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When low-cost carriers and policy changes ruled the sky: 2003-2016

When low-cost carriers and policy changes ruled the sky: 2003-2016
Over the decade, the civil aviation sector saw several private carriers in India set up low-cost business models.

As part of the year-long series India@70InfraCircle has been tracing the history of Indian aviation since Independence. In this article, we take a take a look at the defining years of this century—2003 to 2016—which was about low-cost flying for masses and historic policy changes.india-at-70-logo-2

The entry of Air Deccan—India’s first no-frill, low-cost carrier (LCC)—ushered an era of competition at minimum price points. A game changer, the airline brought about a revolution in the aviation industry, triggering a tariff war. Fares were reduced to almost half of that charged by full-service carriers.

This was when India’s masses, especially the middle class, started travelling by airlines in large numbers. Over the next decade, the civil aviation sector saw several private carriers flying in and low-cost business models being set up. A demand-driven market was finally here.

Over the next few years, seven private airline services started apart from Air Deccan (later acquired by Vijay Mallya’s Kingfisher Airlines Ltd and rebranded as Kingfisher Red). These included Naresh Goyal-promoted Jet Airways (includes JetLite, formerly Sahara Airlines, Jet Airways and Jet Konnect), Kingfisher, SpiceJet, IndiGo, GoAir and Paramount Airways. Many of these were LCCs which saw a lot of traction from a whole new consumer class, forcing the full service carriers to cut fares.

“At that time, European countries started looking at India, China and Asian countries. Air Deccan came in with Rs.500 fare (excluding tax) and changed the market dynamics,” says Harsh Vardhan, former managing director of the erstwhile Vayudoot Airlines.

Also the crude oil price of $10 per barrel in 2003 helped the airlines. Aviation turbine fuel, produced from crude oil, makes up about 40% of an airline’s operational cost.

Low-cost regime

The boom in India’s civil aviation in India came with the entry of G.P. Gopinath’s Air Deccan in 2003, followed by another LCC GoAir in June 2004. A year later in May 2005, liquor-baron Vijay Mallya started a full-service carrier, Kingfisher Airlines, and SpiceJet, a low cost carrier, commenced operations as well. In August 2006, another LCC, IndiGo, started operations which now is a leading airline.

In May 2005, liquor-baron Vijay Mallya started a full-service carrier, the Kingfisher Airlines.
In May 2005, liquor-baron Vijay Mallya started a full-service carrier, the Kingfisher Airlines.

The sudden influx of these airlines set the sector abuzz.

“Even the Atal Bihari Vajpayee government gave incentives around 2001-02 to the aviation sector, and a boom in the information technology sector and financial markets was an added advantage given that it added to the air traffic,” adds Harsh Vardhan.

The government, he said, during 2003 relaxed airport charges to almost free for airlines but as airlines grew, airport charges increased multi-fold creating trouble for airlines, that continues to be the same even till date.

“Now we are the sixth largest aviation market in the world behind the US, the UK, China, Germany and France…but we still have the lowest penetration of air passengers in the country,” says Harsh Vardhan.

Of 5/20 impediment and regional airlines

In December 2004, the Manmohan Singh-headed United Progressive Alliance-1 government introduced the 5/20 rule—a controversial policy that made it mandatory for any domestic carrier to have five years of domestic flying experience and 20 aircraft in fleet to be eligible to fly overseas.

This proved to be a significant impediment for younger airlines which were smaller in scale and they remained confined within the country’s boundaries.

“After 2007, even crude oil started moving up crossing $112 per barrel in 2011, gradually killing the growth of Indian aviation sector and leaving airlines bleeding,” said Harsh Vardhan.

Meanwhile, the national carrier Air India, which had international operations, ordered 111 aircraft for Rs.50,000 crore. It started accumulating losses and subsequently the government announced pumping in around Rs.30,000 crore in 2012 under a turnaround action plan to stabilise the state-run carrier. Currently, Air India’s debt stands at around Rs.40,000 crore.

In 2007, the Regional Airlines Policy was announced wherein licences were given to airlines for operation within a particular region. Given the buzz in the aviation sector starting 2003, several entities showed interest in launching airlines with national operations. Approvals for nine of these were pending till August 2007, when the civil aviation ministry announced a separate category of airlines meant to serve India, beyond its big cities.

Some carriers such as the Jagson Airlines got flying permits under the regional category.
Some carriers such as the Jagson Airlines got flying permits under the regional category.

Soon after the policy was announced, some airlines awaiting national licences, re-applied for regional permits. The Directorate General of Civil Aviation, the governing body for aviation in India, introduced a separate category for a regional airline permit. Some of the airlines such as MDLR Airlines and Jagson Airlines got flying permits under the regional category. Though these two have closed operations, many others such as Air Dravida, Trans India Aviation, Emric Aviation and King Air, among others, failed to get flying permits.

Private sector airports

Given new airlines started operating to newer locations, the government realised the need to improve the aviation infrastructure in the country.

At least 35 non-metro airports were upgraded that underwent modernisation during 2006-2011 at an expense of around Rs.12,500 crore. All these airports are run by the state-owned Airports Authority of India (AAI). Of these many may have to be redeveloped again as they have exceeded their design capacity by now. The Indian aviation sector witnessed the fastest growth rate in financial year 2015-16, over six times more than that of the US which posted the second-highest growth rate of 4.1%.

Witnessing around 12% growth during 2003-04, the Vajpayee-led National Democratic Alliance (NDA) government approved setting up of private greenfield airports at Hyderabad and Bengaluru in 2004 which are operated by the GMR Group and the GVK Group, respectively.

At least 35 non-metro airports were upgraded that underwent modernisation during 2006-2011.
At least 35 non-metro airports were upgraded that underwent modernisation during 2006-2011.

Two years later, the government approved the restructuring and modernisation of the Delhi and Mumbai airports through a public-private-partnership model. These airports are operated by GMR Group and the GVK Group, respectively, as well.

In December 2013, the government announced the Greenfield Airport Policy, which provides that no prior central government approval is needed to set up a greenfield airport beyond 150km of an existing civilian airport. Greenfield airports are newly developed airports, while brownfield airports such as the Delhi and Mumbai airports are the ones where the existing airport infrastructure undergoes facelift, upgrade and expansion.

The consolidation

As with any other sector across the world, the initial boom was followed by a period of consolidation.

Mallya’s Kingfisher Airlines eventually closed down its operations in October 2012. Six months before the airline was grounded, the carrier cut its fleet to 28 planes from 66 as it had started to suffer losses. The airline started defaulting on payments to vendors and employees’ salaries have been delayed since November 2012.

Subsidiary companies, part of Mallya’s UB Group, extended loans and bank guarantees. Mallya himself pledged his shares in those firms and pumped money into the airline. Mallya even tried to find a foreign airline that could invest in Kingfisher in 2011 but Indian rules at the time did not allow foreign airlines to invest in India.

Interestingly, the government relaxed foreign direct investment (FDI) norms a month before the airline closed operations. But by then, the airline was beyond repair. Employees stopped work demanding salaries and finally, the government had to suspended Kingfisher Airlines’ flying licence leaving 8,000 employees without jobs. Kingfisher Airlines owes banks around Rs.7,000 crore and the government has now initiated proceedings to recover the money.

In the first-ever investment by a foreign airline in an Indian carrier, Jet Airways in April 2013 announced plans to sell 24% equity to Abu Dhabi-based Etihad Airways for about Rs.2,058 crore, as part of a strategic alliance that would lead to a significant expansion in its global network. The deal came a year after the Indian government in September 2012 decided to allow foreign airlines to buy up to 49% stake in domestic Indian carriers. Currently, Jet Airways chairman Naresh Goyal owns 51% in the airline while Etihad has a 24% stake. Mutual funds and insurance companies own 10% in the airline while foreign institutional investors own 4.61% and retail investors and others together own 10%.

In year 2007, Air India (for international operations) and Indian Airlines (for domestic operations) were merged to form a company called National Aviation Co. of India Ltd.

There was much happening with the private airlines. Goyal’s Jet Airways acquired Subrata Roy’s Air Sahara for Rs.1,450 crore on 13 April 2007. Air Sahara was renamed JetLite.

In June 2007, Mallya’s Kingfisher acquired Gopinath’s Air Deccan for Rs.550 crore and renamed it as Simplifly Deccan with the old logo substituted by the Kingfisher logo. A year later, Simplifly Deccan was renamed as Kingfisher Red.

Harsha Vardhan says the Kingfisher Airlines and Air Deccan deal was like a merger of an establishment with quality to one with none, and that did not work.

SpiceJet came to near closer in December 2014 but was bailed out by its former promoter Ajay Singh.

Policy tailwind

There are 11 airports in India which currently represent 85% of passengers handled nationally.
There are 11 airports in India which currently represent 85% of passengers handled nationally.

On 12 May 2009, the government set up the Airport Economic Regulatory Authority (AERA) through an act of Parliament to be an economic regulator for all airports with traffic of more than 1.5 million passengers per annum. There are 11 airports in India which currently exceed this threshold, representing 85% of passengers handled nationally.

AERA’s scope is to set aeronautical charges on a five-year cycle, taking into account the economic viability of an airport, in line with international norms. This was followed by setting up of Airport Economic Regulatory Authority Appellate Tribunal in 2010 to address issues related to airports and related tariffs.

The Union Cabinet on 15 June 2016 approved the much-delayed Nation Civil Aviation Policy and relaxed the 5/20 rule. The new policy, however, requires airlines to have at least 20 aircraft to fly overseas. The policy was mooted in 2007.

The change brought the focus back on the Tata Group, and its aviation legacy. The group started two new airlines—full service carrier Vistara, in partnership with Singapore Airlines, and low-cost carrier AirAsia India, with Malaysia’s AirAsia Bhd.

The policy also draws a roadmap to put the unserved and the underserved areas of the country on the aviation grid through a detailed regional connectivity scheme (RCS) by putting a cap on airfares on these routes.

With the policy retaining the FDI cap in the aviation sector at 49%, the government is of the view that it can always revisit it as and when required. It has put a cap on fares at Rs.2,500 for one-hour flights between smaller towns and cities, and Rs.1,200 for 30-minute flights under RCS, among other incentives.

Under the first phase of RCS, the government plans to make 60 airports operational over the next three years. RCS plans to restore a total of 390 airstrips. The aviation ministry has also earmarked Rs.500 crore in its annual budget for the current financial year for this purpose.

With regional carriers Air Pegasus closing down its operations in July this year and Air Costa hitting turbulence, has put up a challenge for the success of the government’s ambitious regional connectivity scheme.

The aspirations of 1.3 billion people have helped shape the Indian civil aviation sector. Many believe that with the goods and services tax setting the tone for the economic integration of the country, it is now the aviation sector’s turn to make good its promise of the opportunities it offers.


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