After flying low for almost a decade, the airline industry in India is finally beginning to pull its nose up. Take a look at the big picture: On the one hand, the government is opening up the skies, allowing private Indian carriers to fly international routes and foreign carriers to increase their services to the country. On the other, there's a boom in capacity and passenger traffic, driven by the emergence of the low-cost airline phenomenon. At present, there's only one such carrier, Air Deccan, but as many as four are waiting in the wings, including one from Vijay Mallya's UB Group and another from Nusli Wadia of Bombay Dyeing. Indian Airlines (IA) and Air-India (A-I), both troubled state-owned carriers, are gearing up for a big fleet expansion, and if rejuvenated, could help make flying cheaper for the consumer. In between all this, the government has kickstarted privatisation of key airports. The winning bids for Delhi and Mumbai airport will be chosen, if all goes to plan, by March-end. Hyderabad is already getting a new private airport, a deal already having been signed, and in Bangalore, after a decade's delay, the Rs 1,300-crore project has been approved.

As a result, the domestic aviation market, which grew at a meagre 5 per cent per annum over the last 10 years, is beginning to soar. Last calendar, some 15 million Indians travelled by air. This year that figure could jump to 17 million. But according to the consultancy Centre for Asia-Pacific Aviation (CAPA), domestic passenger traffic could grow at a much faster rate in the coming years. CAPA puts that at a whopping 27 per cent per annum for the next five years (although the actual growth could be half of that). That means by 2010, there could be 60 million Indians travelling by air, resulting in an industry that's Rs 30,000-crore or $7-billion big. Says Jayesh Desai, a Director at Ernst & Young (E&Y), and an industry consultant: "With key policies in place and Indian carriers also becoming more aggressive, things are looking good in the sector."

"We are trying to do things as fast as we can"

Civil Aviation minister Praful Patel: Putting strategies into place Since taking charge in May last year, Civil Aviation Minister Praful Patel has speeded up aircraft acquisitions for Air-India and Indian Airlines and opened up the Indian skies. Described as the best aviation minister in a decade, Patel spoke to BT's Kushan Mitra on his recent moves. Excerpts. How will the open skies treaty with the US help? The treaty was over half-a-century old and it restricted the operation of Indian carriers to only four cities in the US. There is a large amount of traffic between India and the US that is going to carriers from Europe, South-East Asia and the Middle East. Why should other countries, and not India and the US, benefit? What about Air-India's fleet expansion? Tenders have been issued, but in the interim, aircraft will be leased to operate these sectors. Private carriers will soon get the nod to fly international routes. How will you regulate them? We have asked all eligible carriers to submit concrete proposals before we grant approvals. They can't just wish to fly routes because they sound good. Carriers that default on allocated routes will lose their authority to fly those sectors.

Air Travel Gets Affordable

Globally, aviation is a notoriously unprofitable business. Even in the best of times, airline bottom lines are never too far from the red. Why? Like in India, both fixed costs (in terms of leases and government fees) and variable costs (fuel and landing costs) are high, which means even a slight drop in traffic can bleed an airline. So why are so many entrepreneurs rushing into the business in India? Opportunity. Just like mobile telephony took off in India after prices dropped, air travel could boom with higher incomes and falling fares. Consider Air Deccan: rivals were sceptical when the airline announced plans of flying people cheap. But today, it boasts of a passenger load factor (a measure of seat capacity utilisation) of a stunning 90 per cent. Most airlines consider themselves lucky if they manage 65 per cent. Says G.R. Gopinath, Air Deccan's CEO: "My passengers are nurses, masons, clerks... these are people who have never travelled by air before. The bigger airlines may think that I am stealing their consumers, but I may have actually grown the market."

That point isn't lost on his rivals. Traffic is growing both on the major routes (between metros) and "feeder routes" (between smaller cities) within the country, besides which the opening up of regional international routes like India to Sri Lanka and Thailand has made available an entirely new market to the private carriers. Jet Airways, the #1 airline with a market share of 43 per cent, is in the middle of an initial public offer (IPO) to raise money to expand its fleet of 34 Boeing 737s and eight ATR 72s. According to industry grapevine, Jet is said to have closed a parallel deal for long-haul Boeing 767s, which will allow it to fly international long-distance routes. London and Singapore are two destinations that Jet is expected to start services to initially.

Air Sahara, which has a 14 per cent share of the market with a fleet of 20, also plans to add 12 new aircraft by March next year, but hopes to start flying to Thailand, Malaysia and Singapore latest by May this year. Meanwhile, it is building a brand new hub at Hyderabad, which will serve both its domestic and international flights. Says Rono Dutta, former President of United Airlines and current MD of Air Sahara: "By the end of this year, we expect to have a fully functional international operation."

Vijay Mallya's Kingfisher Airline has announced a launch date of early May 2005, and the first of its eight aircraft-an Airbus A320-will arrive in April. Pervez Damania, who previously worked with Sahara but is now President of Kingfisher Airline, says that theirs won't be a run-of-the-mill carrier. "There are people who would want to travel in class in a carrier you would want to be seen in without getting ripped off, and that's what we plan to be," says Damania. Kingfisher has signed up Alex Wilcox as the CEO. Wilcox played a key role along with David Neeleman in the creation of JetBlue-one of the hottest airlines in American skies and on Wall Street. Next year, Kingfisher plans to add another eight aircraft.

What's good for the private carriers isn't necessarily good for the state-owned giants, IA and A-I. These two have been fighting competition with one hand tied behind their back. IA, which has a fleet of 65, has been flying with an ageing fleet, simply because it needs government approval to buy or lease aircraft, and that has been long in coming. After a delay of 10 years, however, it seems IA may finally get to buy 43 new Airbus (a319, a320 and a321) aircraft in a deal estimated at $2 billion (Rs 8,800 crore). Says Sunil Arora, the airline's Managing Director: "Obviously, we will grow in the domestic sector, but with the government planning to liberalise foreign routes, that is where we see the biggest growth for Indian Airlines."

The Airport Bottleneckn"

Time for an overhaul: Like the one at Delhi (avove), airports all over the country need to be expanded Although the country boasts of more than 400 airports, just 62 of them are in active use, and Mumbai and Delhi airports alone account for over 40 per cent of the passenger traffic. The facilities at the airports are woefully short. There are no parking bays available at Mumbai and Delhi for the newer airlines. Says Jayesh Desai of E&Y: "Two of the principles of low-cost flying-quick turnaround and increased aircraft utilisation-are difficult to implement in India because of the poor airport infrastructure." He estimates that India will need $10 billion (Rs 44,000 crore) in investments to upgrade airports. Bids are underway for privatisation of Delhi and Mumbai airports,and the plans of Bangalore have been finalised but not signed yet. Hyderabad's international airport may be operational by May 2008. Meanwhile, the newer airlines will be flying around on a wing and a prayer.

Which international routes IA gets to fly will depend on the Ministry of Civil Aviation, but the freedom to fly them will put the carrier-besides Jet, Sahara and international carriers-head-on with the nation's flag carrier, A-I. Like its sister company, A-I has been at the receiving end of Indian bureaucracy. But now it has floated global tenders for fleet expansion. Over the next two years, A-I is aiming at a fleet size of 74. At present it has an aged fleet of 35, of which all but six are to be retired. The 68 new aircraft will initially be leased, but there are plans to buy too. "A-I needs to be more flexible and react faster to the needs of the marketplace," says V. Thulasidas, Chairman and Managing Director of the airline.

The fleet expansion is aimed at that. Starting April this year, the airline will launch A-I Express-a value-for-money service that will ply between India and the Middle East. The 18 aircraft on this service will only offer economy seats and there will be "scaled-down frills". Flight turnarounds will be quicker and fares, although not yet finalised, could be 30 to 40 per cent lower than regular fares. "Our basic focus needs to be the core business of flying passengers; other non-essential services can be outsourced," says Thulasidas, referring to union problems at the bloated carrier.

Air Pockets

Despite the rush of airlines, there are several and severe constraints in the industry's expansion. The single-biggest of them is, of course, airport infrastructure. At Delhi and Mumbai, Jet and IA hog the parking bays and check-in counters. A new entrant will be hard-pressed to find space here. How important is that? Here's an answer from Merrill Lynch's research report on the Jet IPO: "The usage of parking slots is a key component in an airline's ability to establish a viable network out of the major hubs. By utilising the parking slots, the airline can originate flights from the major airports at peak times-enhancing aircraft utilisation..."

The newer airlines may still get to fly out of Delhi and Mumbai, but they may have to park overnight at a nearby airport like, say, Lucknow or Pune (respectively). Not only will they incur higher costs in doing so, but more importantly, miss the peak traffic. One alternative would be to allow them to use the international airports, which typically get traffic at night and remain empty during the day time. The other option, of course, is to upgrade the airports (see The Airport Bottleneck). Says Scott Bayman, President and CEO, GE India, which makes aircraft engines, besides leasing aircraft: "Even if the domestic traffic is to grow dramatically, the infrastructure must improve."

What does that mean for the industry in the short run? A big shake-out. Don't forget that when the industry was liberalised back in 1991, a rash of airlines took to the skies, only to come crashing down (East West and Damania Airways were just two). A repeat of that is almost a certainty. Says Damania: "I really don't expect many of these planned carriers to start flying. If they do, best of luck to them."

Without doubt, though, it's a brave new industry that's taking to the skies. A dogfight will lower costs and put air travel within the reach of millions of Indians who travel by train. Only that investors will need to keep an eye out for airlines falling out of the sky.

-additional reporting by Abir Pal