The first commercial flight in India, from Allahabad to Naini, was operated on
February 18, 1911 by French pilot Monseigneur Piguet. It was only, however, 1932
that the first licensed business carrier of India was founded by Jehangir
Ratanji Dadabhoy, 'Father of Indian Aviation.' Tata Airlines was based in Mumbai
and both mail and passengers were transported across India. It was renamed Air
India in 1946.
The Indian Government acquired 49 percent of that airline two years later and
nationalized the airline fully in 1953 in accordance with the 1953 Air
Corporations Act. Not only did this legislation allow for control of the
previous Tata Airlines by the government but the whole sector was nationalized.
Either Indian Airlines Corporation or Air India International were all merged
into existing companies. For the next forty years, this monopoly continued.
The aviation sector was open again to private participation only after the
Indian economic liberalization in the 1990s. In India, the aviation sector grew
slowly despite an early start in the 1900s, mainly because air transport was
traditionally only for the elite but not to the masses.
However, in recent decades the sector grew exponentially due to structural
reforms, airport modernization, the arrival of private airlines, the adoption of
low-cost models and service standard improvements. In support of growth in
aviation, the government also played a major role in encouraging the private
sector in building airports through Public Private Partnership models and
providing State support about concessional land allocation, financing, tax
holiday and other incentives.
Aviation Industry In 20th Century
There are 464 airports in India, 125 of them operated by India's Airport
Authority (AAI). The 125 AAI airports handle nearly 78% of passenger traffic and
22% of passenger traffic internationally. In April 2018 - Feb 2019 the Indian
passenger traffic stood at 316,51mn. Domestic transport of passengers stood at
252.92 minutes, with international traffic at 63.59 minutes. The traffic,
passenger, and freight traffic across all Indian airports increased in February
2019 by 4.9%, 4.5% and 3.1% respectively, as of February 2018.
In comparison with 31.5% of domestic freight traffic, however, the share of
foreign freight traffic is far higher by 68.5%. The MRO industry is projected to
increase from $950 million currently to $1.2 billion by 2020.
The Indian Aviation Sector Fastest Growing Sector
There are several segments in the civil aviation sector, including
helicopter/hydraulic services, ground handling services, maintenance, and repair
organizations, flying training institutes, and technical education
institutions. However, the health of the sector is often primarily identified
with the expansion of planned airlines and public airports. Today, with a global
market size of around US$16 billion, India is the 9th biggest aviation market in
the world. The civil aviation sector grew 13.8 per cent over the last 10 years
and, from April 2000 to February 2015, the FDI attracted over USD 569
Passenger traffic also increased by 12.47 percent, reaching 190 million
passengers by 2015, with an annual average growth of 12 percent (for domestic
passengers) and 8 percent in the next 5 years. (FY 2015) (for international
passengers). Crisil Ltd. recently projected a total profit of 1.29 billion
USD for airlines operating in India in 2016. Moreover, the Indian aviation
industry will continue to grow rapidly in the future. IATA has reported that the
total annual passenger volume in India will increase to 367 million by 2034. The
UK will become the 3rd largest market in 2031. This not only means an increase
in aviation services in the coming decades, but also an increase in demand for
maintenance, repair, and refit services ("MRO").
Players In Aviation Sector
Airlines in India are operated by scheduled and non-scheduled airlines that play
a crucial role in the aviation sector's development as services such as ground
management and MROs are further driven. Domestic scheduled operators such as Air
India, Air Asia (India), Jet Airways, Jet Lite, Spice Jet, Go Airlines, Vistara
(TATA SIA Airlines) and Indigo Airlines dominate the passenger and cargo
transport market. Air India is the domestic airline of India and accounts for
only about 13% of the domestic passenger market, a considerable drop in its
monopoly of 100% before the economic liberalization of India. More than 60
international airline carriers make up 65% of international air travel from and
The IPO has recently been launched since 2012 by InterGlobe Aviation Ltd, Indigo
Airlines' owner (the largest Indian airline by market share). Indigo has been
the only airline in the last seven consecutive years that has reported its
profits in 2006, founded by Rakesh Gangwal and Rahul Bhasa. When Indigo Airlines
was entering during a period in which Jet Airways was the dominant market, it
became the low-cost airline by redefining its concept. In September 2015,
SEBI approved the Rs. 2,500 crore public offer of InterGlobe Aviation Ltd. The
company started the IPO for three days before October 2015 and raised Rs. 3010
Airports are also an important part of the aviation industry's development. In
India, there are currently more than 115 airports and civil enclaves, 17 of them
international airports. In metropolitan areas such as Mumbai, Delhi, and
Bangalore, however, most passenger-traffic active airports are located, whereas
in cities such as Jaisalmer, Rajasthan, smaller airports are currently not in
By increasing regional interconnectedness, the Government aims to
address this discrepancy with a US$1.3 billion investment in upgrading and
modernizing non-metro airports in 2013 to 2017. The Government intends to have
200 new low-cost airports in India that connect the cities of level I and level
II by 2020. In addition, new airports have already been developed in the Navi Mumbai (Maharashtra), the National Capital Region of Dholera (Gujarat) and
several counties in Andhra, Pradesh.
State governments continue to be involved in regional development of airports by
providing land for the construction of airports and by forming joint ventures
("JV") in cooperation with private participants. The development and
management of new airfields is then carried out by such JVs or by private /
public partnerships ("PPP").
The first greenfield airport in India to be
developed through the PPP model, was, above all, the Cochin International
Airport (CIA). The plan was initiated in 1991 to build the new airport. Due to
the incapacity of Sri J Kurian and others for the former National Airports
Authority ("NAA"), the funding of the airport is assumed, while NAA provides
Foreign Direct Investment In Aviation Sector
The provisions of the Foreign Exchange Management Act ("FEMA"), 1999 regulations
of the Reserve Bank of India ("RBI"), the Ministry of Industry, the Secretariat
for Industrial Aid (the Ministry for Trade and Industry) and the Central
Government are governed by foreign investment in India ("the Ministry of
Commerce"). In accordance with FDI policy, foreign investors are permitted to
invest in helicopter services, ground handling, maintenance, and repair
agencies, flying training institutions and technical training institutions.
However, the major foreign direct investments in airports and airline operators
have traditionally been undertaken.
Foreign Investment In Aviation Operators
In companies operating scheduled and unscheduled domestic passenger airlines, a
significant portion of the total FDI in the aviation field is produced.
Scheduled operators provide air services between two or more places and operate
on a regularly or so frequently published timetable or flights that each flight
will be operated by members of the public, as it constitutes a recognizably
systematic series. In contrast, air transport services are provided by
non-scheduled operators which can be charters and/or unscheduled. Times
schedules or tickets for passengers shall not be published by such operators.
The applicant must either be an Indian citizen or a business company which has
its head office inside India, its Chairperson and at least two-thirds of its
Directors shall be Indian citizens and their substantial ownership and control
shall be conferred on Indian nationals to achieve their status as a Scheduled or
Non-Programmed Operator. The applicant shall also comply with certain additional
requirements set out in Annexure 1.
FDI In Civil Air Transportation Services
In Scheduled Air Transportation Services/Domestic Planned Passenger Airlines and
Regional Air Transportation Services up to 49 percent FDI may be authorized via
automated routes. In such segments under the automatic route, NRIs can receive a
full 100% FDI. In addition, 100 percent FDI in Non-Planned Air Transportation
Services is also allowed and Helicopters and Sea planes Services requiring DGCA
automatic route permits.
FDI By Foreign Airlines
Before 2012, the investment of both Scheduled and Non-Scheduled Airlines by
foreign airlines was prohibited. The Government however opened the segment to
FDI by foreign airlines pursuant to Press Note 6, 2012, issued by the Ministry
of Commerce and Industry. FDI currently only allows up to 49% of the paid-up
capital of the company but must be carried out via the approval route by the
government. In addition, the 49% cap also covers investment by FDI as well as
FPI/FII. All foreign nationals likely to join the Scheduled and Non-Scheduled
Air Transport Service must first obtain security clearance and the Minister of
Civil Aviation must clear all technical equipment imported because of
In addition, substantial ownership and the efficient monitoring and management
of the company should be maintained within India if a scheduled or non-scheduled
operator's license is to be obtained. Foreign airlines may invest, according to
the limits and entry routes specified in this Chapter, on the equity capital of
cargo operators and helicopter and seaplane services.
Foreign Direct Investment In Airports
The aviation sector's airport segment grows to meet increasing passenger demand.
A significant investment in the Airport infrastructure is expected to increase
passenger numbers in the next decade by 300 percent. Given this necessity,
the Government has not adopted the Public Private Partnership (PPP) model for
various airport projects, and the AAI itself has neither the resources nor the
expertise to grow in this area. As of March 2015, the PPP model has been used by
5 international airports, which account for approximately 60 percent of the
country's total passenger traffic.
The Government has recently made further efforts to promote the use of the PPP
model for airport development. For example, under the NCAP 2016, the MCA
committed to coordinating multi-modal internal connectivity (roads, railways,
subways, waterways, etc.) with the respective ministries and government
governments to the success of airport plans. The Commission has also ensured
that AERA, AAI, airlines, airport operators and stakeholders, including cargo,
MRO's, and ground handling service providers, are coordinated to determine ways
of cutting airport charges whilst still respecting the provisions of the
FDI In Airports & Other Related Services
The Central State authorizes 100% automatic investment in Greenfield airport
projects under the 2016 Consolidated FDI Policy. FDI is also 100% in existing
airport projects, however only 74% is allowed by the automatic route. Automatic
paths in maintenance and repair agencies, flight training institutions,
technical and land management institutes, subject to industry regulations and
safety clearance, FDI up to 100 percent is allowed.
Private Ownership Of Aircrafts
(Generation Of GDP)
Private aircraft can be operated in India in various ways. The simplest thing,
however, is to buy from its present owner or jet manufacturer an aircraft
already located in India. However, given the limited number of private jets in
India (not least because many want their jets tailored to their own needs) and
that these jets are not manufactured domestically, it is possible to import
private aircraft from abroad.
A company with either an operator's permit or an
unplanned permit to provide air services to the importer is typically importing
an aircraft into India. Companies holding Non-Scheduled Operator permits are
offered Charter Air Services such as a service by well-known airlines such as
Indigo and Jet Airways. The operator's permission is provided by the Scheduled
Operators. Aircraft can, however, also be imported into India and operated under
'private aviation' category. A private aircraft includes any aircraft not
operated for recruitment, recompense, or remuneration.
Operating Permit In India
Non-Schedule Operator's Permit (NSOP)
It is different from a car when you import an aircraft. The plane has strict
rules and inspections of its owner by the Department of Civil Aviation and
General Director of Civil Aviation. The owner must maintain safety and
navigability and give very good pilots to the aircraft. In India, you can either
use private-owned aircraft or operator permits (NSOP). Aircraft owner uses
personal aircraft under private ownership while purchasing commercial aircrafts
under NSOP, company or individual aircraft. Both categories differ in the
structure of import duty in India.
Aircraft Financing-Guidelines Issued By RBI
Line of RBI for those who believe that aircraft is an asset in India, "it is not
an asset." According to the RBI Guidelines, in India, aviation's or ships are
not categorized as assets. The fundamental reason is that there are not many
aircraft in India, and they cannot be traded as property. This clause makes it
particularly difficult for aircraft to be financed in India.
Domestic V. International Sources Of Financing
Customers who are interested to finance their aircraft may receive their funding
from sources such as banks, private equity funds or NBFCs, or national or
international finance. Each financial institution has its own set of rules for
Domestic Banks Aircraft is understood by domestic banks in India as
equipment, and some very specific banks provide up to 90% financing for
aircraft lending. In addition to the Personal or/and Corporate Guarantees,
however, banks will require significant assets based on the Indian Reserve
Bank's policy as collateral to approve such funding.
A detailed set of documents shall be
submitted to the Bank to allow the Bank to obtain bank loans for your aircraft,
including a no objection certificate from the Ministry of Civil Aviation and the
Director-General of Civil Aviation. Domestic banks can also provide Indian
business with up to 90% finance with the product Buyers Credit Foreign Currency
International Banks: Foreign banks can supply customers in India with
dollar or Euro loans. LIBOR is the basis of these loans (London Interbank Rate).
In 2001 the Cape Town Convention was held to considerably make owning an
aircraft in India much easier due to obstacles in the understanding of aircraft
as assets in India under RBI and many other emerging countries. Foreign banks
can offer a proper leasing structure for aircraft ownership in India by means of
the Cape Town Convention in Place.
The most common leases are 2 categories,
Operating Lease and A Finance Lease.
Operating Lease The most flexible leases enable companies in India to
operate an aviation without the approval of any Reserve Bank of India.
Authorized dealer banks allow permits and process payments for leases in an
operating lease structure themselves. Under Operating Lease aircraft ownership
remains with its Lessor, while the Lessee can operate the aircraft on an
on-going basis through its regular maintenance and operation under the guidance
of the General Director of Civil Aviation India. Ireland's operating leases are
the most popular since Ireland also has a particular tax friendly structure in
the International Registry of Mobile Equipment (Aircraft). Businesses for
aircraft of category I can benefit from an operational lease structure of up to
100%. The financing of Category II and III aircraft for an operating lease is
Finance Lease Financial rental arrangements allow companies to claim
ownership of an aircraft by structuring leases with a fully amortizing structure
or partially amortizing structure which can be bought at the end of the rental
term. Structuring the lease as a financing lease permits customers to benefit
from the depreciation of assets and collect it on the balance sheet. All
financial leases structures require an External Commercial Borrowing Approval
from the Indian Reserve Bank for 3-4 weeks. RBI Financial Lease Application
requires both Lender and Borrower details.
With-Holding Taxes & Customs Duty
Duty to the Customer category 18-26% and duty of up to 6% of the aircraft value
for a non-schedule category shall be paid for a No Objection Certificate by the
Customs department. And all outgoing rental payments to non-Indian banks after
2008 are subject to the With-Holding tax. In case of holding taxes, the lease
payments can be 10-20%.
Barriers To Entry In The Aviation Sector
Concluding The Aviation Sector & Indian GDP
- Government Regulations
Airlines have many governing rules and may be a barrier to entry for some
airline contractors by complying with all of them. A mandatory 30-minute
notification on flight status changes and airlines' rules on how to handle
tarmac delay costs more than $1.5 billion a year for all the airlines,
including compulsory compensation for denied bookings
- Cost Of Fleet
For many newcomers in the airline industry, purchasing an
aircraft fleet is an important barrier to access. As of July 2015, prices of a
single aero plane for a small Embraer prop aircraft for a regional service range
from around $11 million, and for a Boeing 777 over $320 million. However,
several financial programmers, which support start-up airlines, cover that
expense, and many start-ups use creative finance to stock their fleets. However,
it is not an easy industry to break into without a huge amount of cash.
In addition, fuel is the largest barrier for many new entrants in
the industry even at the other cost of starting an airline. In the New York
Times, fuel costs represent up to 50% of the airline's costs, according to a
2012 report. Without financial strategy committed to specific purchases well in
advance, the fluctuation of fuel prices may make it difficult for a startup to
For a company, several start-up service positions are necessary,
but the start-up also requires qualified talent in the seat of a pilot. A Wall
Street Journal 2014 article describes a continued pilot shortage and notes that
new pilots often prefer a career with an established company rather than a
Except for government deregulation, new airlines can only
experience a considerable obstacle to entering a major airport. The New York
Times reports that only a few major airlines control most gates at large hub
airports, making it hard for new airlines to take over in those markets. The New
York Times states.
In the last decade, the airline industry has faced barriers, including rising
ATF costs, discontinued airlines, and over-saturated airports. But the industry
has started to develop its inherent growth potential. The growing population
of the middle class and increased disposable income have led to a substantial
increase of passenger traffic. This increase in the number of persons travelling
every year resulted in demand for services in civil aviation. This demand has
been addressed in several ways by the Central Government. It did not only
elevate the FDI limit allowed for the industry but also allowed foreign airlines
finally to invest in the airlines segment of India.
In the context of the aviation sector, a report said that Rs 33,000 crore, or
0.5 percent of India's GDP, currently contributes and supports 1,7 million
employment in the country, besides the creation of much-needed critical assets.
It is expected that this contribution will further increase, as the
sector will recuperate after a number of difficult years, in which many
companies suffered losses, because of the contributions of RS 87,500 crore to
social security and tax. Another Rs 16900 crore in government revenue has been
estimated by the study to measure the economy in India through taxation via
indirect and induced channels.
Through its direct output the sector also contributed Rs 14,700 and Rs 10,700
through the supply chain indirectly. In addition, the Oxford University joint
venture provided a further Rs 58,200 crore for catalytic
tourism, increasing its overall Rs 91,200 crore or 1.5 percent GDP consultancy.
It also said that it supported employment of another 7,1 million people by
catalytic effects, such as tourism, and supported 276,000 jobs directly, another
841,000 indirectly via their supply chain and a further 605,000 jobs through
spending by sector employees.
Recognizing that Indian airline carries 71%
passengers and 77% freight, they have "flowed through the Indian economy,
generating multiplying effects on Indian National revenues or GDP," wages,
profits and tax revenue generated by Indians.
- Directorate General of Civil Aviation (DGCA)
- IATA Press Release
- Market Share Analysis
- Non-Scheduled Operators include cargo carriers.
- Investment by Foreign airlines into Air India continues to remain