Explore the World of Aviation: Understanding Key Growth Drivers & Key Terminology Aviation Market

India Aviation Market

India has become the third-largest domestic aviation market in the world and is expected to become the third-largest air passenger market by 2024, overtaking the UK. The aviation industry contributes 5% to India's GDP and creates a total of four million jobs. Moreover, the industry has a gross value-added contribution of USD 72 billion to the GDP. By 2030, India is predicted to become the world's third-largest air passenger market, surpassing the United States and China, as per the International Air Transport Association (IATA). Due to the increased demand in the sector, the number of?airplanes?operating within the sector is expected to reach 1,100 planes by 2027.

Air traffic has been growing rapidly in the country, with the number of aircraft expected to increase from 600 to 1,200 by 2024. In 2024, the Indian Aviation Market size is estimated to be USD 13.89 billion, and it is expected to grow at a CAGR of 11.08% during the forecast period (2024-2030), reaching USD 26.08 billion by 2030.

The industry can be divided into scheduled air transport services, non-scheduled air transport services, and air cargo services. Domestic travel makes up about 69% of the total airline traffic in South Asia, and India's airport capacity is expected to handle one billion trips per year by 2023.

Despite the impact of the COVID-19 pandemic, the Indian aviation industry has fully recovered. The air traffic movement in FY23 was 327.28 million, compared to 188.89 million in FY22.

From April to January 2024, the number of domestic passengers increased by 15.3% to reach 254.44 million, while international passengers increased by 23.5% to reach 57.57 million, compared to the same period in the previous year.?

In FY23, the airports in India?are expected?to have 270.34 million domestic passengers, representing a 62.1% YoY increase, and 56.9 million international passengers, a 157% YoY increase from FY22.?

Freight traffic in airports in India has the potential to reach 17 million metric tonnes by FY40, as it has increased at a CAGR of 2.20% from 2.70 MMT to 3.15 MMT between FY16 and FY23. In FY23, freight traffic stood at 3.15 million metric tonnes. The number of aircraft movements reached 2.5 million in FY23, up from 1,757,112 in FY22.

source:Indian Aviation Industry, Aviation Companies in India - IBEF

Key Growth Drivers

• Robust demand: India is expected to see an increase in demand for commercial airplanes due to a growing working group and expanding middle-class demographic. In response, India has plans to increase its number of operational airports to 220 by 2025. It has been estimated that by 2038, India will require approximately 2,500 new commercial airplanes to meet the anticipated demand.

• Growing Middle-Class Households: The Indian middle class is the fastest-rising segment of India's population, growing at 6% per year. In contrast, the middle class in Europe and the US has already matured and is growing at less than 1%. Given the large mass of households with incomes just below the global middle-class threshold, India's middle class will continue to grow rapidly. The lower end of this class, defined as households earning under 71 lakh per year, will grow faster than its upper end. Currently, the middle class represents 31% of India's population and is expected to reach 40% by 2031. The growth potential is significant, considering the large income gap between India and developed countries and India's large youth population in a rapidly ageing world.

• Opportunities in MRO: According to industry experts, the Maintenance, Repair, and Overhaul (MRO) market is expected to grow to over US$ 2.4 billion by 2028, up from US$ 800 million in 2018. In September 2021, the Indian government revised the land allotment period for entities establishing MRO facilities in the country from 3-5 years to 30 years. This move is part of the government's efforts to transform India into a "Global MRO Hub."

• Policy support: Under the current FDI Policy, foreign investors are allowed to own up to 100% of scheduled Air Transport and Domestic Scheduled Passenger Airline services. For up to 49%, the process is automatic, while the government route is required for ownership beyond that. NRIs, however, are permitted to own up to 100% of these services under the automatic route.

• Increase in Per Capita income: India is a developing economy with a significant number of people between the ages of 20 and 33, according to BMI. This young and skilled demographic represents a considerable workforce that is driving economic growth. As a result, India's per capita income is growing at a Compound Annual Growth Rate (CAGR) of 6.14%. In the calendar year 2023, India's per capita income stood at US$ 2,610.?

• Increasing Investments: Investments worth US$25 billion are expected to be made in the aviation sector by 2027. Private sector participation in the sector is growing through the Public-Private Partnership (PPP), with the number of PPP airports increasing from five in 2014 to 24 in 2024. Six international airports have been completed under PPP so far. In May 2023, Union Civil Aviation Minister Mr. Jyotiraditya Scindia mentioned a plan to invest Rs. 1 lakh crore (US$12 billion) in airports in the near future.

Key Terminology Aviation Market?

Low-cost carrier (LCC)

Low-cost carriers (LCCs) are airlines that focus on keeping costs low by offering passengers reduced fares. These airlines often fly directly from one point to another, avoiding the more complex hub-and-spoke systems. LCCs may also use secondary airports to reduce expenses. They typically provide a basic service without any additional luxuries such as meals and baggage. These services are often available for an extra fee. LCCs rely on high aircraft utilization rates, simplified fare structures, and online booking to keep their fares competitive. By using these strategies, LCCs cater to budget-conscious travelers who want affordable air travel without sacrificing safety or reliability.

Full-service carrier (FSC)

A full-service carrier is an airline that provides a wide range of services and amenities to passengers as part of the base fare. These airlines prioritize comfort, convenience, and a higher level of service compared to low-cost carriers. Full-service carriers typically fly through major airports and offer more flight options. Amenities that are commonly included in the base fare of full-service carriers may include free meals and drinks, checked baggage allowances, in-flight entertainment systems, and more spacious seating arrangements. Additionally, full-service carriers often provide premium services such as airport lounges, priority check-in, and dedicated customer service support. Although full-service carriers generally charge higher fares compared to low-cost carriers, passengers benefit from a more comprehensive and luxurious travel experience tailored to their needs and preferences.

Hub-and-spoke

A hub-and-spoke system is a way that airlines operate where they use major airports (hubs) as central points for connecting flights to various destinations (spokes). This system allows airlines to serve more destinations with fewer planes, which reduces costs. By consolidating passenger traffic through hubs, airlines can optimize flight routes and frequency, and improve efficiency by filling planes more effectively. Hubs also enable airlines to offer more convenient schedules and increased connectivity, enhancing their competitive advantage in attracting passengers. However, there can be potential issues such as flight delays or missed connections, especially if disruptions occur at hub airports. Despite these challenges, the hub-and-spoke model remains a fundamental strategy for many airlines worldwide.

Point-to-point model

In the point-to-point model, flights go directly from one airport to another without stopping at a central hub. This model is used for shorter routes or when there is enough demand to sustain direct flights between cities. Point-to-point airlines use aircraft that are suitable for short distances and can fly to different destinations without needing a central connecting hub. This makes scheduling and route planning more flexible, and allows airlines to meet the specific needs of different markets. The point-to-point model has several advantages, such as shorter travel times, less congestion at hub airports, and potentially lower operating costs compared to hub-and-spoke systems. Passengers can benefit from more direct route options and greater convenience without needing to change planes or have layovers. However, this model has its limitations, particularly in markets with lower demand or where connecting traffic is important for profitability. Airlines using this model may struggle to compete with larger carriers that have extensive hub networks. But despite these challenges, point-to-point airlines have found success in niche markets and have added diversity to the airline industry's business models.

Leaseback model

Airlines like IndiGo often use a financial strategy known as the leaseback model to manage their fleet and capital. This approach involves selling owned aircraft to a leasing company and immediately leasing them back for use. This way, the airline receives cash from the sale, while still being able to operate the same planes through leasing agreements.?

The leaseback model provides several benefits to IndiGo. Firstly, it frees up capital that would otherwise be tied up in aircraft ownership. This capital can then be used to expand the business, renew the fleet, or invest in other strategic initiatives. Secondly, leasing aircraft instead of owning them helps IndiGo mitigate the risks associated with fluctuations in plane values, maintenance expenses, and technological obsolescence. Additionally, leasing provides flexibility, allowing the airline to adjust its fleet size and composition more easily in response to changing market conditions or operational requirements.

Furthermore, the leaseback model often comes with favourable terms compared to traditional financing or aircraft purchases. Leasing companies may offer competitive lease rates, maintenance packages, and financing options, which can help IndiGo reduce its overall operating costs and improve profitability. Lastly, leasing allows the airline to access newer and more fuel-efficient aircraft without committing to the long-term ownership costs associated with purchasing new planes outright.

Cost of available seat kilometer (CASK)

Airlines use a metric called "cost of available seat kilometer" (CASK) to measure the cost of flying one seat for one kilometer, regardless of whether or not the seat is occupied. This metric is calculated by dividing the airline's total operating costs by its available seat kilometers (ASK). Operating costs include expenses like fuel, labour, maintenance, aircraft leasing, airport fees, and other overhead costs associated with airline operations. ASK is the airline's total seating capacity multiplied by the total distance flown.?

CASK is an important metric for airlines to assess their operational efficiency and cost competitiveness. Lower CASK values indicate that an airline is able to operate more efficiently and at a lower cost per seat kilometer, which can give them a competitive advantage in the industry. Airlines aim to reduce their CASK in various ways, including improving aircraft utilization, increasing load factors, optimizing route networks, and controlling operating expenses.

Revenue per available seat kilometer (RASK)

Revenue per available seat kilometer (RASK) is a significant measure used in the airline industry to evaluate the revenue generated by the airline for each seat kilometer it offers for sale. It is calculated by dividing the total passenger revenue of the airline by its available seat kilometres (ASK). Total passenger revenue includes income generated from ticket sales, ancillary services, and other passenger-related fees. Available seat kilometers (ASK) represent the airline's total seating capacity multiplied by the total distance flown. RASK is an important metric for airlines. It helps them assess their revenue performance and yield management strategies. Higher RASK values suggest that an airline is able to generate more revenue for each seat kilometer it offers for sale. This can be a sign of effective pricing strategies, strong demand, and efficient capacity utilization. Airlines often aim to increase their RASK through various means, such as optimizing pricing and revenue management, improving product offerings, and maximizing load factors on flights.

Passenger load factor (PLF)

Passenger load factor (PLF) is a crucial performance metric in the airline industry that measures the utilization of available seating capacity on flights. It is expressed as a percentage and represents the ratio of seats filled with paying passengers to the total number of seats available for sale on a flight. Passenger load factor is a vital indicator for airlines as it directly impacts their revenue and profitability. Higher load factors indicate better capacity utilization and typically translate to increased revenue per flight. Airlines strive to achieve high load factors by implementing effective revenue management strategies, optimizing flight schedules, and adjusting pricing to match demand. Conversely, low load factors can result in revenue loss and inefficiencies in resource utilization. Maintaining consistently high load factors is therefore a key objective for airlines in managing their operations effectively.

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