PEST Analysis - Aviation

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PEST Analysis - Aviation

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Aviation Sector Details

PEST ANALYSIS Political Factors The airline sector in India is transforming from being highly controlled to a more liberalized sector. The government has relaxed the investment norms and FDI in aviation industry is allowed up to 49%. The Ministry of Civil Aviation has started to adopt highly non- interventionist policies for allocation of traffic rights and capacity entitlements. Domestic carriers have also been granted international licenses and many have entered into joint ventures with foreign companies. Another political factor affecting the aviation industry is high Excise Duty and Sales Tax on Aviation Turbine Fuel. 10.3% Service Tax is applied to air tickets as well as to services that airlines purchase, such as landing and air navigation fees. Domestic flights face state fuel taxes of up to 30%. Globally, fuel accounts for about 32% of an airline’s cost base but for Indian carriers it is 45%. The Government has also recognised the infrastructure deficiency and has wisely sought private sector participation to facilitate infrastructure improvements (modernization of Delhi and Mumbai airports, commissioning of green field projects at Hyderabad and Bengaluru, modernization of 35 non metro airports). Also, The Competition Commission of India and the Petroleum Ministry have not yet mandated access to off-airport transport and storage infrastructure. Also, direct import of fuel import is still being proposed by MOCA.

Economic Factors The airline sector contributes to 0.5% of India’s GDP and supports 1.7 million jobs. The Indian passenger airline sector is growing at 12% (double the international growth in this segment). The fuel prices have been on a rise and may rise further due to tension in the global environment. The tension between the European Union and Iran may be one such reason. Airports are also becoming increasing expensive and many have been granted permission by the government to increase airport charges. However, the carriers may not suspend any services due to such an increase. Moreover, the airline industry has been facing huge losses and In the 12 months ending 31 March 2013, many airlines are expected to make losses running into billions of rupees. Many global carriers are also making losses, the impact of which may percolate to the developing countries. To create world class infrastructure facilities for aviation industry, India would need gigantic investments to tune of US$ 51 billion. With the relaxation in the regulatory environment by allowing 49% FDI in aviation, the investment in the sector is likely to increase and Gulf carriers such as Emirates, Etihad and Qatar Airways could establish a critical advantage in the Indian market, creating a quasi‐domestic market to feed their hubs. The economic environment is also changing in terms of increased Public private partnerships for modernisation of airports. PPPs make it possible for increasing total investments by using a limited amount of public resources to leverage a much larger amount of private investment. Such PPPs accordingly could also increase economic efficiency and lower the capital requirement, provided that regulatory mechanisms are adequate. Another economic factor affecting the aviation industry is the volatility in exchange rates. Due to the current and trade account deficits, weak capital inflows and safe haven flows to the US dollar as a result of the EU debt crisis, the Rupee might depreciate to as low as INR60 in the absence of Reserve Bank of India intervention.

Social Factors The social factors mainly comprise of the changing travel habits of people. The major change in the travel habits of people can be attributed to the rising household incomes. Air travel is a status symbol for rising middle class & a necessity for business class. As the disposable incomes of the middle class

are increasing the region socio-economic patterns are changing and air traffic in India is growing not just on metro routes but also tier II and III routes. Another reason for the growth in traffic is the advent of many low-cost carriers and frequent attractive offers for non-flyers. Also, there have been developments in Airport Cities, more connections and air travel is being compared directly with st railway 1 class. Given its growing nature, the airline sector is generating many employment Opportunities – Pilots, air hosts and hostesses, ground staff, travel agents, etc. However, there is a demand supply gap, owing to which the Director General of Civil Aviation has permitted foreign pilots to fly aircrafts on domestic circuits. This gap represents opportunities for aviation academies and flying schools to set up shops in India. The rise in airline traffic can also be attributed to more tourists visiting India and Indians going for foreign trips. International traffic has been growing at a compound annual rate of 11.8% over the last eight years. There is also increased emphasis on travel time, quality of flight experience, sound levels and comfort.

Technological Factors The airline industry has been characterised by the growth of Electronic Ticketing. E ticketing in the airline industry was made mandatory for IATA members as from June 1, 2008. In just a matter of 10 years e-ticket rapidly replaced the older multi-layered paper tickets and went from being close to zero to 100%. There has also been a capacity growth of 7‐8% due to purchase of new aircrafts by airlines like SpiceJet, etc. and reduction due to Kingfisher. A significant technological advancement for improving airline operations has been the funding of Data Link services in the Bay of Bengal with a $4 per flight fee by the Airports Authority of India (AAI). The successful installation of this link has significantly improved airline operations. There has also been a significant advancement in modern communication, navigation, surveillance, and air traffic management systems and procedures and programmes for pilots in the air and air traffic controllers on the ground. Another significant technological factor affecting the aviation sector is the Technical Cooperation with EU- European Union Emissions Trading Scheme (EU ETS) which has increased the focus on research and development and developing low carbon technologies. USTDA (US trade & development association has also funded a feasibility study and workshops for the Airports Authority of India which has been leading to technical advancements.

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