving the Earth’s
atmosphere. Meanwhile, flying prototypes of aircraft powered by alternative fuels, such
as ethanol, electricity, and even solar energy are becoming more common.

I. INDIAN PERPECTIVE
India has a long history in the field of aviation. The operation of air transport was entrusted to
three Public Undertakings, namely

1. Air India for international services,

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2. Indian Airlines for domestic services and services to neighboring countries, and
3. Vayudoot.

Hindustan Aeronautics Limited: The Hindustan Aircraft (now Hindustan Aeronautics

Limited), was founded in 1940. It was started at Bangalore (now Bengaluru) as a repair,
overhauling and assemblage depot, has now grown into an important manufacturing plant. It has
designed and manufactured trainer air-crafts. It belongs to the Aerospace and Defence industry.
It is managed by Ministry of Defence.

Timeline

 1910: The first Indian, or maybe even Asian, to have an airplane is the young Maharaja
of Patiala, Bhupinder Singh, who has a keen interest in aviation. Singh sends his Chief
Engineer to Europe for a study with orders to buy three planes, including a Bleriot
monoplane and Farman biplanes, which arrive in the Punjab later that year.
 1911: Domestic commercial aviation is born in India, Henri Piquet, flying a Humber
biplane, carries mail from Allahabad to Naini Junction, some six miles away.
 1929: JRD Tata is awarded India’s first pilot’s license, Pilot License No.1 by Federation.
 1932: JRD Tata launches India’s first scheduled airline, Tata Airlines, by piloting the first
flight himself from Karachi to Mumbai via Ahmedabad on a single-engine.
 1946: Tata Airlines changes its name to Air India. In 1947, Air India signs an agreement
with the government of India to operate international services under a new company
called Air India International Ltd.
 1960: India enters the jet age when Air India begins operating its first Boeing 707-437. It
also marks the year in which USA is first connected to India by an Indian airliner.
 1990: Air India is commended in the Guinness Book of World Records for the largest
evacuation effort by a civil, when it flew over 111,000 people from Amman to Mumbai
in 59 days, operating 488 flights just before the first Gulf War.
 2004: On August 26, Air Deccan turns into the first truly national budget carrier with the
launch of its A320 flights on the Delhi – Bangalore route.

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BENEFITS OF AVIATION

Indian Aviation sector’s contributions are considered to be three-fold. This will be shown with
the aid of the facts and figures which follow:

I. AVIATION’S ECONOMIC FOOTPRINT

Contribution to Indian GDP

a. The aviation sector contributes INR 330 billion (0.5%) to Indian GDP. This total
comprises: INR 147 billion directly contributed through the output of the aviation
sector (airlines, airports and ground services, aerospace);
b. INR 107 billion indirectly contributed through the aviation sector’s supply chain; and
INR 77 billion contributed through the spending by the employees of the aviation
sector and its supply chain.
c. In addition there is INR 582 billion in catalytic benefits through tourism, which
raises the overall contribution to INR 912 billion or 1.5% of GDP.4

Major employer

The aviation sector supports 1.7 million jobs in India. This total comprises:

a. 276,000 jobs directly supported by the aviation sector;

b. 841,000 jobs indirectly supported through the aviation sector’s supply chain;
c. 605,000 jobs supported through the spending by the employees of the aviation sector and
its supply chain.
d. In addition there are a further 7.1 million people employed through the catalytic (tourism)
effects of aviation.5
e. The growth in the Indian economy has increased the Gross Domestic Product above 8%
and this high growth rate will be sustained for a good number of years
f. Air traffic has grown enormously and expected to have a growth which would be above
25% in the travel segment.

4
Oxford Economics, Economic Benefits from Air Transport in India (Economics,
2011)<https://www.iata.org/policy/Documents/Benefits-of-Aviation-India-2011.pdf> accessed 17th October, 2017.
5
Oxford Economics, Economic Benefits from Air Transport in India
<https://www.iata.org/policy/Documents/Benefits-of-Aviation-India-2011.pdf> accessed 17th October, 2017.

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g. In the present scenario around 12 domestic airlines and above 60 international airlines are
operating in India
h. With the growth in the economy and stability of the country India has become one of the
preferred locations for the trade and commerce activities
i. The growth of airlines traffic in Aviation Industry in India is almost four times above
international average
j. Aviation Industry in India have placed the biggest order for aircrafts globally
k. Aviation Industry in India holds around 69% of the total share of the airlines traffic in the
region of South Asia6

High productivity jobs

The average air transport services employee generates nearly INR 1.3 million in GVA
annually, which is around 10 times more productive than the average in India.

Contribution to public finances

“The aviation sector pays over INR 87.5 billion in tax including income tax receipts from
employees, social security contributions and corporation tax levied on profits. It is estimated
that an additional INR 9.8 billion of government revenue is raised via the aviation sector’s
supply chain and another INR 7.1 billion through taxation of the activities supported by the
spending of employees of both the aviation sector and its supply chain.”

II. CONSUMER BENEFITS FOR PASSENGERS AND SHIPPERS

In the year 2011, 70 million passengers and 1.4 million tonnes of freight travelled to-from
and within India. Domestically, more than 664,000 flights make 89 million seats available to
passengers annually, destined to 73 airports. This makes India a vibrant market in the
aviation sector.
“Air passengers resident in India comprise approximately 53 million of the passenger total.
For the 70 million passenger flights in total, passengers pay INR 1,755 billion (inclusive of
tax), with Indian residents paying around INR 1,329 billion. This expenditure is likely to
6
Make in India, Investment Opportunities < http://www.makeinindia.com/sector/aviation/> (Investment
Opportunities, 2017) accessed 17th October, 2017.

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significantly understate the value passengers actually attach to the flights they use (see
Section 1). Calculations by Oxford Economics suggest the value of the benefit to travellers
from flying, in excess of their expenditure, is worth INR 1,100 billion a year (INR 832
billion for Indian residents).”
“Air transport is crucial for the distribution of high value to weight products. Air freight may
only account for 0.5% of the tonnage of global trade with the rest of the world, but in value
terms it makes up around 34.6% of the total. Shippers pay airlines INR 165 billion annually
to carry 1.4 million tonnes of freight to, from and within India. The benefit to shippers, in
excess of this expenditure, is estimated as INR 69 billion. Based on the share of exports in
total merchandise trade, Indian shippers receive around 45% of this benefit (INR 31
billion).”

III. ENABLING LONG-TERM ECONOMIC GROWTH

a) India’s integration into the global air transport network transforms the possibilities for the
Indian economy by:
b) Opening up foreign markets to Indian exports;
c) Lowering transport costs, particularly over long distances, helping to increase
competition because suppliers can service a wider area and potentially reduce average
costs, through increased economies of scale;
d) Encouraging Indian businesses to invest and specialise in areas that play to the
economy’s strengths;
e) Speeding the adoption of new business practices, such as just-in-time-inventory
management that relies on quick and reliable delivery of essential supplies;
f) It is estimated that a 10% improvement in connectivity relative to GDP would see an INR
39.3 billion per annum increase in long-run GDP for the Indian economy.
g) Increasing the flexibility of labour supply, which should enhance allocative efficiency
and bring down the natural rate of unemployment;
h) Encouraging Indian businesses to invest and specialise in areas that play to the
economy’s strengths;

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FOREIGN DIRECT INVESTMENT IN THE AVIATION SECTOR

According to data released by the Department of Industrial Policy and Promotion (DIPP), FDI
inflows in air transport (including air freight) between April 2000 and March 2017 stood at US$
1.01 billion.
Key investments and developments in India’s aviation industry include:

 Rolls-Royce Holdings Plc, the UK-based aircraft engine manufacturer, has opened a new
defence service delivery centre (SDC) in Bengaluru, which would deliver real-time
solutions for improving capability and provide faster front-line support to over 750
aircraft engines used by the Indian Air Force, Indian Navy and State-owned Hindustan
Aeronautics Ltd (HAL).
 Qatar Airways is planning to start India’s first fully owned foreign airline in partnership
with Qatar Government's investment arm, Qatar Investment Authority, as per Qatar
Airways.
 Indian budget airline carriers Indigo and GoAir, plan to expand their network to Gulf
cities like Doha, Sharjah and Dammam in 2017, which would likely boost the growth of
Indian aviation sector.
 GVK Power & Infrastructure Ltd., which operates the existing airports in Mumbai and
Bangalore, has won the right to build Mumbai’s second airport in Navi Mumbai, which
will require an investment of Rs 16,000 crore (US$ 2.48 billion) to build the airport with
a capacity to handle 10 million passengers annually in the first phase, expected to be
operational by 2019 and 60 million passengers a year by 2030.
 IndiGo, having 42 per cent of the Indian aviation market has entered into a partnership
with global distribution system services operator Travelport, to expand its global
presence by distributing its ancillary products to the portal’s customers across 180
countries.
 Several European countries, including Greece, Netherlands, Georgia and Sweden, have
shown interest in signing an open sky agreement with India, following the change of
rules in India's National Civil Aviation Policy (NCAP), which is expected to significantly
enhance the country's international connectivity.

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 During the International Civil Aviation Negotiations (ICAN) 2016 held in Nassau in
December 2016, India has signed Open Skies Agreement to encourage connectivity and
passenger travel between India and Jamaica, Guyana, Czech Republic, Finland, Spain
and Sri Lanka, apart from resolving other issues such as greater traffic rights, new service
agreements and code sharing with several other countries.
 300 business jets, 300 small aircraft and 250 helicopters are expected to be added to the
current fleet of Indian carriers in the next five years.
 Demand for MRO facilities is increasing in India, due to growth in the aviation sector.
 Investment opportunities worth USD 3 billion in greenfield airports under PPP at Navi
Mumbai and Mopa (Goa).
 The development of new airports – the Airport Authority of India (AAI) aims to bring
around 250 airports under operation across the country by 2020.
 For development of aviation in the North-east region – the AAI plans to develop
Guwahati as an inter-regional hub and Agartala, Imphal and Dibrugarh as intra-regional
hubs.
 AAI has planned to spend USD 3 billion on non-metro projects between 2016 and 2020,
focusing on the modernisation and up-gradation of airports.
 Indian airports are emulating the Special Economic Zone (SEZ) Aerotropolis model to
enhance revenues, focus on revenues from retail, advertising and vehicle parking,
security equipment and services.

I. GOVERNMENT INITIATIVES

 In the Union Budget 2017-18, the Civil Aviation Ministry received a substantial increase
of over 22 per cent in budgetary allocation at Rs 5,167.60 crore (US$ 775.14 million) for
the next financial year.7

Some major initiatives undertaken by the government are:

 Indian airline companies like Air India, Air Deccan, SpiceJet, Air Odisha and Turbo
Megha, have been awarded with the right to fly to 128 routes across India, requiring them

7
Make in India, Investment Opportunities < (Investment Opportunities, 2017)/> accessed 17th October, 2017.

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to cap half the seats at nearly 50 per cent of the fare, under the Government of India’s
regional aviation scheme named UDAN.
 The Government of India has approved the construction of 18 Greenfield airports in the
country, which would be executed and financed by the respective airport promoters, and
are estimated to require an investment of Rs 30,000 crore (US$ 4.66 billion).
 The Cabinet Committee on Economic Affairs, Government of India, has approved the
proposal to revive 50 un-served and under-served airstrips in three financial years starting
from 2017-18 at an estimated cost of Rs 4500 crore (US$ 698.7 million).
 The Government of India has started a new regional connectivity scheme (RCS) called
Ude Desh ka Aam Nagrik (UDAN) under which fares will be capped at Rs 2,500 (US$
37.5) for half the seats in an one-hour flight, as per Mr Jayant Sinha, Minister of State
Civil Aviation. The Government of India has also received bids from 11 airlines for the
same.
 Mr Jayant Sinha, Minister of State for Civil Aviation, has stated that the government
plans to double the number of airports in India over the next two to three years to cater to
the increased passenger traffic due to developing regional air travel market.
 The Ministry of Civil Aviation along with Airports Authority of India (AAI) plans to
develop small airports with frugal facilities, and encourage private airlines to bid for
routes connecting these small airports with existing larger airports, thereby increasing
regional air traffic.
 AAI plans to increase its capital expenditure for 2017-18 by 25 per cent to Rs 2,500 crore
(US$ 375 million), primarily to expand capacity at 12 airports to accommodate rising air
traffic, as per Mr Guruprasad Mohapatra, Chairman, AAI.
 The Ministry of Civil Aviation has revised its air services agreement with Netherlands,
which would enable air carriers from both the countries to operate up to 28 flights each
week, up from current weekly limit of 21 flights, which would benefit regional carriers as
well as enhance connectivity between the countries.
 The Executive Development Programme of Rajiv Gandhi National Aviation University in
collaboration with Indo US – American Cooperation Program, inaugurated by Mr Ashok
Gajapathi Raju, Minister for Civil Aviation, aims to promote skill development of senior

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leadership and close the gap of increasing demand for trained people in the aviation
sector.

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CHALLENGES FACED BY AVIATION INDUSTRY

 There is dearth of properly trained pilots and technicians necessary for quick expansion of
aviation services.
 Though several centers for the training of pilots and technicians have already been opened
they are patently inadequate to meet the requirements of even the existing volume of air
traffic.
 Another difficulty is with regard to aviation petrol. India, having very small supply of
indigenous petroleum, has to depend on foreign sources for fuel, especially for aviation
purposes. Whenever there is any bottleneck in the regular supply of aviation spirit, even the
regular scheduled services, have to be cut off temporarily.
 Besides these hurdles, the general poverty of the masses is a factor to be taken into account
in estimating the possibilities of the expansion of aviation in India.
 In India, however, the number of people who can afford air travel is very small, and they
cannot by themselves keep the airline companies going.
 The top three airlines including Air India, Kingfisher Airlines and Jet Airways are now
carrying a cumulative debt burden of approximately $8 billion. Incidentally, this is almost
equivalent to the losses of $8.5 billion posted by all global carriers. Restructuring this huge
amount of leverage will be a challenge as resorting to equity capital will also be equally
difficult during economic slowdown.
 Infrastructure continues to be a major constraint for Indian Airline Industry today, which has
been aggravated further due to excess capacity created during good times. Maintenance and
Air Traffic Control (ATC) infrastructure are grossly inadequate if the industry expects to
grow any further.
 Even though the industry is weighed down with excess capacity, regional connectivity
continues to be poor, primarily due to the lack of infrastructure. Industry experts suggest that
increasing regional connectivity instead of concentrating in metros and redeploying current
fleet to routes where there is demand will help airlines in managing their excess capacity.
 Skyrocketing ATF prices, depreciating rupee coupled with global recession has directly
impacted the Indian Airline Industry.

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CONCLUSION

The Future of Indian Aviation Industry is bright. As already mentioned above, India is set to
become one of the top five aviation markets by 2020. The latest report on civil aviation reveals
an all-round improvement in air traffic. The number of passengers as also the volume of goods
and mails carried by airplanes during the period shows an appreciable improvement over those of
the last decade.

The Aviation sector is expected to witness huge surge in investments from private sector players.
The number of aircraft is expected to touch 800 by 2020. The low penetration ratio (0.04 per
capita/p.a) provides immense opportunity for investment in aviation sector.

Aviation being not only a very important form of peacetime communication but also a vital part
of the defense organization, the State cannot remain indifferent to its development along proper
lines.

This progressive expansion may be expected to continue, and a time may come, not at a very
distant future, when aero planes will be ever more popular, and become, the normal means of
communication. The idea of one world, therefore, may not long remain an empty slogan but will
be a concrete reality in the foreseeable future.

India has to rely on foreign sources for the supply of crude petroleum. If India is to develop
aviation services as also other major industries, it must be self-sufficient in fuel supply.

In a vast country like India, with very suitable weather conditions all the year round, the
possibilities of aviation are immense and the Government may be expected to take suitable
measures for helping the growth of this important industry, so that it may play its part in the all-
round development which India is planning for its people.

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REFERENCES

 Economics, O. (2011). Economic Benefits from Air Transport in India. Retrieved October
17, 2017, from https://www.iata.org/policy/Documents/Benefits-of-Aviation-India-
2011.pdf

 India, A. A. (2017, september). Retrieved October 17th, 2017, from

https://www.ibef.org/industry/indian-aviation.aspx

 India, D. (2016, April 22). Indigo Leads, Jet Airways and Air India follow. Retrieved
October 17, 2017, from http://www.dnaindia.com/money/report-indigo-leads-with-384-
market-share-jet-airways-air-india-follow-in-march-2204915

 Investment Opportunities. (2017). Retrieved October 17, 2017, from Make in India: <
http://www.makeinindia.com/sector/aviation/

 Investment Opportunities. (2017). Retrieved october 17, 2017, from Make In India:
http://www.makeinindia.com/sector/aviation

 Srivastava, P. (2015, June 24). Aviation Industry in India: History,Growth

Challenges,FDI and Future. Retrieved October 17, 2017, from
www.importantindia.com/15745/aviation-industry-in-india

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