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Good News, Finally

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There’s some good news for airlines in India. As per the latest industry forecast by IATA (International Airport Transport Association), many more Indians will fly domestically as we approach 2016. India is expected to have the second-highest growth — a compound annual growth rate of 13 per cent — adding a total of 49.3 million new passengers. This is substantial as globally, the number of domestic fliers is expected to increase by 494 million by 2016. 
 
Kazakhstan is expected to experience the fastest growth rate at 22 per cent but it will add only 3.9 million passengers to its existing 2.2 million (2011) — so it remains a fraction of the size of the giant Indian market.
 
India’s growth rate is expected to beat China’s as far as adding domestic passengers goes — although in terms of numbers India’s growth is almost a third of China. In fact, China will account for 32 per cent of the growth in total domestic traffic by 2016.
 
As a result of this rapid growth, India is expected to be the fourth-largest market for domestic passengers by 2016. As per IATA estimates, the US will lead with 710.2 million followed by China (415 million), Brazil (118.9 million), India (107.2 million), and Japan (93.2 million).
 
For India, adding 49.3 million new passengers will be like doubling the current market size. As per numbers published by the Directorate General of Civil Aviation (DGCA), the total number of domestic passengers in January-September 2012 were 43.8 million. This year has been a bad one in terms of traffic, reflecting the drop in the economy’s growth rate and lower cargo volumes. By the yearend, domestic traffic is expected to be around 57-58 million, according to the Centre for Asia Pacific Aviation (CAPA). Recent CAPA research shows that “India has the sixth-largest number of domestic airline seats but by far the lowest per capita ratio among major markets so the market is far from saturated”.
 
But by all indications, this dip in growth is likely to be more of a blip and India’s aviation growth — which has hardly seen a fall (traffic is just 0.9 per cent lower than January-September last year) should continue to rise at a reasonable clip. For domestic carriers that have got their business model and costs right, this should definitely be a cause to celebrate the New Year with a renewed gusto. The growth expected by 2016 is likely to benefit the more organised and systematically-run domestic carriers especially since some of the players may well bow out of the market as the case may be with Kingfisher. Indigo, SpiceJet and GoAir seem to have gained as a result of Kingfisher’s travails.
 
However, as far as international traffic goes, India remains a relatively insignificant player. As a low-income country, India is nowhere near the largest markets for international traffic. By 2016, the number of global international passengers are expected to increase by 331 million but not many will be from India. India, in fact, does not figure even in the top ten fastest-growing markets for international travel although Kazakhstan remains number one even in this category.
 
While the Indian aviation sector has been through various ups and downs since the introduction of major reforms in 2003-04, international traffic has been the steady performer, growing at a compound annual rate of 11.8 per cent over the last eight years. Even during the economic downturn in 2008-09, when domestic traffic registered a double-digit decline, international traffic grew at 6 per cent. According to CAPA estimates, international traffic this year will grow albeit at a lower rate. According to CAPA research, India is ranked only 16th in terms of international airline seats — far behind much smaller nations — so again the upside is huge.
 
But what perhaps is more worrying for Indian carriers flying abroad and for national carrier Air India is the fact that most of the gains from growth of international traffic are being cornered by foreign airlines. The share of domestic (Indian) carriers including Air India remains very small or almost negligible even though the domestic carriers have expanded international capacity. 
 
If the Indian government and policy makers could concentrate on how to ensure that a larger proportion of the gains from growth of India’s aviation market accrues to our own carriers, aviation in India could end up contributing quite substantially to the economy’s growth through the services sector. But for that they must first stop viewing aviation as a luxury only to be enjoyed by a few privileged and look at ways to commoditise it.
 
anjulibhargava(at)gmail(dot)com

(This story was published in Businessworld Issue Dated 24-12-2012)