The total freight traffic handled by domestic airports grew close to 10 per cent during April-March 2005-06 compared to the previous year. The major increases were noticed at Tiruchi, which registered a whopping growth of 115% 2005-06. Bangalore recording a growth of 23.6% while Chennai recorded a growth of 10.8%. The other airports that recorded major increase in freight traffic include Patna (37.2 per cent) and Delhi (11.2 per cent).

This increase in passenger as well as cargo traffic has placed a heavy strain on the existing airports and airlines, and has highlighted the need for substantial investment to develop and expand the existing facilities.

According to India’s Civil Aviation Minister, the domestic aviation sector was expected to grow at 25-30% this year and at least 20% per year in each of the subsequent five years, and would attract investments to the tune of $50 billion (about Rs 2288 billion) in the next 10 years, mainly in the form of airport infrastructure upgrade and fleet acquisition by carriers.

Airlines in India are expected to buy at least 280 new planes by 2010, worth an estimated US $15 billion, and another SU $15 billion below worth in the following decade. Market estimates of international aircraft manufacturer Airbus Industries, indicate that demand for planes from India could grow to about 800-1,000 in the next two decades.

This growth potential, coupled with the government's decision to privatize five key airports, makes India a very attractive market for airport and avionics equipment manufacturers and service providers. The liberalization of the Indian civil aviation market is expected to not only bring rapid increases in aviation capacity and improvements in service quality, but it will also present foreign firms with significant export and investment opportunities.

Existing domestic airports also require significant infrastructure improvements, in areas such as runways, air traffic control, communications, navigation, ground handling, air terminals etc.  The AAI has plans to upgrade and modernise its other airports and in particular to upgrade its navigational and communications aids.

France & USA are the main source of aircraft, while USA has been the leading supplier of Aviation Communication equipment to India.  The share of Netherlands has been negligible.

The government is also considering a proposal to raise the foreign investment cap in domestic carriers from 49% to 74%, as it is of the view that a more investment friendly system is required to help carriers raise funds for their expansion plans.

However, foreign airlines looking to invest in India’s aviation sector still have to wait — the ban on their investing in domestic carriers will continue. Even foreign equity funds in which airline companies have a stake are barred.

Civil Aviation
Over the last few years, there have also been significant changes in India’s bilateral air services policy, aimed at enhancing the availability of capacity for international traffic. Accordingly, the government has re-negotiated the existing bilateral agreements or has entered into fresh new bilateral agreements with a number of countries. Consequently, the capacity on international routes has gone up to approximately 3.3 million seats per annum.

In addition, the government has allowed new points of call for foreign airlines and agreed to the utilization of the Indian landing entitlement in other countries by foreign carriers on mutually beneficial terms.  For cargo operations, India has an open-skies policy. All foreign airlines are allowed to operate cargo services without any restrictions. For chartered flights, the government has been gradually liberalizing the conditions for allowing such flights at a larger number of airports. Except for popular destinations like Goa, Jaipur, Agra, etc., charters are now permitted to fly Indian nationals as well.

The Airport Authority of India (Amendment) Bill, 2003 has been passed by Parliament. The Bill provides a legal framework for operational and managerial independence to private operators. It also seeks to ensure a level playing field to private sector greenfield airports by lifting control of AAI except in certain respects.

Privatization
Private sector is allowed to operate scheduled airlines in the domestic sector. Private sector participation is also allowed in airport modernization, ground services, and aircraft manufacture.

The government has decided to hand over the operation and management of the four international airports at Delhi, Mumbai, Chennai and Kolkata to private operators. The total cost of upgrading these four airports is estimated at US$ 2.22 billion. The modernisation of the Mumbai and Delhi airports alone is estimated to cost US$ 666.67 million. Private parties will recover their investment through levying special surcharge for airport facilities.

However, the Government’s mega exercise to privatize and modernize the international airports in Delhi and Mumbai initially ran into trouble, as the major airport developers from across the globe expressed reservations about investing in the project. This was due to the government’s decision to keep ground handling activities at the airport to itself, which is estimated at Rs 5000 million per year.  The promoters short-listed for the privatization projects argued that the Government decision to restrict the ground handling to the PSUs, would affect the revenue generation of the proposed projects.

Interestingly, even the three parties appointed by the government — Indian Airlines, Air-India and Airports Authority of India — do not undertake most ground handling activities themselves. IA has outsourced most of the activities at the ramp and baggage X-Ray for both its domestic and international flights to a host of private firms like Neha Enterprises and Arun International. Even A-I has sub-contracted some of the activities to a third party — Livewell Aviation. As for AAI, it has no prior experience at all in ground handling.

After a long drawn out bidding process, legal hurdles, protests by the employee unions as well as the Left parties, in April 2006 the Government of India signed the agreements with the GMR and GVK consortia for modernisation of Delhi and Mumbai airports respectively.  Delhi airport has been handed over to the GMR led consortium (including Fraport AG and Malaysia Airports Holding Berhad). The work of modernisation has started and is scheduled to be completed before 2010 Commonwealth Games.

Hyderabad Airport: The first phase of this project to build an international airport in Hyderabad, is expected to cost US$ 257.78 million. The Malaysian MAHB consortium will develop this project along with the Government of Andhra Pradesh (GoAP) and the AAI. The Malaysian consortium will have a 74 per cent equity stake in the project and the rest will be shared equally between AAI and GoAP. The advance development fee of US$ 23.78 million, paid by GoAP, will be recouped by levying an additional tax on the existing airport at Hyderabad. The GoAP recently cleared US$ 70 million of interest-free loans and granted US$ 23.78 million as advance development fees for this project.  The state support and shareholders’ agreements are expected to be signed soon. This would be followed by a concession agreement between the developer and the Indian government.

Bangalore Airport: The project cost is estimated at US$ 288.89 million, with a debt-equity ratio of 2:1. About 74 per cent of equity will be held by its developers, Siemens Consortium. The Karnataka Government will invest 13 per cent through Karnataka State Industrial Investment & Development Corporation, and AAI will hold the rest. The project has achieved financial closure, and construction has begun.

Tax regime
The customs duty on most of the imported equipment for the sector, including radar apparatus and radio navigational aid for airports, is 36.81%.  On aircrafts, the import duty is 17.34%.  However, notified projects attract customs duty exemptions and concessions, depending upon the equipment specifications and proposed end-use. 

Considering the immense scope for co-operation between EU member countries and India in the sector, an Indo-EU Aviation Summit 2006 was held in New Delhi in November 2006, jointly organized by the Ministry of Civil Aviation of India and the Directorate General for Energy & Transport of the European Commission.  This Aviation Summit was intended to bring together top-level policy makers and industry executives from all sectors involved in the European and Indian aviation and aerospace industries and services hence providing an important platform for enhancing co-operation between the EU and India in aviation.