Trends and Outlook – Indian Infrastructure

The growing domestic market, along with continued policy and regulatory liberalisation, especially the National Civil Aviation Policy (NCAP), has set the country’s aviation sector on a robust growth path. At present, India is the ninth largest aviation market in the world, and is likely to be the third largest by 2020. Factors such as greater affordability, declining airfares, increasing competition among airlines, greater use of technology, growing fleet size, etc., have aided the sector’s growth in recent times. However, future growth will depend on a number of factors such as attention to safety and security, the availability of skilled resources, and continued investment in airports.

Policy

On the policy front, the biggest development undoubtedly remains the launch of the NCAP in July 2016. As per the NCAP, the Ministry of Civil Aviation (MoCA) launched the Regional Connectivity Scheme (RCS) in April 2017, by awarding 128 regional routes to five airlines – Alliance Air, SpiceJet, Turbo Megha, Air Odisha and Air Deccan. In the first round of the RCS, Air Alliance has been awarded 15 routes, giving it access to five unserved and two underserved airports; Air Deccan has won 34 routes to 10 unserved and five underserved airports; and Air Odisha has won 50 routes. The government has received more than Rs 11.5 million towards the Regional Connectivity Fund. From December 1, 2016, the MoCA started collecting a levy from scheduled airlines operating on major routes to raise money for the fund.
The government commenced the second round of bidding under the RCS on August 24, 2017 bringing in a few amendments for increased participation. These include permitting routes with stage length less than 150 km for operations as RCS routes through fixed wing aircraft, and greater flexibility to selected airline operators (SAO). The last date of submission of initial proposals by the airlines is October 26, 2017 and the list of SAOs is likely to be announced by end-November 2017.
In a landmark move, the government liberalised foreign direct investment norms for the sector in June 2016, bringing brownfield projects in aviation under the automatic approval route. The move is expected to aid in the expansion/modernisation of existing airports in the country.
The Airports Economic Regulatory Authority has set a tentative ceiling of Rs 65,000 per square metre for terminal buildings and Rs 4,700 per square metre for runways/taxiways/aprons (excluding earthwork up to the sub-grade level). The cost will be used to determine tariffs on a tentative basis. The ceiling rates will be applicable in the case of new projects only where the works are yet to be awarded. In the case of awarded projects, capital costs will need to be examined by a committee approved for the purpose.
Airport charges have been increased, with the Airports Authority of India (AAI) increasing charges by 5 per cent at non-major metro airports from April 1, 2017. Accordingly, the passenger service fee, which is charged as a part of air ticket fare, has been increased from Rs 85 per passenger to Rs 89 in 2017-18 and subsequently to Rs 93 in 2018-19 and Rs 98 per passenger in 2019-20.
The Directorate General of Civil Aviation has amended aircraft import norms, under which domestic airlines have been permitted to import aircraft which are up to 18 years old. With the revised norms, pressurised aircraft that are not over 18 years of age or those which have not completed 50 per cent of the design economic pressurisation cycle can be imported. The decision with respect to unpressurised aircraft will be taken on a case-to-case basis after examining the record of the aircraft to be imported.
With the increasing use of technology, security at Indian airports is moving to global standards. The Central Industrial Security Force announced the suspension of stamping and tagging of hand baggage at seven major airports – Delhi, Mumbai, Bengaluru, Hyderabad, Kolkata, Cochin and Ahmedabad – from April 1, 2017. Meanwhile, the Bureau of Civil Aviation Security scrapped the practice of mandatory retention of a portion of the boarding pass by airlines.

Traffic trends

During the past five years (2012-13 to 2016-17), passenger traffic at Indian airports has increased at a compound annual growth rate (CAGR) of around 13.5 per cent, reaching 265 million in 2016-17. Of the total traffic, domestic traffic accounted for nearly 77.6 per cent while international traffic accounted for the remaining 22.4 per cent. In terms of year-on-year growth, passenger traffic recorded a growth of over 18.3 per cent in 2016-17 over 2015-16, which was the highest growth rate in the past five years.
Meanwhile, the trend of freight traffic shows that after falling in 2011-12 and 2012-13 by 2.91 per cent and 3.52 per cent respectively, traffic revived in 2013-14 and has been growing steadily since, to reach 3 million tonnes in 2016-17. Of the total, international and domestic traffic accounted for shares of 38 per cent and 62 per cent respectively. During 2012-13 to 2016-17, total freight traffic increased at a CAGR of around 8 per cent, while domestic and international freight traffic increased at a CAGR of 9.31 per cent and 7.09 per cent respectively. The domestic segment has been recording double-digit growth in the past three years, on the back of rising GDP levels and an increase in economic activity.

Airports

Rising passenger traffic unmatched by proportionate increases in capacity has led to severe congestion at airports. Metro airports such as Hyderabad, Bengaluru and Mumbai have utilisation rates of over 100 per cent, while Delhi is nearing saturation. Nevertheless, steps are being taken to augment capacity. AAI has drawn up a capital expenditure plan of Rs 175 billion for the five-year period from 2015-16 to 2019-20, which covers the upgradation and expansion of existing airports.
During the year under review, new terminal buildings were inaugurated at the Vadodara, Vijayawada and Cochin airports. Besides, a new cargo terminal was inaugurated at Mumbai airport, while the new Bathinda airport in Punjab was inaugurated in December 2016.
Bids were invited for construction/expansion/upgradation works at the Nagpur, Jaipur, Vijayawada, Mangalore, New Pune, Rajkot and Agartala airports.
Among metro airports, Phase II expansion works at Bengaluru’s Kempegowda International Airport have commenced, at an estimated cost of Rs 40 billion. The expansion includes the construction of a second terminal (T2) and a parallel runway.
Delhi International Airport Limited has announced its master plan to start the process of airport expansion and construction work on Delhi airport is likely to commence by March 2018. The plan will be implemented in three modular phases – Phase 3A (2018-21), Phase 3B (2021-25) and Phase 4 (2026 onwards). The expansion process will commence from Terminal 1 (T1) wherein its capacity will be augmented from 20 million passengers per annum (mppa) to 40 mppa. Further, the two terminals – T1D and T1C will be merged and expanded to accommodate a footfall of 40 mppa. Thereafter, T2 will be demolished to build a fourth runway. Post 2026, Delhi airport will have three operational terminals and four operational runways and is expected to cater to 115 mppa.
Environmental clearance has been granted for the Mumbai airport T2 terminal upgradation project, and has been recommended for the Hyderabad airport expansion project.
AAI has submitted a detailed project report for building new terminals proposed as a part of Chennai airport’s Phase II expansion and the MoCA has approved the master plan for the Kolkata airport expansion which is proposed to be undertaken in phases.
The long-awaited Mopa International Airport (Goa) and Navi Mumbai International Airport have been bid out to GMR Airports Limited and GVK Power & Infrastructure Limited respectively. Once Phase I of both these airports is commissioned, a capacity of around 15 mppa will be added.
Following the launch of the RCS, the Cabinet Committee on Economic Affairs approved a proposal for the revival of 50 unserved/under-served airports/airstrips in the country, at an estimated cost of Rs 45 billion. As per the approval, these airports will be revived in a period of three financial years starting from 2017-18. A total of 15 airstrips/airports each will be revived during 2017-18 and 2018-19 while 20 airports/airstrips will be revived during 2019-20. Since these airports will be developed without insisting on financial viability, the revival will be demand-driven, depending upon the commitment from airline operators and the respective state governments for providing various concessions.

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 eyeing a share of the rapidly increasing market size. The combined fleet size of both national and private scheduled airlines increased at a CAGR of 6 per cent between 2011-12 and 2015-16.
In terms of market share, IndiGo continues to dominate, with a share of 40 per cent, as of March 2017, primarily driven by rapid capacity additions and healthy passenger load factors owing to superior on-time performance. It was followed by Jet Airways at 15 per cent, SpiceJet at 13.2 per cent and Air India at 13 per cent. The new airlines, AirAsia India and Vistara, have also established their presence, reporting shares of 3 per cent each.
On the financial front, except IndiGo and Jet Airways, profits of most airlines remain under pressure. Although there was some improvement in the profits of several airlines in 2015-16, this was largely attributed to a reduction in fuel prices.

Outlook

The sector is on a double-digit growth trajectory, and the momentum is expected to get stronger in the coming years, driven by active government participation, rising economic activity and tourism, changing demographics and growth in business and leisure travel.
The introduction of the NCAP, 2016, has brought optimism and given a new direction to the sector. Although the real impact of the NCAP will require two-three years to show, the introduction of the RCS shows swift action on the part of the government. Going forward, policy execution will remain key. The creation of implementation task forces; roll-out of rules, procedures and amendments; close cooperation between government and industry; and process-driven implementation should be focused on.