Trends and Outlook - Indian Infrastructure

The launch of the long-awaited National Civil Aviation Policy (NCAP), 2016 has been a landmark move for the civil aviation sector in the past year. Further, the improved economic scenario in the past two years (2014-15 and 2015-16) has led to a revival of the civil aviation sector in general. The decline in fuel prices has contributed significantly to the improved outlook for India’s aviation industry in particular. Fuel accounts for about 40 per cent of the operating expenditure for Indian carriers, and over the last two years, aviation turbine fuel prices have fallen by almost 50 per cent.

Policy

On the policy front, the biggest development has undoubtedly been the release of the NCAP in July 2016. Launched with a vision of creating an ecosystem enabling 300 million domestic ticketing by 2022 and 500 million by 2027, the NCAP, 2016 is the first integrated aviation policy since 1947.
Under the policy, the 5/20 international flying norm, operational since 2004, has been replaced by the 0/20 norm, under which all airlines can commence international operations provided that they deploy 20 aircraft or 20 per cent of total capacity (in term of average number of seats on all departures put together), whichever is higher, for domestic operations.
On bilateral traffic rules, India will have an open sky policy for South Asian Association for Regional Cooperation nations and countries beyond a 5,000 km radius of Delhi on a reciprocal basis. As part of the regional connectivity scheme (RCS), an airfare ceiling of Rs 2,500 has been fixed for flights of up to one-hour duration. The RCS will come into effect in the second quarter of 2016-17.
To exploit India’s huge maintenance, repair and overhaul (MRO) potential, the policy stipulates that service tax on output services of MRO service providers will be zero rated, aircraft maintenance tools and toolkits will be exempt from customs duty, the process for the clearance of MRO parts will be simplified by allowing self-attestation by MROs, the period for which spare parts imported by MROs can be stored tax-free will be extended to three years to enable economies of scale, and foreign aircraft brought to India for MRO work will be allowed to stay for the entire period of maintenance or up to six months, whichever is less. In addition, to ensure fair competition among ground handling agencies (GHAs), NCAP, 2016 has mandated that there will be at least three GHAs including Air India’s subsidiary/joint venture at an airport.
In a separate move, the Ministry of Civil Aviation (MoCA) has relaxed foreign direct investment (FDI) norms, under which foreign investors, barring overseas airlines, have been permitted to hold 100 per cent stake in domestic scheduled air transport and regional air transport services. With regard to airports, 100 per cent FDI in brownfield projects through the automatic route has been permitted.

Traffic trends

During the past five years (2011-12 to 2015-16), passenger traffic at Indian airports increased at a compound annual growth rate (CAGR) of around 9.29 per cent, reaching 223 million in 2015-16. Of the total traffic, domestic traffic accounted for nearly 76 per cent while international traffic accounted for 24 per cent. In terms of year-on-year growth, passenger traffic recorded a growth of over 17 per cent in 2015-16 over 2014-15, the highest growth rate in the past six years.
Meanwhile, the trend in freight traffic in the past five years shows that after falling by 2.91 per cent and 3.52 per cent in 2011-12 and 2012-13 respectively, traffic revived in 2013-14 and has been growing steadily since, to reach 2.7 million tonnes in 2015-16. During the past five years, freight traffic increased at a CAGR of around 2.82 per cent. The domestic segment witnessed a higher growth at 4.32 per cent (CAGR), while the international segment grew at 1.92 per cent during the same period. The sluggish growth in international freight traffic is largely a result of the ongoing global financial slowdown.

Airports

The increase in passenger traffic has also led to increased congestion at most airports and capacity expansion, especially at non-metro airports, is now crucial. As a positive effect of the increase in traffic, the Airports Authority of India (AAI) reported increased revenues of Rs 108.25 billion for 2015-16 compared to Rs 92.85 billion for 2014-15. Further, AAI’s profit after tax increased from Rs 19.59 billion in 2014-15 to Rs 25.37 billion in 2015-16.
Among metro airports, Chennai, Delhi, Hyderabad and Bengaluru have capacity augmentation plans on the anvil. Hyderabad’s Rajiv Gandhi International Airport has already surpassed its capacity of 12 million passengers per annum (mppa) and is awaiting approval from the Airport Economic Regulatory Authority to begin work on the second phase of expansion. Capacity at the airport is planned to be increased to 18 mppa by fiscal year 2019.
Meanwhile, the Bangalore International Airport plans to begin construction of its second runway and terminal by end-2016. The new terminal (T2) is being designed by US-based architecture firm Skidmore, Owings & Merrill. The terminal will have a capacity of 35 mppa and will be constructed in two phases. Phase I will add a capacity of 20 mppa while under Phase II another 15 mppa will be added. Bangalore International Airport Limited will also expand the existing facility (T1) to accommodate growth till Phase I of the new terminal is completed. Construction works are scheduled to be completed by 2021.
Delhi International Airport Limited has received approval from the MoCA for its expansion plans which include a new runway, a new terminal and an internal rail network. The current domestic terminal, T1D, will also be expanded from its 53,000 square metre area to 133,000 square metres, 10 new aerobridges will be constructed and the number of boarding gates will be increased from eight to 25. A new terminal, Terminal 4, will be constructed in the area where Terminal 2 is currently located, to cater to full-service domestic carriers such as Air India and Jet Airways. The airport’s fourth runway is expected to be commissioned by 2018.
AAI has initiated the Chennai Airport Modernisation Project Phase II, which is expected to be completed by end-December 2019. Phase II of the project involves undertaking development works at Chennai airport in Tamil Nadu at an investment of Rs 23 billion.
Progress on greenfield airports has remained slow. However, recently on August 26, 2016, the Mopa (Goa) airport project was bid out, after a long delay, to GMR Airports Limited on a build-operate-transfer basis. The airport is expected to cost Rs 31 billion and will handle 4.4 million passengers annually in the first phase, which is expected to be completed within three years. As per the contract, GMR will share 36.99 per cent of the airport’s gross revenue with the Goa government. Apart from this, though, progress has only been seen on the Shirdi and Kannur greenfield airport projects. The Kannur International Airport is expected to be fully ready for operations by March 2017, while Shirdi airport is likely to be inaugurated in October 2016.
Work at the greenfield airport at Pakyong (Sikkim), which was expected to be operationalised in 2015, had been stalled since January 2015 over issues regarding compensation to displaced persons. The work restarted in July 2015, however, the delay resulted in a substantial cost escalation – Rs 6.1 billion compared to the Rs 3.1 billion estimated earlier. The airport is now expected to be operational by September 2017.
Meanwhile, the largest greenfield airport project in terms of investments – the Navi Mumbai (Maharashtra) airport – is still facing delays. Recently, in July 2016, the Ministry of Environment, Forest and Climate Change’s Forest Advisory Committee deferred Stage II forest clearance for the Navi Mumbai International Airport on account of deficiencies in the compensatory afforestation scheme, thus delaying the project further.

Airlines

The Indian airline industry has grown significantly over the years. The capital and debt-intensive sector has expanded in recent times, with some new players joining in, eyeing a share of the rapidly increasing market. With regard to market share, low-cost carriers continue to dominate. As of February 2016, their share is about 60 per cent, led by IndiGo, which continues to be a market leader.
The government had announced that Air India could be expected to post an operating profit of Rs 80 million during 2015-16, which would also be the first time since the merger of Air India and Indian Airlines that the national carrier would be reporting an operating profit.
In October 2015, IndiGo launched an initial public offering (IPO) to raise over Rs 30 billion. The issue was oversubscribed more than six times and the price band for the offer was fixed at Rs 700-Rs 765 per share. Following IndiGo, GoAir is reported to be moving ahead with its plan to raise funds through an IPO issuance. In February 2016, the airline appointed Goldman Sachs, Bank of America Merrill Lynch and Kotak Mahindra Bank for managing its planned $150 million (Rs 10.26 billion) IPO. Meanwhile, Air Costa is awaiting the Directorate General of Civil Aviation’s approval to begin pan-India operations.

Outlook

The NCAP, 2016, although still being debated on certain aspects, is nonetheless being seen as progressive by the aviation industry in general. Overall, the outlook for the sector remains positive, mostly backed by buoyant traffic projections. India is expected to become the third largest aviation market in the world before 2025.