WALL STREET JOURNAL
Thursday, March 03, 2005

Air Travel Takes Off In Booming India Growing Middle Class, Less Regulation Drive Opening Up of the Skies

By JOHN LARKIN

BOMBAY, India -- Flying in India, once a huge hassle for diamond trader Vasant Mehta, is now saving him time, money and a good deal of anxiety.

Just a few years ago, Mr. Mehta had to dispatch millions of dollars in South African diamonds on a risky train journey from Bombay to be cut and polished by artisans in western India. Getting a seat on a plane was almost impossible. "Now, I don't even have to book ahead," he says. "I just go to the airport and buy a ticket for the next flight."

Mr. Mehta can thank a revolution in Indian aviation that is opening up the skies to private carriers, driving down ticket prices and giving foreign airlines and equipment suppliers unprecedented access to one of the world's fastest-growing markets.

The explosion in Indian air travel is being driven by a booming economy, a rapidly growing middle class and increased deregulation. In the year that ends March 31, it is expected that 19 million people will have taken domestic flights in India. That would be a 28% jump from the previous year and one of the highest growth rates in the world.

Aviation experts, who project similar rates of expansion in coming years, forecast that India's annual passenger load will hit 50 million by 2010. International travel to and from India also is soaring at a 20% annual clip.

"It's just amazing what's happening there," says Maurice Flanagan, vice chairman of Emirates Group in Dubai. Emirates offers about 12,000 seats a week to India and fills more than 85% of them, very high by industry standards. "We're bursting at the seams," he says.

India remains far behind China in numbers of domestic passengers and aircraft. But the global aviation industry sees India as the next China, chiefly owing to its increasingly wealthy middle class and the speed with which the sector is opening up. Dinesh Keskar, vice president for sales at Boeing Co., says the aviation businesses of Asia's two most populous nations are "similar stories," as India is "now joining the fray in a very accelerated manner."

New deregulation measures could help India to accelerate its growth. In February, New Delhi granted two privately owned Indian airlines the right to compete with state-owned Air India on routes to Singapore, Malaysia and London and permitted one of the carriers, Jet Airways, to fly to the U.S. as well. And as many as five new privately owned Indian carriers are expected to begin flying domestically this year.

India also is opening up to foreign airlines, striking more flexible bilateral deals with other countries that have multiplied the number of flights foreign carriers can operate to and from the country. India and Britain, for example, last year agreed to double the number of flights each would permit from the other to 40 a week. In the next few months, India also expects to sign an open-skies agreement with the U.S. -- the world's biggest civil aviation market. That deal is likely to remove all restrictions on routes between the two countries, currently flown by two million people a year.

India "has completely changed its thinking on aviation," says Rod Eddington, chief executive of British Airways.

Asian, European and Middle Eastern airlines are already ramping up flights to India. Britain's Virgin Group even hopes to buy a stake in an Indian carrier, although New Delhi has yet to permit such investments. With more competitors flocking to the market, prices of tickets for domestic and international travel, once a preserve of the elite, are plummeting.

Demand for new planes is set to soar, too: Boeing estimates that sales of new aircraft to India will be worth at least $35 billion over the next 20 years, making it the fastest growing aircraft market after China. Boeing and rival European manufacturer Airbus are eagerly wooing India's five existing major carriers as well as the local airlines expected to begin operations this year.

"This is no flash in the pan," says Binit Somaia of the Center for Asia Pacific Aviation, a Sydney-based consulting firm. "The industry has been completely transformed."

That is a far cry from the 1970s and 1980s, when getting on a domestic flight was difficult and very expensive. Service was often awful and delays interminable. Air India and its domestic sister carrier, Indian Airlines, held a monopoly on local air travel and access to India by foreign airlines was tightly restricted, even though Air India's small fleet couldn't service the international routes it had been allotted.

"Getting a seat was a nightmare," recalls Mr. Mehta, the diamond trader. "There were only two flights a day between Delhi and Bombay."

The transformation began in the mid-1990s, when the government scrapped a ban on privately owned airlines. A host of smaller carriers eventually sprouted to challenge Air India and Indian Airlines. Some folded, but others, like Jet Airways, have flourished. Jet now has more than 40% of the domestic market. And its own newfound dominance is being contested by fresh rivals such as Air Sahara and Air Deccan, India's first budget airline. Meanwhile, Indian Airlines' market share has fallen to less than 40% from more than 50% a few years ago.

Air Deccan, in particular, has shaken up the industry since its launch 18 months ago. It flies chiefly to smaller cities, a strategy that G.P. Gopinath, its founder and managing director, says has given it 10% of the domestic market. Deccan now flies from 32 airports and plans to add 100 new flights every year, with fares as low as 500 rupees.

"I'm doing what the early American pioneers of the railroad did -- open up the country," says Mr. Gopinath, who boasts that his fares are cheaper than a first-class air-conditioned berth on India's huge passenger train network.

Mr. Gopinath believes the new routes will spur growth in poorer, outlying regions -- which happens to be New Delhi's most pressing economic challenge. "I can help this economy explode," he declares.

Experts agree that businesses, particularly tourism, can expect real gains from slashed travel times and new destinations to be serviced by a flock of no-frills airlines scheduled to start this year. "It's going to have a huge effect," says Adil Zainulbhai, a director at McKinsey & Co., in Bombay.

Indeed, hotelier Muhummed Kuamruddin aims to add 20 or 30 rooms, on three new floors, to his seven-room inn to meet growing tourist demand after foreign airlines started flying to Bodhgaya, a town in poor Bihar state where Buddha reputedly attained enlightenment. Changes in Indian aviation have "been great for business," Mr. Kuamruddin says.

Still, some significant problems mar the rosy outlook. The biggest one: rundown aviation infrastructure and retrograde airport services. Terminals at gateway airports like New Delhi and Bombay are shabby, crowded and chaotic. Nearly every aspect of airport services, from runway maintenance to air traffic control and baggage handing, needs huge upgrades to cope with the increased demand.

"Our infrastructure is abysmal. It's almost saturated even now," says Kapil Kaul, who heads the New Delhi office of the Center for Asia Pacific Aviation. "That lack is going to be a key determinant of how much growth actually happens."

The government has earmarked $3 billion to upgrade the country's main gateway airports at Bombay and New Delhi, and as much as $300 million to build new airports at Bangalore and Hyderabad. Significant upgrades also have been promised to more than a dozen smaller airports.

The need is urgent, says McKinsey's Mr. Zainulbhai. "Every element of infrastructure for aviation in India is going to be stretched over the next three years," he says.

Another obstacle is New Delhi's reluctance to privatize Air India and Indian Airlines, preferring the politically less-sensitive strategy of rebuilding their fleets to give them a chance against private competition.

Moreover, the government's policy of barring investment in domestic airlines by foreign carriers is depriving the aviation sector of vital capital, say industry experts. Foreign airlines have long argued against the policy, but Mr. Kaul predicts it's not going to change soon.