23-08-2013, 04:49 PM
Research Study of the Civil Aviation Sector in India
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Executive Summary
In accordance with the requirements set forth by the Ministry of Corporate Affairs of the
Government of India, this report aims to identify and analyze potentially competition inhibiting
provisions of statutes, rules, policies and practices found within the regulatory framework of
India‘s civil aviation sector. This report hopes to assist the Ministry with the following:
a. Framing of the National Competition Policy (NCP);
b. Formulating a strategy for competition advocacy with government and private sectors.
This report considered a variety of rules and regulations and picked out individual statutes
which we believe inhibit competition. The study mostly focuses on rules and regulations
guiding air carriers, briefly addresses taxation of airports, air turbine fuel, air carriers and
passengers as well as procurement by regulating agencies.1
Introduction
A country‘s transportation sector plays an integral role in the growth and development of an
economy. According to the ―Indian Aerospace Industry Analysis‖ report,2 in terms of passenger
traffic, India is currently the ninth largest aviation market in the world. With regards to air cargo
tonnage, India leads the South Asian region -consisting of Afghanistan, Bangladesh, Bhutan,
India, the Maldives, Nepal, Pakistan and Sri Lanka.3 Currently, India has 128 airports -
including 15 international airports.4
Over the past ten years the Indian civil aviation sector grew by 14.2% in terms of domestic
passengers and 7.8% in terms of air cargo (in CAGR - compound annual growth rate).5 In 2010-
11 six major Indian carriers with around 400 aircraft catered to 143 million passengers, including
38 million passengers that originated abroad.6 In 2010-11, Indian airlines carried approximately
1.6 million tons of air cargo.7 Further growth of the aviation sector between 2011- 2013 is
estimated at 15%.8
Market Structure and Competition Issues
According to economic theory, market structures range from a perfectly competitive market to a
monopoly. A perfectly competitive market is one where there are numerous producers selling the
same product or service to a very large number of customers. Each producer supplies the good or
service to a fraction of the market and hence does not have any influence on the market price.23
Competition among the suppliers drives the prices down to a point where they just recover their
average cost. 24
On the other hand, in a monopoly there exists only one producer/service provider. The
monopolist has the ability to set the price by restricting the output. 25 This in turn results in the
consumers being worse off than in a perfectly competitive market where consumers enjoy the
benefits of competition among the producers.
A market structure that falls between the two extremes - perfect competition and monopoly - is an
oligopoly. In an oligopoly there are few suppliers who control a significant share of the market.
Pricing in an oligopoly falls between a perfectly competitive market where the market players have
no pricing power and a monopoly where a single producer can fix the highest price possible, subject
to demand.
India’s Civil Aviation - Market Structure
India‘s civil aviation sector is much younger than other modes of transportation, and its market
structure has changed frequently over the last few decades. India‘s civil aviation sector evolved
from a market tightly controlled by the government with two air carrier service providers to a
relatively competitive market with a somewhat small number of domestic and international air
carriers.
Some features of India‘s civil aviation sector include a large number of consumers (passengers and
cargo), a relatively small number of airlines with significant market share, significant cost barriers
to market entry, differentiated services, and competitive firms affecting each other‘s business
decisions. These market characteristics indicate that India‘s civil aviation sector has an inherent
oligopolistic market structure. Since within India‘s civil aviation sector, economies of scale and
scope exist; in order for each market participant to break even, the firm must achieve a minimum
efficient scale of operation.
Recommendation
Consider phasing out compulsory government regulated route dispersal and put out a call for input
from stakeholders for different incentive programs that will help create more air carrier traffic to
smaller airports. Recently, the AAI considered a number of proposals for such incentive programs
from air carriers.58 Input from India‘s civil aviation stakeholders can generate an alternative solution on
how to ensure service to all of India‘s operational and future airports.
Furthermore, the United States‘ experience of deregulation in 1978 can serve as a model of how all
routes received adequate service with limited government involvement. The ―Essential Air Service
Program‖ provides subsidies to air carrier service providers that agree to fly to underserviced
airports. However, government subsidies are expensive solutions. Economic theory states that once
instituted subsidies tend to weaken the subsidized market participants‘ incentive to cut costs and are
difficult to eliminate, because those benefitting from government subsidies would lobby against
elimination of those sources of income.59