Aviation Sector Report – Jan 2024

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 Table of content –

Sr. No Particulars Pg. No.

1 Overview 3

2 Industry Insights 6

3 Value chain of Industry 7

4 Cost structure of the industry 9

5 Revenue and capacity metrics 10

6 Advantage India 11

7 Expansion of aviation 13

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 Overview

The Indian civil aviation sector has grown to become the 3rd largest in the world in terms of domestic
traffic. It was also expected to eventually become the 3rd largest in terms of overall traffic before the
pandemic hit. The Government of India has introduced several measures like the NCAP 2016, the
RCS UDAN, The Drone Policy, NABH Nirman Aircraft Leasing under the IFSC, and the
announcement of the recent helicopter policy for the sector to thrive. The Indian civil aviation sector
has benefited from several factors that include the country’s rising middle class, improved regional
connectivity through the RCS UDAN, and the development of greenfield airports and brownfield
airport transactions to improve infrastructure in the country’s existing airports.

By 2033, the airports in metropolitan cities are expected to handle only about 57% of the projected
traffic (they currently handle about 62%), which accounts for about 959 million people,4 since the
traffic at smaller towns/cities is forecasted to grow by almost three times over the next decade. To tap
into the vast potential of these airports, properly structured Public Private Partnership (PPP) models
and policy level interventions will be significant. Some of the interventions to be explored include the
provision of continued support to airports under the UDAN scheme and flexibility regarding capital
investments and regulatory measures.

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 Table 2 : Airline traffic and load factor data

In terms of Passenger Load Factor (PLF), a measure of capacity utilisation of airlines, for scheduled
domestic operations, Spice Jet registered the highest PLF of 88.6% followed by Vistara (87.4%),
Indigo (82.3%) & Star Air at (80.1%). Spicejet topped the position in terms of international operations
with a PLF of (84.9%) followed by Air India (83.1%).
A higher PLF implies that an airline is successful in selling available seats. However, higher
PLF may not result in higher operating profit. When PLF is less than break-even load factor, the
airline in question is running losses.
Evidently, in the year 2021-22, only Fly Big were operating at a PLF higher than break-even load
factor (BELF).

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 Industry Insights

A narrow-body aircraft generates a higher capital turnover than a wide-body plane because of cost
and usage. A narrow-body Boeing 737-800 is three to four times cheaper than a wide-body aircraft
such as the 777-300ER. Because a narrow-body aircraft is deployed on shorter flights, it can complete
five or six flights per day compared with one or two trips for wide-body aircraft.

Regardless of aircraft type, airlines that buy newer, more expensive aircraft will have to manage the
large weight on their balance sheets by maximizing utilization. Ideally, new planes should be in the
air for ten to 12 hours a day for narrow bodies and 14 to 15 hours a day for wide bodies.

If airport regulations permit, airlines could complement such flight activity with the potential
deployment of depreciated aircraft, especially on popular routes. Airlines that do this may capture
revenue peaks while lowering asset costs. As capital assets, airplanes are subject to depreciation.
However, if an aircraft is properly serviced and maintained, there’s no correlation shown between its
age and safety. One low-cost carrier, for example, separates its aircraft internally into two subfleets.
The new, efficient modern fleet flies more than 12 hours, on average, every day. The older fleet, with
significantly lower ownership costs, flies when there’s sufficient demand at the right yields.

Fast-growing markets attract many new entrants. As new planes are rapidly added in anticipation of
demand growth, ticket prices fall. The Asian market, which is the lowest-performing region, is a case
in point. Before the pandemic, the Asian market became less consolidated, and stiff competition has
badly bruised many of the airlines there.

On the flip side, US airlines have fared better, due in part to mergers leading to a more consolidated
market. However, market structure isn’t the only factor. Latin America, too, saw a similar
consolidation, but airlines there failed to return their cost of capital. This shows that airline conduct
is the more critical factor (Exhibit 4). US carriers were careful to add capacity at a slower rate than
GDP growth and only on routes where they already had enjoyed a competitive advantage.

Airlines may offer price-sensitive passengers a low base fare to give them a great sense of value, and
then entice them with a range of add-ons. In economy class, for example, many high-performing
airlines are actively innovating new ancillaries and selling them at the right moment in the
customer’s journey. Aisle seats, premium meals, reserving overhead space, and private-car transfers
at the point of destination are just a few examples.

When it comes to origin-and-destination (O&D) pairs, an airline enjoys privilege when it’s able to
provide passengers with a unique itinerary that others don’t. Every carrier’s network of flights has
some privilege. Successful airlines can identify, create, and monetize niches in their flight network.

Panama’s Copa Airlines, a consistent value creator, provides an excellent example. Its fleet of
narrow-body aircraft serves more than 80 destinations across North and Latin America, offering
thousands of O&D pairs. For example, if a traveller is going from Chicago to Rosario, Argentina, Copa
has the only reasonable one-stop connection. The percentage of Copa’s passengers who travel on its
privileged O&Ds is three times the industry average.

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As airlines bring back flights, decision makers could analyze their network privilege to capture more
value. Usually, this can be achieved by serving smaller, secondary, and tertiary cities( A strategy
currently being used by Akasa Air) and connecting the flights through large-scale hubs. There may be
potential to deploy longer-range, fuel-efficient aircraft such as Airbus A321neos or Boeing B787s to
experiment with new destinations. They should be careful of adding too much capacity too quickly.

Value Chain of Industry

Sale and leaseback model

Buy Sell
Aircraft Manufacturers Airlines Leasing Companies

Order in Bulk to get Lease back the same

Discounts. aircraft

Suppliers
The journey of value creation in the airline industry begins with suppliers. These are the entities
responsible for providing the raw materials and components needed for the operation of airlines.
Suppliers include aircraft manufacturers (Boeing, Airbus), fuel suppliers, aircraft maintenance
companies, catering services, and technology providers. Airlines rely heavily on these suppliers to
ensure the quality and safety of their services.

Airlines
At the core of the value chain are the airlines themselves. They play a pivotal role in coordinating
various aspects of the travel experience, including flight scheduling, crew management, and
ticketing. Airlines are responsible for investing in a fleet of aircraft, maintaining them, and ensuring
that flights are operated efficiently. They also manage reservations, check-ins, and baggage handling,
all of which contribute to the overall customer experience.

Airports
Airports serve as critical nodes in the airline value chain. They provide the infrastructure and facilities
necessary for aircraft takeoffs, landings, and passenger handling. Airports offer terminal buildings,
runways, air traffic control services, and customs and immigration facilities. Efficient airport
operations are vital for minimizing delays and ensuring a smooth travel experience.

Ground Handling Services

Ground handling services encompass a range of activities, including aircraft servicing, passenger
boarding, and baggage handling. Ground handlers ensure that planes are loaded and unloaded
efficiently and that passengers are safely transported between the terminal and the aircraft. These
services are crucial for maintaining flight punctuality and enhancing passenger satisfaction.

Travel Agencies and Online Booking Platforms

Travel agencies and online booking platforms bridge the gap between airlines and travelers. They
play a significant role in marketing and selling airline tickets, tour packages, and other travel-related
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services. Travel agencies earn commissions from airlines for ticket sales, and online platforms, such
as Expedia and Kayak, provide travellers with convenient booking options.

Transportation to and from Airports

Transportation to and from airports is another essential component of the airline value chain. This
segment includes taxis, shuttle services, public transportation, and even ride-sharing platforms like
Uber and Lyft. Ensuring easy access to airports is crucial for passenger convenience.

Aircraft Maintenance and Overhaul Providers

Aircraft maintenance and overhaul providers are responsible for ensuring the safety and
airworthiness of aircraft. These specialized companies perform routine maintenance, inspections,
repairs, and major overhauls on aircraft to keep them in optimal condition. Overhaul providers
contribute significantly to the operational reliability of airlines.

Regulatory Bodies
Government regulatory bodies, such as the Federal Aviation Administration (FAA) in the United
States or the European Union Aviation Safety Agency (EASA), Directorate general of Civil Aviation
(DGCA) in India oversee the airline industry’s safety and compliance standards. They set regulations,
conduct inspections, and issue certifications to ensure that airlines operate safely and efficiently.

Cargo and Freight Services

In addition to passenger travel, airlines often provide cargo and freight services. This aspect of the
value chain involves the transportation of goods and packages. Cargo airlines or dedicated cargo
holds on passenger planes handle the shipping of products, fostering global trade and logistics.

In-Flight Services
In-flight services, including catering, entertainment, and cabin crew services, contribute significantly
to the passenger experience. Airlines invest in providing meals, drinks, and entertainment options to
make flights more comfortable and enjoyable for travellers.

Marketing and Advertising

Marketing and advertising efforts are essential for attracting passengers. Airlines employ marketing
strategies to promote their brand, services, and special offers. Effective marketing campaigns can
influence travellers’ choices and drive ticket sales.

Customer Service and Support

Customer service and support are critical for addressing passenger inquiries, resolving issues, and
ensuring a positive travel experience. Airlines invest in call centres, online support, and staff training
to provide top-notch customer service.

Loyalty Programs
To retain customers and encourage repeat business, many airlines offer loyalty programs. These
programs reward frequent flyers with miles, points, or other perks, fostering customer loyalty and
enhancing the airline’s competitive edge.

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 Cost Structure of the Industry

While decomposing the airline industry cost structure, highest cost accounts to
Aircraft fuel and oil with 33.7% followed by Depreciation and amortization (18.1%) of the of the total
Operating Cost of Indian aviation industry.

Other costs involved are costs of aircraft maintenance costs, airport charges (parking and landing
charges)

The cost comparison was undertaken before and after adjusting Operating Cost to Average Stage
Length. Because of high fixed cost of airlines unit cost decrease as distance increases. Hence, a stage
length adjustment is necessary for fairer comparison. In the year 2021-22, Indigo and Go Air had the
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least Adjusted Operating Cost Per ASK (adjusted for stage length) i.e. Rs 3.3 and 3.4 respectively. In
the same year, Air Taxi and Fly Big had the highest Adjusted Operating Cost Per ASK (adjusted for
stage length) i.e. Rs.33.0 and 14.6 respectively.

Revenue metric (Yield or Revenue passenger kilometer (RPK))

Passenger yield is a measure of average fare paid per passenger km flown, calculated by dividing
Passenger Revenue by Revenue Passenger Kilometres. In the year 2021-22, Air Asia had the lowest
passenger yield followed by Go Air and Spice Jet.

Demand and Capacity in India’s civil aviation sector have shown robust growth.
▪ Capacity (Available Seat Kilometer) available in domestic flights increased to 158,349 million kms
in FY23. Correspondingly, demand (Revenue Passenger Kilometer) for domestic services grew rapidly
to 132,092 million kms in FY23.
▪ Growth in demand has consistently outpaced the growth in supply, resulting in high utilisation
(Passenger Load Factor).
▪ During the year from 2011-12 to 2022-23, the capacity (ASK) in the domestic market grew at a rate
of 7.27% (CAGR) while the demand (RPK) grew at 7.96% (CAGR) during the same period.

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 Advantage India

Demand for aviation

Rising working group and widening middle-class demography is expected to boost demand.
India has envisaged increasing the number of operational airports to 220 by 2025.
Country will become the third largest aviation market in terms of passengers by 2024.
India will need 2,500 new commercial airplanes by 2038.

Investments
Investment to the tune of Rs. 420- 450 billion (US$ 5.99-6.41 billion) is expected in India’s airport
infrastructure between FY18-23.
Growing private sector participation through the Public-Private Partnership (PPP). The number of PPP
airports is likely to increase from five in 2014 to 24 in 2024.
In May 2023, Union Civil Aviation Minister Mr. Jyotiraditya Scindia said that there is a plan to invest
Rs. 1 lakh crore (US$ 12 billion) in airports in the coming days.

MRO opportunities
Growth in aviation accentuating demand for MRO facilities. Expenditure in MRO accounts for 12-
15% of the total revenue; it is the second-highest expense after fuel cost.
Land allotment for entities setting up MRO facilities in India has been revised to a period of 30 years
in September 2021, from the current 3-5 years as the government aims to make India a ‘Global MRO
Hub.’

Important metrics

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 Growth of Aviation

Until 2013, AAI was the only major player involved in developing and upgrading airports in India.
▪ Post liberalisation, private sector participation in the sector has been increasing.
▪ The Government of India has given ‘in-principle’ approval to 19 airports, out of which, seven are going to be
developed on a PPP basis with an
investment of Rs. 27,000 crore (US$ 41.89 billion).

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 Expansion of aviation
▪ In June 2023, Union Civil Aviation Minister Mr. Jyotiraditya Scindia said that 200-220 more airports, heliports,
and water aerodromes will be built in the country over the next five years.
▪ On July 14, 2023, the fourth runway and dual ECT (also called elevated taxiways) became operational at the
Delhi airport. Indira Gandhi International Airport (IGIA) is the first airport in the country to have four runways and
Eastern Cross Taxiways (ECT).
▪ Directorate General of Civil Aviation (DGCA) has granted in-principle approval to Air India Ltd. and Interglobe
Aviation Ltd (Indigo) for import of 470 and 500 aircraft respectively. As per the induction plan of the airlines, the
aircraft are proposed to be imported during the period 2023-2035.
▪ Indian carriers are expected to double their fleet capacity to around 1,100 aircraft by 2027.
▪ As on January 31, 2023, a total number of 73 unserved /underserved airports including nine heliports and two
water aerodromes have been operationalised, since 2017, under the UDAN scheme.
▪ The AAI has announced a few developments in Indian Airports—construction of a new airport on a greenfield
site in Hollongi (Arunachal Pradesh) by November 2022, new integrated passenger terminal building expansion
of Tiruchirappalli & Pune Airport (March 2022), Guwahati International Airport (June 2022), Maharaja Bir Bikram
Airport (Early 2021) and a major expansion of Surat Airport (December 2021).
▪ India aims to have 220 new airports by 2025, said, Mr. Jyotiraditya Scindia, Minister of Civil Aviation. Cargo
flights for perishable food items will also be increased to 30% with 133 new flights in the coming years.
▪ In February 2022, the Airports Authority of India (AAI) and other airport developers set a capital outlay target
of Rs. 91,000 crore (US$ 12.08 billion) for the development of the airport industry.
▪ In March 2021, the Indira Gandhi International (IGI) Airport in Delhi announced a key expansion project to
increase its passenger handling capacity. The expansion project includes a new terminal, advanced facilities,
an additional runway, and improved capacity to handle more passengers.

Read more about the airline sector at

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

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