India’s Aviation Sector Has Potential to Become World’s Largest by 2030

March 14, 2014 Posted by India Briefing Reading Time: 4 minutes

DELHI – India’s aviation sector holds much untapped potential and could become the largest aviation market by 2030, according to a joint report released by the Federation of Indian Chambers of Commerce and Industry (FICCI) and KPMG. India’s civil aviation industry is already in the top 10 globally, valued at around US$16 billion, but Amber Dubey of KPMG says this is just “the tip of the iceberg” for the country’s aeronautical sector.

The report was released yesterday during the country’s week-long civil aviation expo, India Aviation 2014, and highlighted the enormous growth prospects for India’s aviation industry, given that plane travel is still out of reach for nearly 99.5 percent of the developing country’s 1.2 billion people.

The report was optimistic in observing that most of the challenges facing India’s aviation industry were man-made problems relating to policies, regulations and taxes, and could be tackled by appropriate reforms. With these concerns in mind, several states have already begun cutting or eliminating sales taxes on aviation turbine fuel.

Further tax reductions were suggested by the report, along with other measures, including relaxing regulations, revising security requirements, allowing domestic code sharing, providing free or discounted utilities and connecting infrastructure.

“Indian Government and industry are already working together closely. I am confident this partnership will be further strengthened and play a critical role in improving regional connectivity and promoting sustainable development of the civil aviation sector in the country,” said Sidharth Birla, President of FICCI.

Much of the growth in the aviation sector will be driven by enhancing regional connectivity. There are around 450 airports and airstrips scattered over the country, though many of these are abandoned and a number of second or third tier cities are still unconnected or underserved by airlines.

In 2012-2013, almost 70 percent of domestic air travel in India was served by low cost carriers (LCCs), which have been the primary drivers of growth in the industry.

Cutting the Cost of Travel

As LCCs expand, competition grows, and no-frills airports increase in number, the costs of air travel will continue to fall. What is currently but a dream for the vast majority of the population will become increasingly accessible to India’s emerging middle class, which is expected to increase to 41 percent of the total population by 2025, according to McKinsey projections.

LCCs SpiceJet and IndiGO were the first to engage in price wars, aggressively slashing advance booking prices by up to 75 percent in February. A few days ago, they launched another sale, which airline officials said caused bookings to double. This prompted full service carriers Air India and Jet Airways to join in, offering up to 30 percent discounts on fares.

With prices as low as Rs 1,999 (around US$33) all inclusive on some routes, the aim of the airlines is to widen their flyer base. Dubey predicted that after a person flies for the first time and observes the huge time savings compared to train travel, it would become harder for him or her to go back to train travel.

As a result, this market segment is projected to see huge growth in coming years and the airlines are moving to capitalize on this. Budget airline SpiceJet just finalized a major US$4.4 billion deal at the aviation expo to purchase 42 Boeing 737 MAX jets, greatly expanding its existing fleet of 57 planes. Meanwhile, the FICCI-KPMG report stated that full service carriers also have plans to adjust their strategies and shift more seats into their low-cost offerings in line with market trends.

India’s Visa-on-Arrival Scheme

International flights will also make a significant contribution to the growth of India’s aviation industry, as the country becomes an increasingly attractive destination for tourists.

During the January and February period this year, India recorded a 6.8 percent growth in the number of tourists using its visa-on-arrival (VOA) scheme, compared to the same period in 2013.

Inbound tourist numbers will certainly increase further as India announced last month that it would extend its VOA scheme to nationals of 180 countries in total, hopefully by October. At present, India only offers VOAs to eleven countries, including Japan, New Zealand, Finland, Luxembourg and seven ASEAN member countries (nationals from Brunei, Malaysia and Thailand cannot get VOAs).

Nationals of countries that are not eligible for the VOA scheme (including the US, UK, Canada and Australia) need to obtain visas in a process that can take several weeks.

Once the infrastructure is in place for the expanded VOA scheme, inbound tourist numbers are likely to surge, providing yet another boost for India’s aviation sector.

You can stay up to date with the latest business and investment trends across India by subscribing to Asia Briefing’s complimentary update service featuring news, commentary, guides, and multimedia resources.

Related Reading

Taking Advantage of India’s FDI Reforms
In this edition of India Briefing Magazine, we explore important amendments to India’s foreign investment policy and outline various options for business establishment, including the creation of wholly owned subsidiaries in sectors that permit 100 percent foreign direct investment. We additionally explore several taxes that apply to wholly owned subsidiary companies, and provide an outlook for what investors can expect to see in India this year.