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Is the aviation boom sustainable?

Enhanced liberalisation and fantastic market fundamentals will mean high growth environment will continue for next 10-15 years, writes Kapil Kaul.

india Updated: Dec 10, 2007 22:39 IST

Indian aviation has undergone a strategic change in last 3-4 years. The business landscape has changed. This sector which was heavily regulated and under managed before 03-04 is now more open, investment friendly and of vital importance to the national economy.

Optimism about the future of the Indian aviation market is the prevailing sentiment. Enhanced liberalisation and fantastic market fundamentals will mean high growth environment will continue for next 10-15 years. This, coupled with the governments willingness to move in new directions and increase the private participation to bring much needed throughput increases and cost diminution, is going to be a critical driver for the industry’s renaissance.

The next 12-18 months are crucial. We have seen lot of activity in the last 3 years plus but it is time to see more tangible results. Much of this depends on our execution ability. The most important points that need attention are as follows:

1. Airport Modernisation: The existing gateways are operating at full capacity. The non-metro airports need urgent investment in ground and airside infrastructure. The current plans to improve the infrastructure with an investment of $10 billion needs to gather speed. DIAL and MIAL projects need to be completed on time as we cannot afford delays. There is a vital need to have an effective regulator in place. There is need to put the Non-Metro airport modernisation on a fast track. ATC development is another priority area.

2. Airline Viability: Indian carriers face a very negative fiscal regime. ATF charges in India are highest in the world and the biggest barrier to airline profitability. Indian air transport sector cannot realise its investment potential unless the fiscal climate is changes for the airline sector. Airlines need to be viable and this is central to industry’s future.

3. Regulatory Framework: Restructuring of the regulatory framework is essential. It is time that DGCA concentrates on technical issues. We need a sectoral regulator to ensure more transparency and competitiveness. The size and scale of this business is changing and government cannot remain as a regulator as well as a policy maker. It has strategic implications and needs to be avoided.

The outlook for 2008 will be largely challenging, as airlines will make every attempt to reach profitability. The benefits of consolidation will begin to be visible in 6-8 months, as all the three major groups will start realizing cost benefits. The yield climate will also improve by 8-10 per cent as a result of a sensible fare regime, slowdown in capacity induction and overall high growth rate will ensure high PLF.

The Q3 of 08-09 will see some of the players turning profitable. No new players likely to start operations by Q3 of 08-09 will also help. Possibility of a merger between Jet Airways and Jetlite exist. Kingfisher and Deccan are also exploring merger options. There could also be a temporary slowdown in the LCC growth because of the consolidation as key players which acquired LCCs are full service carriers.

It is important for both to keep the LCC arms operational as it be a valuable asset to have in the future as the growth in domestic/ regional international markets will be driven by LCCs.

CEO — Indian Subcontinent & Middle East, Centre for Asia Pacific Aviation (CAPA)