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Historical background of the Indian aviation industry
India is a vast country with a variety of flora and fauna and various different kinds of
terrains spreading across the length and breadth of the country. In this respect, to enhance
connectivity throughout the country, the importance of the Indian air infrastructure was realized.
The nodal industry responsible for the formulation of civil aviation related policies and its
development is the Ministry of Civil Aviation. It also plays the important role of planning and
implementation of various schemes for the growth and expansion of civil aviation transport,
airport facilities, air traffic services, and carriage of passengers and goods via air. The
responsibility of air safety lies with CCRS in provisions of the Railways Act. The Ministry has
administrative control on various such affiliated autonomous organizations.
The history of Indian commercial aviation dates back to the 1900s, when in 1911, a
French pilot, Henri Pequet, set a world record by flying the world’s first official air mail from
Allahabad’s agricultural and industrial exhibition ground to a distance of eight miles carrying
letters and postcards. Subsequently, airmail services began. In 1915, the Central Flying School
was set up in Sitapur, by the Government of India. To encourage civil aviation, an Air Board was
formed. In 1920, rules of registration of aircraft, licensing of personnel, and the like were
formulated. The construction of civil aerodromes began in 1924 at places like Calcutta,
Allahabad and Bombay. The department of civil aviation was formed in 1927 with Director
General of Civil Aviation being Lt. Col. Shelmerdine. In 1929, Tata airlines submitted plans to
operate air services between Karachi and Bombay. And in 1933-34, several airlines came up
including Indian National Airways; Indian Trans Continental Airways etc. at the same time, the
expansion of the air activities took place. In 1946, Tata Airlines was transformed into Air India.
At the dawn of independence, India had nine air transport companies providing both cargo and
passenger services. Various new routes were opened up. The exigencies of war led to exploration
of aircraft manufacturing. Various airports were also constructed at this time in preparation of the
war. In 1947, the civil aviation was operating 44 airports.
In 1953, the Air Corporation Act nationalized all existing airline assets and established
the Indian Airline Corporation and Air India International for domestic and
international air services respectively. Until, 1991, these two companies played monopoly in
India. It was only in this year that private airlines were allotted the 'air taxi scheme', under
which they could operate chartered and non-scheduled services for uplift of Indian tourism. As a
result, a number of private players including Jet Airways, Air Sahara, Damania
Airways etc. commenced domestic operations In 1994, as a result of a repeal of the air
corporation act, private airline companies obtained permission to operate scheduled air services.
Ultimately the carriers with more efficient operations and strategies survived and by 1997,
only Jet Airways and Air Sahara made the cut from the original group.
The next big change in the industry came in late 2003 with the emergence of India’s first
no-frill Airlines introduced budget flying by lowering down the fares to mere 17% of what the
other airlines were charging. Now the list includes Spice Jet, Go Airways and Kingfisher Air.
These budget airlines have taken up the major Indian Aviation Industry market share. They have
established newer trends in the aviation industry. In fact, now m an y ai rl in e t ic ke ts c an
b e b o u g h t fo r a p ri ce co mp ar ab l e t o an upper class railway ticket for the same route. In
December 2004, Indian scheduled carriers with a minimum of 5 years of continuous
operations and a minimum fleet size of 20 aircraft were permitted to operate
scheduled services to internationals destinations. On January 11, 2005 the
government designated four scheduled Indian carriers (Air India, Indian Airlines, Jet
Airways and Air Sahara) to operate international services to and from Singapore,
Malaysia, Thailand, Hong Kong, UK and USA. Aviation Industry in India is one of the fastest
growing aviation industries in the world.
With the liberalization of the Indian aviation sector, aviation industry in India has
undergone a rapid transformation. From b ei n g primarily a government-owned industry,
the Indian aviation industry is now dominated by privately owned full service airlines
and low cost carriers. Private airlines account for around 75% share of the domestic
aviation market. Earlier air travel was a privilege only a few could afford, but today air travel has
become much cheaper and can be afforded by a large number of people. The sector contributes
0.2% to the country’s GDP. Domestic air cargo traffic has been growing at CAGR of 11.23%
from 2003 to 2008 whereas international air cargo traffic has been moving at CAGR of 6%
during the same period.

Major Players in India

• Air Deccan
• Air India Express
• Air India
• Air Sahara
• Go Air
• Indian Airlines
• IndiGo
• Jet Airways
• Jet Lite
• Spice Jet
• Paramount Airways
• Kingfisher
 Porter’s Five Forces Model application to Indian Aviation Industry
RIVALRY FROM COMPETITORS
1. No of Competitors

Attractiveness 1
Since the number of players in aviation industry in India is large it will be difficult for
another player to enter in this industry. At the same time since the competition is from both
national and international it becomes further difficult to enter in aviation industry
2. Industry Growth

Attractiveness 3
Since the per capita income of Indians is rising the industry is somewhat favorable for
entry but at the same time the pressure of rising fuel prices is transferred to customers in the form
of increased prices so both pros and cons are acting simultaneously.
3. Fixed Cost

Attractiveness 1
The fixed cost for the players is high. It includes the purchase costs of planes and the
amount given to the government as license fee. So this industry is unattractive when fixed costs
are taken into consideration.
4. Differentiation

Attractiveness 4
This could include unique technical expertise, talented personnel or innovative processes.
Successful brand management also results in perceived uniqueness even when the product is the
same as that of competitors. So with respect to aviation industry differentiation is high and hence
the player can carve out a niche for itself in this area by rigorously following a particular
differentiation strategy and hence attractiveness with respect to this area will be somewhat high.
5. Switching Cost

Attractiveness 1
It very costly to enter in this industry and once a player has entered in this industry it
would be very expensive to switch to another industry or business so switching costs are high
and hence the industry is unattractive when we take switching costs into account.
6. Openness of terms of sales

Attractiveness 4
 All the terms of sale are specified to the customers when aviation companies sell the air
tickets to the customers but at the same time we have also seen in some cases that customers face
difficulties when they are adjusted in another flight of different company (without prior
information) due to overbooking by the original company. So a rating of 4 is appropriate.
7. Excess capacity

Attractiveness 2
Most of the time there are some vacant seats in the flight that could not be sold and hence
excess capacity is large and attractiveness is low.
8. Strategic stakes

Attractiveness 1
The strategic stakes for an aviation company are very high as any mishappening affects
the airline’s brand image and can shift the loyalty of customers to another airline causing a huge
loss to the company. So attractiveness is low.

BARRIERS TO EXIT
1. Asset Specialization

Attractiveness 1
Aviation industry requires high asset specialization by an airline company in order to
distinguish itself from other competitors. So industry becomes unattractive in this aspect.
2. Cost of Exit

Attractiveness 1
After investing a huge amount of capital and resources into the industry it is very costly
affair to exit from the industry and hence unattractive to exit from this industry.
3. Government Restriction

Attractiveness 1
Since there are many government restrictions on airline industry in India so it is highly
unattractive to enter in this industry.
 BARRIERS TO ENTRY
1. Economies of scale

Attractiveness 3
The aviation requires large number of customers to operate as the fixed costs is too high.
But there are also few examples of the airlines providing customized services. So, the level of
attractiveness is moderate.
2. Product differentiation

Attractiveness 2
More or less same types of services are provided by airline companies to its customers
except a few so we can say product differentiation is somewhat low and hence it is attractive to
enter into aviation industry.
3. Brand Identity

Attractiveness 3
No much emphasis on brand is given by travellers so we cannot conclude anything about
attractiveness of aviation industry on the basis of brand identity.
4. Access to channel of Distributions

Attractiveness 2
Most of the airline companies have more or less similar access to distribution channels
and hence it is unattractive for the new player to enter in the aviation industry when taking
distribution channels into account due to high competition on this front.
5. Capital Requirement

Attractiveness 5
Since the capital requirement is very large to enter into aviation industry, not many
players can enter the industry so it becomes attractive for a new player with big pockets to enter
into the aviation industry.
6. Access to technology

Attractiveness 4
Most of the airline companies have more or less similar access to technology and hence it
is unattractive for the new player to enter in the aviation industry when taking technology into
account due to high competition on this front.
7. Access to raw material

Attractiveness 2
Access to raw material (Equipment) is easy to the players but since it is very costly we
have given a rating of 2 out of 5 when considering the attractiveness of entry into the aviation
industry.
8. Government Protection

Attractiveness 1
In India there is negligible government protection provided to airline companies barring a
few like Indian airlines and Air India. This makes the industry highly unattractive to enter.

THREAT FROM SUBSTITUTES

1. Availability of close substitutes

Attractiveness 4
The only close substitute to air travel are train and bus but for long distances or abroad
destination air planes is most widely and suitable means of transport. So there is low availability
of substitutes; so it is attractive to enter into this industry.
2. Switching Cost

Attractiveness 5
In case of switching to a substitute one needs to consider time cost and financial cost
both. In this case time cost is very high when compared to financial costs so it is attractive to
enter into this industry.
3. Substitute's price value

Attractiveness 1
Since train and bus are the only substitute to air travel and have very low price when
compared to air travel, we can conclude that it is unattractive to enter into aviation industry.
4. Profitability of producer of substitutes

Attractiveness 4
Profitability of railways and road transport is low but it does have a large capacity. So
taking an overall picture into account aviation industry remains an attractive industry to enter as
far as profitability of substitutes is considered.
 Bargaining power of Buyers
1. Number of Buyer

Attractiveness  5
Total no of buyers for scheduled airlines are 1.5 billion in 2009.1 Numbers of
buyers in the case of aviation industry are the long distance travellers in case of
international sector. And in the case of domestic buyers, people are mainly time savvy.
Also business class is the main customer for aviation industry.
2. Availability of substitutes

Attractiveness  4
The substitutes for aviation industry are mainly other means of transport like
trains, buses, shipping etc. But these all are time taking and few in numbers, so giving
less threat to aviation. Also they have their own geographical limitations so less
threatening. Only in terms of cost, these substitutes are beneficial, but no threatening to
the aviation industry because of benefits from these.
3. Switching cost

Attractiveness  4
The switching cost for buyers from this industry to its substitutes is very high
because of time and facilities (service).
4. Buyer's threat of backward integration

Attractiveness  5
Buyer’s threat of backward integration is very low because of the factors like high
capital investment, govt. regulations etc. making this industry very attractiveness.
5. Industry's threat of forward integration

Attractiveness  5
Industry’s threat (from buyers) is low in aviation industry as the buyers are the
final users of the services provided by the aviation industry. So, the attractiveness of this
industry is high.
6. Contribution to quality

Attractiveness  4
 Aviation industry is a service industry where the buyer is also a main contributor
to quality for the services provided. Also the services can be customized in terms of
different classes travel, making this industry attractive.

7. Contribution to cost

Attractiveness  2
The buyer’s contribution to cost in aviation industry is high because of the service
cost depends upon the buyer’s specifications. This makes this industry less attractive.
8. Buyer's profitability

Attractiveness  4
Buyer’s profitability from the aviation industry is high because of the time saved,
the services provided, comfort etc. This makes this industry attractive.

Bargaining power of suppliers

1. Number of supplier

Attractiveness  1
There are only two suppliers of airplanes to this industry, Airbus & Boeing which is
the key asset of this industry. Other suppliers are fuel providers, education industry (for
technicians, pilots and others). Spare parts for maintenance are also provided only by
these two manufacturers. So, this makes the industry less attractive.
2. Availability of substitutes

Attractiveness  1
The availability of substitutes is low, so this again makes this industry less attractive.
3. Switching cost

Attractiveness  1
The switching costs from one supplier to another supplier are very high because of
limited number of suppliers and different models and technology. So, the attractiveness of
this industry is again low.
4. Supplier's threat of forward integration

Attractiveness  3
 Supplier’s threat of forward integration is moderate as per our group. This is because
the airplane manufacturers can easily enter into this industry because of their resources.
But it is a fact that these two are in manufacturing from more than 50 years but they
haven’t entered in this industry so there may be less chances of them entering in this
industry.

5. Contribution to quality

Attractiveness  2
Supplier’s contribution to quality is very important because of the types of the
services of the aviation industry. The suppliers contribute too much in terms of the
specifications of the supply, so they cannot be ignored. This makes this industry less
attractive. Not rated 1 as the quality also depends on the service providers how they
utilize these functions.
6. Contribution to cost

Attractiveness  4
The fixed costs for aviation industry are majorly from their supplies, means they a
major chunk of costs for this industry. As the contribution of suppliers is high in cost, it
makes this industry attractive.
7. Industry's importance to supplier

Attractiveness  5
Industry’s importance to supplier is high as they are one of the important buyers of
their supplies. This ensures the quality and the timely service of the suppliers. The
attractiveness of this industry is very high on this parameter.

Government Actions
1. Industry protection

Attractiveness  1
Industry protection from government is very low in terms of subsidies and tax
relaxations as can be seen in India. Majority of the aviation firms are on loss in India
because of this. So the attractiveness of industry is low.
2. Industry regulation

Attractiveness  1
 Government regulations are high for this industry as the policies like Aircraft Act,
1934, Airport Authority of India (Manner of investment of funds) Rules, 2007 etc. [2] are
there in India. This makes this industry less attractive.
3. Customs and tariff restriction abroad

Attractiveness  1
[3]
There are customs and tariff restrictions abroad like there are duties in India.
So, the attractiveness is also less from this point.

Overall assessment
1. Barriers to entry

Attractiveness  5
As per our evaluation, barriers to entry are too high making this industry difficult
to enter. So, it is attractive for the current players and the players who have the
potential to enter in this industry.
2. Rivalry among competitors

Attractiveness  2
Good number of players in industry, low switching costs with excess capacity makes
this industry less attractive.
3. Barriers to exit

Attractiveness  1
Barriers to exit are too high because of asset specialization and restrictions. This
makes this industry less attractive.
4. Power of buyers

Attractiveness  4
Power of buyers is high because of the economies of scale, low switching costs, less
product differentiation etc. so, this industry becomes attractive because of low threat of
forward integration.
5. Power of suppliers

Attractiveness  1
Power of suppliers is high because of limited number of suppliers, no availability of
substitutes, high switching costs etc. So, this industry is less attractive on this parameter.
 6. Threat of substitutes

Attractiveness  4
Threat from substitutes is very low because of less number of substitutes and their
disadvantages making aviation industry attractive in terms.

7. Government action

Attractiveness  1
Government actions are too high for the players in this industry because of which this
industry is less attractive.
8. Overall Attractiveness

Attractiveness  2
The overall attractiveness of this industry is low. This is so because of the evaluation
done by us from the above parameters.

Life- cycle Stage of the Industry

The Aviation Industry in India is amongst the fastest growing industry, growing at a rate
of 18% per annum. Due to the open policies of government, many foreign players take interest in
this sector. About 75% of the sector is the private participation. Hence, India is becoming a
major player in the global aviation market [4].

As per the research, the global aviation industry is poised to grow at a healthy 5.6%
CAGR over the next 15 years. It is expected that the major conventional mature markets such as
the US and Europe will witness a significant fall in market share from 61% to 52%, emerging
markets such as India, China and the Middle East, offer a great growth potential [4].

The Indian Aviation Industry is in growth stage of product life cycle. The factors that
have propelled the growth of this sector are: the increase in the purchasing power, low airfares
due to the rise of low-cost carriers, emergence of India as a tourist country and the economic
progress [5].

Growth Potential
 In India, the aviation industry seems to look promising. The liberalization of the Indian
aviation sector in the mid-nineties resulted in significant growth due to the entry of private
service airlines. There has been a strong surge in demand by domestic passengers, due to the
increasing middle class with its massive purchasing power, attractive low fares offered by the
low cost airlines, growth of domestic tourism in India and increasing outbound travel from India.
Government has also focused on modernizing non-metro airports, opening up new international
routes, establishing new airports and renovating existing ones [7].

The entry of low-cost carriers pioneered by Air Deccan helped in reducing the costs
involved in flying. This attracted consumers for whom air travel was a dream. The low-cost
airlines operating in India like Go Airways, Spice Jet and Kingfisher Air have a major share in
the Indian aviation industry [4].

In the Indian Aviation industry, the domestic participation is projected to grow by 25-
30% and internationally by 15%. It is expected that by 2020 the cargo section will rise to
approximately three million tonne.

According to data released by the Directorate General of Civil Aviation (DGCA), for the
first half of 2010, passengers carried by domestic airlines stood at 25.71 million as against 21.1
million in the corresponding period of 2009, which was a growth of 22% y-o-y. In terms of
market share, private carrier Jet Airways was the market leader with 26%, followed by
Kingfisher Airlines (21%), Air India (16.9%), Indigo (16.4%), SpiceJet (13.3%) and GoAir
(5.8%) during the month of June 2010 [6].

Market share of airlines in Indian [3]

According to latest report released by Aviation ministry, there has been a sustained
growth in both the capacity and demand which continued even in the month of January, 2011.
 Majority of major airline operators in India such as Air India, Indian Airlines, Jet
Airways and Kingfisher Airlines have reported large losses since 2006, due to high aviation
turbine fuel (ATF) prices, rising labor costs, shortage of skilled labor, rapid fleet expansion and
intense price competition. The problem was also intensified by entry of new players. In spite of
the already weak domestic scenario, the airlines suffered further during the recession.

India's civil aviation passenger growth is expected to be 400 million by 2020. To keep
pace with this accelerated demand, existing players have been trying to increase fleets and widen
their footprint to regional destinations. There has also been increasing attention from
international low cost airlines such as Air Asia (Malaysian) and Jet Star Asia (Australian) to
capture part of this lucrative opportunity.

The government plans to modernize the infrastructure and develop more international
airstrips. New airports are to be built to handle more traffic and ease the pressure on the existing
airfields. Modernization of airstrips in metropolises is also being planned. All these initiatives are
through public-private partnerships.

Rising disposable income

Rising disposable incomes, especially among India’s middle class, together with the
introduction of low-cost carriers, has stimulated the country’s aviation industry and necessitated
further development of airport infrastructure. Personal disposable income in India had risen by
18% in 2008-2009 against INR 37.26 trillion in the previous year while personal disposable
income at factor cost per capita had grown by 16.4% in 2008-2009 from INR 38.097 in 2007-
2008 [6].
 India’s Personal Disposable Income [3]

Growing tourism industry

A growing tourism industry encourages the development of airport infrastructure in the
country. The Government of India has been actively promoting the country’s tourism industry,
which grew at a CAGR of 11.2% for the period spanning 2004-2008.
In 2008, domestic tourist traffic grew at a CAGR of 11.4% to 562.92 million tourists
against 366 million tourists in 2004.The share of foreign tourist arrivals by air transport increased
from 85.6% in 2004 to about 89.1% in 2008. Delhi and Mumbai airports both had accounted for
more than 50% of these arrivals [6].
Aviation Policy in India

The government is focusing on developing airport infrastructure in the country by

encouraging private participation and foreign direct investment (FDI). In the Eleventh Five Year
Plan (2007–2012), government has set aside a budget of USD 1.9 billion for the development of
airport infrastructure.

Government allows 100% FDI via the automatic route for the green field airports.
Foreign investment up to 74% is permissible through direct approvals whereas special
permissions are required for 100% investment.

Private investors are allowed to establish general airports and captive airstrips while
keeping a distance of 150 km from the existing ones. Complete tax exemption is also granted for
10 years. About 49% FDI is allowed for investment in domestic airlines via the automatic route.
This option is not available for foreign airline corporations. Complete equity ownership is
granted to NRIs. Foreign direct investment up to 74% is allowed for non-scheduled and cargo
airlines [5].

Thus, all these policies promote foreign investment in this industry.

Future Scope

The Indian aviation industry is forecasted to grow phenomenally in the coming years. The
Vision 2020 announced by the Civil Aviation Ministry conceives of building infrastructure to
support 280 million customers.

Investments to the extent of US$ 110 billion are expected by 2020. About US$ 30 billion
for development and sprucing up of existing airports and US$ 80 billion for building new fleets
is being estimated. The aerospace giant Boeing projects that the Indian aviation industry will
require about 1,000 commercial jets in the coming 20 years.

Related areas like repairs, maintenance, and training also provide good investment
potential. There is likely to be a massive need for skilled personnel to helm this growth. India is
already experiencing a shortage of pilots and is likely to face similar shortages across the wide
direct and indirect employment pool [7].

Thus, overall Indian Aviation industry is a very promising sector.

REFERENCES:

1. http://adg.stanford.edu/aa241/intro/airlineindustry.html, accessed on March 13, 2011.

2. http://civilaviation.nic.in/aai.html, accessed on March 13, 2011.

3. http://www.taxindiaonline.com/RC2/inside2.php3?
filename=bnews_detail.php3&newsid=2152
4. Article on Aviation Industry in India by Kamal Poria accessed on 25th Feb, 2011 at
http://ezinearticles.com/?Aviation-Industry-of-India&id=4585121
5. Article on Aviation Industry retrieved from
http://www.investinindia.com/industry/aviation/aviation-industry
6. Report on Aviation Industry Issue 2H2010 By Emerging Market Direct – the business
research arm of ISI Emerging Markets
7. Overview of Aviation Industry from http://www.info.shine.com/