India: Flying high

Overview “Should we drive, take a train, or fly?” was once a prevalent question across every Indian household. To a large extent, it still is.

But times are changing. Historically, taking a flight has always been the most expensive method of transportation, followed by train, and a car thereafter. While this will likely never change, the prominence of airlines as a means of transport in India will sore in the near future.

Surprisingly, this is not because the average Indian has become more comfortable with flying, or due to a heightened acceptance of airlines being considered a “safe” method of transportation. Rather, it is a result of compounded efforts on behalf of both the private and public sector aviation industries in India. Here is what’s interesting about the growth of Indian aviation: In 2000, 199 million kilometers were flown by scheduled airlines, there were 39 non-scheduled airlines in operation, and there were 225 aircrafts across India using a grand total of 50 operational airports.

Fast forward to 2019, where 1,550 million kilometers were flown by scheduled airlines, 72 non-scheduled airlines were in operation, and a whopping 680 aircrafts were flying across the country using a grand total of almost 125 operational airports. What does that mean? The number of kilometers flown has grown by 7.8x, the number of aircrafts in use has increased by 202% and there are 2.5 times the number of operational airports in India than there were less than 20 years ago… that’s fantastic growth!

These statistics place India as the seventh largest civil aviation market in the world and poise the nation to become the world’s third largest by 2024. Adding to the magnitude of these numbers, India plans to open an additional 100 airports by 2024. While the underlying fundamentals of flying in India will not change, this conversation begs the question: what is going to be the key driver for aviation growth in India?

Incidentally, there are three. Heightened demand across the country, increased private sector investment, and last but not least, increased public sector involvement. These are all poised to take India to new heights.

A growing corporate sector, and consequently a rising middle class, is poised to be the largest demographic contributor to growth in the Indian aviation sector in the near term. This will result in increased spending on leisure travel (including both domestic and foreign tourism), as well as strengthened demand for the industry at large. When combined with strong growth in external trade, these factors will result in India requiring 2,380 new commercial airplanes by 2038.

Secondly, increased private sector investment is expected to provide the Indian aviation industry with an unprecedented push. According to the leading national credit agency, CRISIL, investments of up to Rs.

420 – 450 billion (~US£ 6 billion) are expected to flow into the Indian airport infrastructure by FY23. These will be further bolstered by increased private sector participation through Public-Private Partnership (PPP).

The Airport Authority of India is driving modernization to aid this, and this has resulted in increased greenfield projects as well as the development of low-cost airports across the country. Finally, public sector support will further buoy the Indian aviation industry with varied strategies and policies. Aside from the Indian government having been encouraging private sector participation, they have allowed foreign investment of up to 49%.

This is applicable to scheduled air transport service, regional air transport service and domestic scheduled passenger airlines. Alongside encouraging FDI, the Indian government has made infrastructure a strong focus in the near term, and this has resulted in increased liberalization (for example, the Open Sky Policy) within the sector. Furthermore, the Airport Authority of India plans to abolish royalty and offer steep discounts in lease rent to encourage the setting up of maintenance, repair and overhaul facilities at Indian airports.

So who stands to gain the most? As things stand today, the three largest domestic airlines are IndiGo, SpiceJet, and Air India. Recently launched airlines that lag slightly behind are GoAir and Vistara.

Their market shares are as follows: While the existence of smaller, regional airlines across the country is undeniable, there are a handful of key players in this market that will benefit greatly from the growth of the Indian aviation industry.

In fact, the largest airlines (mentioned above) have already seen a large level of upside owing to the growth of the industry in the past 5 years. Certain airports across the country with notable growth are as follows:

1.  Bengaluru: passenger traffic handled (in millions) increased from 19 in FY16 to 32 in FY20

2.Chennai: passenger traffic handled (in millions) increased from 15 in FY16 to 22 in FY20

3.Delhi: passenger traffic handled (in millions) increased from 48 in FY16 to 67 in FY20

4.Hyderabad: passenger traffic handled (in millions) increased from 12 in FY16 to 22 in FY20

5.Kolkata: passenger traffic handled (in millions) increased from 12 in FY16 to 22 in FY20 Traditionally, there have always been two requirements for transport using airports and planes: people and cargo (sometimes both!).

Consequently, it stands to reason that both passenger traffic as well as freight traffic will impact the Indian aviation industry. The analysis below proves exactly why growth in both these sectors positions the industry well. Passenger traffic

In terms of passenger traffic, growth has been strong in recent years due to rising income and low-cost aviation. India’s passenger traffic stood at 341 million in FY20 (domestic passenger traffic was 275 million while international traffic was 66 million). This represents a CAGR of 11% between FY16-FY20.

Specifically, domestic passenger traffic grew at a CAGR of 13% between FY16 and FY20, while international passenger traffic grew at a CAGR of 5% between FY16 and FY20. India has carved out a position for itself as the third-largest domestic aviation market in the world; and is expected to surpass the UK to become the third-largest air passenger market (for both domestic as well as international) by 2024. By 2036, India is projected to have 480 million flyers, which will be more than that of Japan (just under 225 million) and Germany (just over 200 million) combined.
These developments will positively impact the Indian economy as well.

According to the World Travel and Tourism Council, India ranked 10th among 185 countries vis-a-vis travel & tourism’s total contribution to GDP in 2019 (~7%). India: Flying high The following chart represents some of the most popular destinations for inbound and outbound travel:

India: Flying high Freight The second element is cargo.

Freight traffic grew at a CAGR of 5% between FY16 and FY20, increasing from 2.70 million tons (MT) to 3.32 MT. This business has the potential to reach 17 MT by FY40. Growing exports and imports will be an important factor for increased freight traffic given that 30% of all trade is done using airways.

In 2019, the Indian government released the National Air Cargo Policy Outline. This policy is expected to make Indian air cargo/ logistics the global gold standard in terms of efficiency, seamlessness and cost and time effectiveness.

Between FY16 and FY20, domestic freight traffic grew at a CAGR of 6% and international freight traffic grew at a CAGR of 5%. While domestic freight traffic was 1.32 MT in FY20, and international freight traffic was 2.00 MT, total freight traffic in India could be 4 MT by 2023, representing a CAGR of 7% (FY16-FY23). Furthermore, international freight traffic is expected to grow at a CAGR of 7% and domestic freight traffic is expected to grow at a CAGR 8% (FY16-FY23).

While the advent of the COVID-19 pandemic has indubitably reduced the short-term demand from passenger traffic, airlines have been adept in shifting gears and growing their freight businesses. The resulting change provides further conviction around the idea that airlines will be able to weather storms that come their way. In summation, the Indian aviation industry is expected to be able to take advantage of numerous tailwinds.

These stem from increased growth in passenger traffic, as well as an enhanced level of freight/ cargo traffic. The growth in this space will be further catalyzed by private investments, and then buoyed by a conducive ecosystem and infrastructure generated via government initiatives. In short, the Indian aviation industry is “ready for take-off”, so please fasten your seatbelts!

Sources:
World Travel & Tourism Council
India Brand Equity Foundation

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Disclaimer

Views expressed above are the author’s own.

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