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4gpl.doc - NALSAR

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					Before explaining the topic Globalization, Liberalization and
Privatization of Aviation industry it is necessary to give
introduction of Aviation industry.
„You are giving people the freedom to fly‟ quote, Southwest Airlines. Its purpose
is to democratize the skies-to make air travel as available and as flexible for
average travelers as it has been for the well-to-do. There‟s more to the airline‟s
performance than low cost and high productivity. There is, in fact, a genuine
sense of purpose (and a one-of-a-kind sense of humor) that animates aviation

Globalization, Liberalization and Privatizations serve the purpose of efficiency
and ingenuity that allows us to keep offering low fares and keeps our planes in
the sky.‟

„All the airlines want to get more people to fly „operating on the edge leads to
more creativity in the business.

Higher calling of Globalization, Liberalization, and Privatization, its purpose is
about the difference aviation industry trying to make-in the marketplace, in the
world. If everybody is selling the same thing, what‟s the tie-breaker? Its

Working Experience at the airline-from‟‟ the freedom to learn and grow‟‟ to
“the freedom to create financial security” to “the freedom to work hard and
have fun” to “the freedom to create and innovate”---and travelling “freedom
exposition” defines the legal aspects of aviation industry.

"Aviation has only been treated as a glamour industry; it has
never been treated as something which is core to infrastructure
and development of the country.''
Aviation Industry in India is one of the fastest growing aviation
industries in the world. With the liberalization of the Indian
aviation sector, aviation industry in India has undergone a rapid
transformation. From being primarily a government-owned
industry, the Indian aviation industry is now dominated by
privately owned full service airlines and low cost carriers.
Private airlines account for around 75% share of the domestic
aviation market. Air transportation in India is under the purview
of the Department of Civil Aviation, a part of the India's
Ministry of Civil Aviation and Tourism.
India has an eminent position in the civil aviation sector with a
large fleet of aircrafts. In all, 56 airlines are operating scheduled
air services to and through India and 22 foreign airlines are over
flying Indian Territory. There are over 450 airports and 1091
registered aircrafts in the country. There are also 41 non-
scheduled air transport operators. Additionally 34 applicants
have been granted NOC by the Ministry of Civil Aviation for
setting up non scheduled air transport operation. Air Transport
has a significant role to play in a vast country like India with
major industrial and commercial centers located far apart.
Earlier air travel was a privilege only a few could afford, but
today air travel has become much cheaper and can be afforded
by a large number of people. The 1884 La France, the first fully
controllable airship Although many people think of human flight
as beginning with the aircraft in the early 1900s, in fact people
had been flying repeatedly for more than 100 years.
The liberalization in civil aviation industry began in 1986 with
the introduction if Air Taxi system to boost development of
tourism. Though there were several restrictions relating to seat
capacity, airports, timing and fare, the scheme was liberalized
over a period of time. Even the fare was totally deregulated,
allowing air taxi operators to charge any fare. In April 1990, the
government adopted open-sky policy and allowed air taxi -
operators to operate flights from any airport, both on a charter
and non-charter basis and to decide their own flight schedules,
cargo and passenger fares. With open sky policy many private
operators began operation in the domestic sector. The carriage
increased from a modest 15,000 passenger in 1990 to more than
0.4 million in 1992.Air travel remains a large and growing
industry. It facilitates economic growth, world trade,
international investment and tourism and is therefore central to
the globalization taking place in many other industries. The
airline industry has proceeded along the path towards
globalization. Ever since the aviation sector opened up the skies
to private carriers, air passenger travel in India has been
expanding at about 25% a year. The Airline industry has
experienced a drastic increase in number of passengers, driven
by Privatization of Aviation Industry and introduction of low
cost carriers like Deccan airlines, Go Air and Spice Jet etc.It is
said that Indian Aviation Industry is one of the fastest growing
Aviation Industry is one of the fastest growing Aviation Industry
in the entire globe.
Aviation Industry in India is one of fastest growing industry in
the world. With the liberalization of India Aviation Sector,
aviation industry in India has undergone a rapid transformation.
The Indian Aviation Industry is now dominated by privately
owned full service airlines and lost cost carriers private airlines
account for around 75% share of the domestic aviation market.
The privatization of Airports which is happening all around in
India, like the public structure of Air travel remains a large and
growing industry. It facilitates economic growth, world trade,
international investment and tourism and is therefore central to
the globalization taking place in many other industries. Airlines'
profitability is closely tied to economic growth and trade.
During the first half of the 1990s, the industry suffered not only
from world recession but travel was further depressed by the
Gulf War. In 1991 the number of international passengers
dropped for the first time. The financial difficulties were
exacerbated by airlines over-ordering aircraft in the boom years
of the late 1980s, leading to significant excess capacity in the
market. Globalization is illustrated in aviation by commercial,
marketing and control issues beyond national boundaries, while
Tran nationalization means airlines going off shore that is
locating parts of their operations out side their national base. In a
strict sense, Privatization means transfer of ownership and all
the incidences of ownership including management of public
enterprises to private investors.
The development of aviation industry has been increasing
significantly due to the rapid change of the world's economic
and regulatory climates. One major explanation of this can be
explained by airport privatization. Privatization is commonly
defined as any process aimed at "shifting functions and
responsibilities, whether as a whole or as a part, to the private
sector "(A.T WELLS).The liberalization of aviation industry in
India has precipitated the boom for domestic and international
passenger carriers. There has been a high level of privatization
activity in the aviation industry in recent years, especially in the
airport sector. Although it tailed off for a while it has started to
pick up again rapidly, especially in Europe and Asia, and
prospects look good in Latin America. Privatization is very
much back on the agenda.
   Globalization of aviation industry increases competition-
    on, making firm more efficient
   Globalization of aviation industry promotes technologic
    advancement, again creating job and growing income
   Globalization of aviation industry allows outsourcing
    which is beneficial as people can do the same job for less
    money elsewhere, and the people who did the job originally
    can get a job they are actually good at
      Air travel remains a large and growing industry. It
facilitates economic growth, world trade, international
investment and tourism and is therefore central to the
globalization taking place in many other industries.
In the past decade, air travel has grown by 7% per year. Travel
for both business and leisure purposes grew strongly worldwide.
Scheduled airlines carried 1.5 billion passengers last year.

Worldwide, IATA, International Air Transport Association,
forecasts international air travel to grow by an average 6.6% a
year to the end of the decade and over 5% a year from 2000 to
2010. These rates are similar to those of the past ten years. In
Europe and North America, where the air travel market is
already highly developed, slower growth of 4%-6% is expected.
The most dynamic growth is centered on the Asia/Pacific region,
where fast-growing trade and investment are coupled with rising
domestic prosperity. During the first half of the 1990s, the
industry suffered not only from world recession but travel was
further depressed by the Gulf War. In 1991 the number of
international passengers dropped for the first time. The financial
difficulties were exacerbated by airlines over-ordering aircraft in
the boom years of the late 1980s, leading to significant excess
capacity in the market. Ticket less travel, new interactive
entertainment systems, and more comfortable seating are just
some of the product enhancements being introduced to attract
and retain customers. A number of factors are forcing airlines to
become more efficient. In Europe, the European Union (EU) has
ruled that governments should not be allowed to subsidize their
loss-making airlines. Elsewhere too, governments' concerns over
their own finances and recognition of the benefits of
privatization have led to a gradual transfer of ownership of
airlines from the state to the private sector. Deregulation is also
stimulating competition, such as that from small, low-cost
carriers. The US led the way in 1978 and Europe is following
suit. Beyond Europe too, 'open skies' agreements are beginning
to dismantle some of the regulations governing which carriers
can fly on certain routes. Despite this, the airline industry has
proceeded along the path towards globalization and
consolidation, characteristics associated with the normal
development of many other industries
The outlook for the air travel industry is one of strong growth.
Forecasts suggest that the number of passengers will double by
2010. For airlines, the future will hold many challenges.
Successful airlines will be those that continue to tackle their
costs and improve their products, thereby securing a strong
presence in the key world aviation markets.
The commercial aviation industry in the United States has
grown dramatically since the end of World War II. In 1945 the
major airlines flew 3.3 billion revenue passenger miles (RPMs).
By the mid 1970s, when deregulation was beginning to develop,
the major carriers flew 130 billion RPMs. By 1988, after a
decade of deregulation, the number of domestic RPMs had
reached 330 billion (Source: Winds of Change).
The United States is the largest single market in the world,
accounting for 33 per cent of scheduled RPMs (41 per cent of
total scheduled passengers) in 1996. This changed the face of
commercial aviation in the United States. Deregulation of the
industry was followed quickly by new entrants, lower fares and
the opening of new routes and services to scores of cities. The
growth in air traffic brought on by deregulation's first two years
ended in 1981 when the country's professional air traffic
controllers went on strike. Traffic surged again after 1981,
adding 20 million new passengers a year in the post strike
period, reaching a record 466 million passengers in 1990.In
1989 events began which severely damaged the economic
foundations of the industry. The Gulf crisis and economic
recession caused the airlines to lose billions of dollars. The
industry experienced the first drop in passenger numbers in a
decade, and by the end of the three-year period 1989-1992 had
lost about US$10 billion - more than had been made since its
inception. Great airline names like Pan American and Eastern
disappeared, while others, such as TWA and Continental
Airlines, sought shelter from bankruptcy by going into Chapter
11.Today the domestic industry in the US is a low cost, low fare
environment. Most of the major airlines have undergone cost
restructuring, with United Airlines obtaining employee
concessions in exchange for equity ownership. Some airlines
sought the protection of Chapter 11 bankruptcy to restructure
and reduce costs and then emerged as strong low-cost
competitors. In 1993 President Clinton appointed the National
Commission to ensure a strong competitive industry. Its
recommendations seek to establish aviation as an efficient,
technologically superior industry with financial strength and
access to global markets. Another key recommendation by the
Commission was that foreign airlines should be allowed to
invest up to 49 per cent of the equity in US airlines and in
return, obtain up to 49 per cent of the voting rights. Current US
law allows foreign investment up to 49 per cent of the equity
with voting rights of up to 25 per cent. An amendment to
existing law requires an Act of Congress. Autumn 1996 saw the
UK and US Governments hold bilateral talks with the intention
of negotiating an 'Open Skies' arrangement between the two
countries. The result of these talks is eagerly awaited by airlines
on both sides of the Atlantic.
The average load factor, an indicator of passenger demand and
efficiency of the airlines' sales and marketing efforts, was 58 per
cent; it was 56% in the previous years.As per DGCA statistics,
for the first time in 2003-04 domestic airlines were able to
record revenue per kilometer (RPKM) higher than costs, with a
positive operating margin of 3 per cent, against a negative
margin of 3 per cent in previous years.
Over the past few years the aviation industry has continued to
face challenges on how well to manage the industry on both
operational and management level in relation to interests of
different stakeholders in the industry. Customers have
increasingly demanded for better services while shareholders
demand for more profit. With globalization of aviation industry,
the market has become more competitive and demands the
industry to be highly competitive to survive on the global
market. This issue of global competitive further complicates the
achieving of customers, shareholders and other stakeholders
needs by the industry. Thus the industry needs to change its
organization behavior and structure determines the success of an
industry. These new challenges has made the industry to rethink
its business behavior, objective and aims coming up with
strategies that has made the industry more successful than
      Globalization has had varied influences on policy making
the aviation industry, by influencing the making of key decisions
in the industry. Globalization in this case has influenced
economic policy making in aviation industry. One of the effects
to economic policy making in aviation industry is that, it has
made it more complex. According to top managers in aviation
industry, globalization has made this policy making quite
challenging due to the very many factors that are globally
affecting it and the various needs of the different stakeholders
that has to be fulfilled. Globalization has affected aviation
industry in its decision making. This is because all the decisions
made in this industry have to comply with international
standards. This is so because globalization comes along with
standards which all the industries have to adhere to decisions
that are made in aviation industry also have to be according to
international trade policies. Aviation industry faces big
challenges in line with global competition and balancing of
various stakeholders. The entire industry confronts a common
agenda of issues driven by globalization, including regulatory
adjustment and risk, scale and ownership, role of national
identify and investment policy, competitive pressure, service,
national security and network economies.
-In the era of globalization, consolidation is a common method
across industries to achieve economics of scope and scale,
increase efficiency and meet customer demands. The airlines
that can build global networks are likely to be the most
successful in both lowering cost and achieving the type of
service that the broader process of trade and economic
integration is demanding.
-International regulatory reform is "at the top of the agenda.
Deregulation in the United States followed a domestic
regulatory system over whelmed by the tremendous growth in
demand, high-cost structure and regulatory over load the same
pressures in the context of globalization that are putting the
reform of the international regulatory regime front and center.
Air travel remains a large and growing industry. It facilitates
economic growth, world trade, international investment and
tourism and is therefore central to the globalization taking place
in many other industries. The international airline industry faces
a crucial dichotomy as both a leading driver of globalization -
helping enable worldwide commerce and interchange - and a
laggard, trailing other industries in adopting such globalization-
driven strategies as consolidation, expanded scale, deregulation
and network structure, according to Yergin, chairman of
Cambridge Energy Research Associates (CERA).

Aviation industries have had to recognize the need for radical
change to ensure their survival and prosperity. Many have tried
to cut costs aggressively, for airlines to reduce their debt, build
reserves and sustain investment levels. In addition, many airlines
remain unprofitable. The outlook for the air travel industry is
one of strong growth. Forecasts suggest that the number of
passengers will double by 2010. For airline to meet the
requirements of their increasingly discerning customers, some
airlines have to invest heavily in the quality of service that they
offer, both on the ground and in the air. Ticket less travel, new
interactive entertainment systems, and more comfortable seating
are just some of the product enhancements being introduced to
attract and retain customers. A number of factors are forcing
airlines to become more efficient.. In order to appeal to
prospective shareholders, the airlines are having to become more
efficienpetitive.The airline industry has proceeded along the
path towards globalization and consolidation, characteristics
associated with the normal development of many other
industries.. Successful airlines will be those that continue to
tackle their costs and improve their products, thereby securing a
strong presence in the key world aviation. Weber immediately
swung into action. He grounded 23 aircraft, cut staff by one
thousand, slashed 3.5 percent from the expense budget, and set
out to boost sales and earnings. To kick-start the company's
revival, in 1993 he launched "Programmer 93," an in-house
structural plan that cut six thousand more jobs, primarily at the
administrative level, and called for cutbacks in materials costs.
The company's earnings were boosted by DM 700 million in
1993 alone. The 1990s saw swift and significant changes in the
airline industry worldwide and, thanks to Weber's foresight and
penchant for taking swift but well-thought-out action, Lufthansa
went from being simply a local airline into what the company
called on its Web site a "high-performance network of
cooperating subsidiaries."
 In 1993 rapid changes were occurring in the world economy,
changes that eventually became known as globalization. Some
of those changes were affecting the aviation industry in the form
of deregulation. This was just Weber's first step in implementing
his vision to create a global alliance of airlines, a vision that
came to fruition on May 14, 1997, when the CEOs of Lufthansa,
United Airlines, SAS, Thai Airways, and Air Canada signed an
agreement that launched the Star Alliance. Then, in late 1998,
Weber announced that Lufthansa would metamorphose from a
traditional airline into an aviation group with the goal of
becoming a world leader in air-traffic services. The group
created seven business segments: passenger business, logistics,
leisure travel, machine-repair operations, catering, ground
services, and information technology. Although Aviation is an
enabler of globalization, paradoxically, the airline industry itself
remains subject to highly restrictive national controls on cross-
border competition and investment. The aviation industry lags in
adapting to globalization even as it drives other sectors to
When Weber became chairman and CEO of Lufthansa in 1991,
the airline—which had come to be known as "the patient"—was
suffering huge losses in a declining world economy and
backlash from the war in the Persian Gulf. Weber immediately
swung into action. He grounded 23 aircraft, cut staff by one
thousand, slashed 3.5 percent from the expense budget, and set
out to boost sales and earnings. To kick-start the company's
revival, in 1993 he launched "Programmer 93," an in-house
structural plan that cut six thousand more jobs, primarily at the
administrative level, and called for cutbacks in materials costs.
The company's earnings were boosted by DM 700 million in
1993 alone.
For decades, air travel in India was meant for the most elite and
powerful in society. An overwhelming majority of travelers who
could not afford the prohibitive air travel fares, preferred to
journey on trains and buses.
The revolutionizing effects of liberalization swept India with
dynamic changes in the aviation sector. From being a service
that few could afford, the sector has now graduated to being a
fiercely competitive industry with the presence of a number of
private and public airlines and several consumer-oriented
offerings. In ten years of competition in the aviation sector,
private airlines have changed the rules of the game, and they
now account for more than 60 % of the domestic aviation
More and more middle class families in India now prefer air
travel to the more traditional travel by train. In 2003, 10 million
Indians traveled by air domestically. In 2004, 25 million took to
the skies within India and 6 million Indians traveled abroad.
The Centre for Asia Pacific Aviation estimates that the domestic
Indian market will add 5 million passengers every year for the
next five years, growing to 45 million passengers by
2010.Today, the relationship of domestic to international travel
stands at 40:60 whereas in 1994 it stood at only 25:75. But
taking into account a growing middle class with increased and
increasing purchasing power, there are 200-210 million potential
spenders. The Indian population grows at a rate of 8% per year.
 The entry of budget airlines like Air Deccan, the introduction of
cheap airfares by other domestic carriers, combined with rising
incomes and consumption of the middle class as also their
growing aspirations, have created this new paradigm: Air travel
is no longer for the elite.
Air Deccan triggered the race to the bottom in the low cost
sector. Their model forced the industry to move from having
simple economy, business and first class fares, to multiple slab
tariffs such as apex fares, internet auctions, special discounts,
bulk purchases and last day fares. Some of the tariffs offered are
so low that they have brought airline fares neck-to-neck with
upper class railway fares. This low cost model is two-fold:
offering connectivity between smaller cities and major metros
and making air travel a feasible option to a new class of
Before 1991, the Indian skies were not open to the private
players. At that time the two major airlines operating in India,
both owned and controlled by the Government of India were –
Air India and Indian Airlines. The Government nationalized the
airlines industry in 1953, with enactment of Air Corporation
Act, and assets of nine existing air companies were transferred
to the two new corporations – Air India International and the
Indian Airlines. A third government-owned airline, Vayudoot,
which provided feeder services between smaller cities, was
merged with IAC in 1994. These government-owned airlines
dominated Indian aviation industry till the mid-1990s.1990s;
aviation industry in India saw some important changes. With the
liberalization of the Indian aviation sector, the industry has
witnessed a transformation with the entry of the privately owned
full service airlines and low cost carriers. In 2006, the private
carriers accounted for around 75% share of the domestic
aviation market.
                The liberalization of aviation industry in India
has precipitated the boom for domestic and international
passenger carriers. The domestic passenger and cargo traffic
recorded a growth rate of 44.6% and 8.7%, and the international
passenger and cargo traffic recorded growth rates of 15.8% and
13.8% respectively during 2006-071. The Airport Authority of
India (AAI) manages total 122 airports in the country, which
include 11 international airports, 94 domestic airports and 28
civil enclaves. Top 5 airports in the country handle 70% of the
passenger traffic of which Delhi and Mumbai together account
for more than 50%. The latest data compiled by Airports
Authority of India (AAI) shows that all the airports handled
90.44 million passengers during the calendar year
2006.Compared with 67.95 million handled during the same
period in the previous year.
 The substantial growth of Indian aviation industry is mostly due
(I) low fares offered by Low Cost Carriers (LCC) like Deccan,
Spice jet, Go Air etc; and
 (ii)Scheduled domestic air services are now available from 75
airports as against just 50 earlier.

In 1990s, aviation industry in India saw some important
changes. The Air Corporations Act was abolished to end the
monopoly of the public sector and private airlines were
reintroduced. With the liberalization of the Indian aviation
sector, the industry has witnessed a transformation with the
entry of the privately owned full service airlines and low cost
carriers. In 2006, the private carriers accounted for around 75%
share of the domestic aviation market.
The sector has also seen a significant increase in the number of
domestic air travel passengers. Some of the factors that have
resulted in higher demand for air transport in India include the
growing middle class and their purchasing power, low airfares
offered by low cost carriers like Air Deccan, the growth of the
tourism industry in India, increasing outbound travel from India,
etc. It is a phase of rapid growth in the industry with estimated
growth of domestic passenger segment at 50% per annum.
This has led to intense price competition due to which full
service carriers like Jet Airways, Indian Airlines and Air Sahara
are giving discounts of up to 60-70% for certain routes to match
the new entrants' ticket prices. The customer has thus gained
enormously as a result of liberalization of the sect

The first step towards liberalization was as early as in 1986
when private airlines were allowed to operate charter and non-
scheduled services to all authorized airports under the Air Taxi
Scheme and were also permitted to decide their fares and flight
schedules. A major move towards liberalization was in the early
1990s when India Implemented an open sky policy for cargo
which allowed international airlines to operate cargo flights
without restrictions and to charge rate without reference to
Director General of Civil Aviation (DGCA). Under this policy,
any foreign domestic airline or association of exporters or
private operator‘s could bring freight carriers to India for lifting
cargo from any airport. However, there still remain restrictions
on Cabot age as international airlines are not allowed to carry
domestic cargo on their flights within the country.
           The ‗Open Sky Policy‘ with US replaces an antiquated
agreement signed in 1956 that placed restrictions on services
between the two countries, including limits on cities that could
be served and restrictions on pricing. The deal also allows all-
cargo carriers to operate in either country without directly
connecting to their homeland 18.significant steps taken by the
Indian government on liberalization of Indian aviation industry
include: (I) The Foreign Direct Investment limit in Air Transport
Services (Domestic Airlines) has been increased from 40% to
49% and is soon expected to be increased further. However, the
NRI`s and Persons of Indian Origin (PIO) have been allowed
100% FDI; (ii) Private scheduled carriers with five years
experience in domestic sector and having fleet size of twenty
aircraft permitted to operate on
international routes; (iii) Liberal policy in the exchange of
capacity entitlement /traffic rights paved the way for more
foreign airlines to operate to / from India; (iv)Amendment of the
various outdated provisions of Aircraft Rules to keep the
provisions abreast with the international standards and
developments in the civil aviation sector; (v) Tourist charter
guidelines liberalized; (vi) Fleet expansion plans of Air
India/Indian Airlines approved; (vii) Restructuring of Delhi and
Mumbai airport and work on development of Greenfield airports
at Bangalore and Hyderabad undertaken25;
(vii) Up gradation/ expansion/ development of airports
undertaken depending upon traffic potential, requirement of
airline operators and need of air passengers. The new entrants
have cornered 44% of Indian aviation market and made
considerable dent in the market share of erstwhile operators:
Indian Airlines, Jet Airways and Sahara airlines,
And LCC‘s constitute 34% of market28

Entry of Low Cost Carriers (LCC)
The LCC growth in India was in the form of Low Price Tags,
Apex Fares, Internet Auctions, Bulk Purchases and Last Day
Fares. The reason for the growth of LCC is:
   Low Entry Barrier.
   Attraction of Foreign Shores.
   Increased Permitted Foreign Equity.
   Rising Income Levels and Demographic Profile.
   High load efficiency.
    Operations to far flung areas.
    Low cost and Low Frill business model.
   Staff strength was kept to a minimum.
    Operations to neighboring countries like Sri Lanka.
   Successfully penetrated the rising middle class and first
    time fliers.
Future Trends
   The Centre for Asia Pacific Aviation (CAPA) has predicted
    that domestic traffic will increase by 25 to 30 per cent till
    2010 and International traffic growth by 15 per cent by
   By 2020 400 million Indian passengers are likely to be
    flying and Indian airports would be handling more than 100
    million passengers.
   The Aviation industry has to be guarded against foreign
    carriers especially from the Middle East.
   The global meltdown and decrease in air travel due to
    terrorist activity have eroded the profitability of the aircraft
    operators in India.

At independence, the East African governments opted for mixed
economies whereby the states intervened in the market and
played important roles in resource allocation. One role is state
ownership of enterprises in virtually all sectors of the economy,
including aviation.
Today, liberalization and globalization are overtaking the airline
industry in this sub-region and Africa in general. Foreign mega
carriers such as British Airways, KLM, Air France, and
Lufthansa have invaded the African continent and now carry
about 75% of international traffic, leaving the numerous and
small-size African airlines with the remaining 25% (East
African 2003). With this invasion, it is becoming increasingly
doubtful if most African airlines will survive such stiff
competition, which has intensified since the September 11
terrorist bombing in the United States.

Regulation of International Air Transport before Liberalization

The 1944 Chicago Convention organized international air
transport as we know it today. An overriding motivation of the
history of economic regulation of the aviation sector has been
the desire to ensure the protection of national flag carriers,
which explains the attitudes of many countries toward air
transport liberalization .Lei Bach Over the years, the BASAs,
which impose certain restrictions on airlines frequencies and
capacity, have rendered the industry inefficient. This is because
the restrictions suppress competition via route size and
designated carriers cannot operate additional services beyond
those specified in BASAs. In many developing countries, East
Africa included, the capital market is usually too small to
provide sufficient equity for the development of a capital-
intensive airline industry. Furthermore, foreign airlines are not
allowed Cabot age rights, thereby limiting competition in
domestic markets to locally owned airlines.

Throughout the developing world, many airlines were
established as national flag carriers during the transition from
colonialism to independence .The East African countries, like
others in the developing world, could not count on private
capital to create airlines that were capable of meeting national
objectives. Some of the economic development functions with
which airlines in the developing world were charged included
integrating national territory, promoting tourism and trade
through international links, and providing high wages and high
skill jobs. These airlines were also integral elements in state
foreign policies and defense. Moreover, the private sector's
singular objective of profit maximization usually conflicted with
national objectives (Bowen and Leinbach 1995).

Liberalization Initiatives in Africa

The Yamoussoukro Declaration

The African ministers in charge of air transport met in
Yamoussoukro in Cote d ‗Ivories (Ivory Coast) on October 6
and 7, 1988, with the aim of defining a new framework for
continental air transport. A new policy named the
"Yamoussoukro Declaration" was formulated. This declaration
was regarded as the cornerstone of African Civil Aviation
(Abeyratne 1998, Loadable 2005) and had the following four
salient objectives. The first was to ensure flexibility in granting
of traffic rights among African countries. The second was to
encourage joint use of air transport facilities. The third was to
encourage cooperation and ultimate merger among African
carriers and the fourth was to encourage further financing of the
air transport sector.
One of the positive impacts of the Yamoussoukro Declaration is
that it served as a catalyst for sub-regional initiatives for its
implementation. However, it did not go far enough to restructure
the existing framework as issues such as privatization of
national carriers and mostly the liberalization of BASAs were
not adequately addressed. By the end of 1996, which was the
implementation deadline, little or no progress had been made.
Therefore, there arose a need for another agreement to correct
the shortcomings of the declaration and make it implement able.

The Yamoussoukro Decision

In 1999, a Council of Ministers responsible for civil aviation
met again in Yamoussoukro. After thorough discussions, they
adopted a decision relating to the implementation of the
Yamoussoukro Declaration regarding liberalization of access to
air transport markets in Africa. The decision was signed in July
2000 by the heads of state of the various African countries. The
decision established principles for developing air transportation
in Africa and offering traffic rights, frequencies, and roles of
member airlines on liberalized preferential basis. An ambitious
target of two years (2002) was set to achieve air transport
liberalization in the continent. The new policy framework aims
at providing safe, efficient, reliable, and affordable air services
to consumers and came to be known as the Yamoussoukro
Decision. It takes precedence over any multilateral or bilateral
agreements on air services between countries that are
incompatible with the decision. The major policies of the new
framework were: gradual liberalization of scheduled and
nonscheduled intra African air services; free exchange of traffic
rights including the third, fourth, and fifth freedoms among
African states;2 multiple designations by each party on a city
pair basis;3 no restriction of service frequencies and capacities
offered on air services linking any city pair combination; no
regulation of tariffs by governments; complete liberalization of
cargo and nonscheduled services; and encouraging commercial
and other forms of cooperation between African carriers.

The Decision also responded to the problem of aging aircraft in
Africa. Many aircraft in Africa were obsolete and could not
comply with Chapters 2 and 3 of Annex 16 of the Chicago
Convention concerning aircraft noise. From Table 1, it is
apparent that more than half of the aircraft in Africa are old, that
is, they have been in service for about 15 or more years.
Current African Fleet in Service by Aircraft
Region      New     Old        Others    Total   Percentage of Total

Europe      1768     237       1363      3368          7.0

North Am    1654     1301      2581      5536          24.0

Africa      162      316       111       589           54.0

Asia        1154     295       969       2418          12.0

Latin Am    238      393       259       890           44.0

Middle Ea   240     155        144       539           29.0
Pacific   155       15        102       272        5.5

Liberalization in Kenya

The privatization of the national carrier, Kenya Airways (KQ),
in 1996 was one way Kenya liberalized its airline industry. The
term privatization here refers to the transfer of ownership of the
airline industry from the public sector or government to the
private sector, while liberalization is the relaxation of previous
government restrictions in the industry. This privatization was
the major reform in eliminating monopolistic operations in the
airline industry in the country. The Kenya Airways shareholding
structure is presented in Figure 1. As this figure shows, KLM
Royal Dutch airlines purchased 26% of the total shares on offer,
the Kenya public (citizens) and institutions such as banks
purchased 34%, the government of Kenya retained 23% of the
total shares, international investors purchased 14%, and Kenya
Airways staff bought the remaining3%.The government's 23%
minority shares in Kenya Airways represent an important asset
of the nation. Since 1996, the airline's contribution to the
Kenyan economy has been substantial. This includes 4.0 billion
Kenyan shillings (USD 73 million) contribution to the treasury,
8.5 billion Kenyan shillings (USD 155 Million) in local taxes for
the period 1998 to 2000, and 15 billion Kenyan shillings (USD
273 million) in foreign exchange inflows for the 1999/2000
fiscal year (Kenya Airways 2000). From the figure, it can be
observed that the number of passengers carried by the Kenya
Airways increased from 806,000 in 1997/1998 to 1,540,000 in
2001/2002. This represents an increase of about 91%. The
amount of cargo carried by Kenya Airways increased from
12,115 tons in 1997/1998 financial year to about 23,000 tons,
representing an increase of about 90%. The revenue passenger
kilometer (RPK) carried by Kenya Airways also increased form
1,832 million in 1997/1998 to 3,725 million in the 2001/2002
financial year. With the management expertise brought in by
Speed Wings, a British Airways consulting company, and KLM,
in addition to the noninterference of the government in the
management of the airline, Kenya Airways has become one of
the leading and profitable airlines in Africa. Table 2 shows that
it is the sixth-ranked airline in terms of revenue, ahead of
Ethiopian Airlines. With a record profit of 3,882 million Kenya
shillings (USD70.6 million) for the financial year ending March
31, 2005, the airline entered its 10th consecutive year of
profitable operations.4 The privatization of Kenya Airways is a
success story of Kenya's air transport industry (Oladele 2005) as
it is the first privatized flag carrier in Africa. As he observes, the
success of Kenya Airways supports the two major sectors of the
Kenyan economy, which are travel and tourism. Additionally, its
air freight capacity is supporting the country's agricultural sector
through the export of horticultural products to international
markets. Apart from the privatization of the Kenya Airways, the
government of Kenya also published the Civil Aviation
Amendment Bill which established an autonomous Kenya Civil
Aviation Authority on October 24, 2002. This removed the
Directorate of Civil Aviation (DCA) from the government and
created the Kenya Civil Aviation Authority, charged with
ensuring air safety in the country.
Figure: Performance of Kenya Airways, 1997-98 to 2001-02
(a) Passengers Carried ('000s)

(b) Cargo (tons)

(c) Revenue Passenger Kilometers (millions)
Table 2: Top 10 African Airlines by Revenue, 2003

Ranking              Carrier          Country of Origin   Revenue (US$Million)
1                    South                South Africa            222
2                    Royal                Morocco                 804
3                    Air Alegria          Alegria
4                    Tunis Air            Tunisia                 502
5                    Air Mauritius        Mauritius               431
6                    Kenya Airways        Kenya                   397
7                    Ethiopian Airlines   Ethiopia                321
8                    Comair               South Africa            203
9                    Air Gabon            Gabon                   154
10                   Cameroon Airlines    Cameroon                153

Liberalization in Tanzania
In Tanzania, air transport has been liberalized since 1992. At the
international level, the country has adopted BASAs on double
and multiple designations with Kenya, Uganda, Switzerland, and
South Africa (Mwandosya 2003). Tanzania has a national air
transport policy, which allows for private sector ownership and
management of airlines, airports, ground handling activities, and
air service provision. In 1992, the Tanzanian government
enacted the Public Corporate Act, which led to the creation of
the Presidential Parastatal Sector Reform Commission (PSRC).
This is the body that facilitated the privatization of the country's
flag carrier, the Air Tanzania Corporation (ATC).

Air Tanzania Corporation was established in 1977 after the
demise of the East African Airways Corporation. At the time of
its inception, it had 11 passenger aircraft. However, by the time
it was privatized in 2002, it had only one passenger aircraft, a
Boeing 737-200. The others were either sold or cannibalized to
repair crumbling aircraft over the years. The Tanzanian
government announced its plan to privatize its national flag
carrier in February 2002. To ensure that the privatization process
brought in the best partner for ATC, the government approved a
transaction structure that included the creation of a new
company, Air Tanzania Company Limited (ATCL). ATCL was
to be incorporated as a limited liability company under the
Companies Act to take over the operating assets and specified
rights and liabilities of ATC. A second new company, ATC
Holding (the holding company), was created to take over the no
operating assets and all the liabilities of ATC. The government
incorporated an evaluation of Bidders Business Plans into the
overall ranking of bids.

The government also paid all the liabilities of the privatized
company (ATC). Privatization of ATC initially involved selling
49% of the government shares to a strategic partner, and the
government continuing divesting from the airline until its
shareholding fell to 25% and later to zero. Eight international air
operators bid for ATC, including South African Airways (SAA)
and Kenya Airways. The government finally picked South
African Airways as the winning bidder for the purchase of 49%
of shares in Air Tanzania Company Limited (ATCL). The
Tanzania government retained 51% of the shares in ATCL. SAA
offered to pay US $10 million to the government of Tanzania for
the shares acquired and injected a further US $10 million into a
capital and training account for financing the business plan SAA
had proposed to make ATCL profitable. According to the sales
agreement, SAA was to bring technical, commercial, and
managerial expertise into the new company. It was also to
provide extensive training and transfer of skills to ATCL staff,
including retraining of pilots and aircrew.
Liberalization in Uganda
Air transport is of strategic importance to Uganda, a landlocked
country, by guaranteeing the country an alternative gateway to
the rest of the world. It provides the most efficient and quickest
transport means to and from Uganda. In Uganda, the
liberalization of the airline industry began with the
establishment of the Uganda Civil Aviation Authority (UCAA)
in 1991. The mandate of the authority was to develop and
regulate the air transport industry. The general thrust of the
Uganda aviation policy is liberalization, which relies on the
private sector to provide safe, regular, and efficient air transport
services to the traveling public.
In 1992, UCAA reviewed its ground-handling services. At the
time, Uganda Airlines as a monopolist was using revenue from
ground handling to cross-subsidize its flight operations. This
adversely affected cargo handling by depriving it of the flow of
money required to maintain quality services (ADB 1999). So
far, only the airline business has been opened to competition.
Air navigation and airport services are still state controlled. The
country has also implemented the COMESA Legal Notice No. 2
and the Yamoussoukro Decision II (Akandonda 2003). The
UCAA has played a key role in the promotion of aviation in the
country. However, the authority has yet to achieve full
autonomy from the executive branch of the government. As
currently set up, UCAA is about 70% independent, with
autonomy to borrow, raise revenue, and manage its operations
(ADB 1999).
Impacts of Aviation Industry Liberalization
The liberalization of the airline industry in the EAC has begun
to yield some positive impacts, including an increase in
frequency of flights, cooperation of airlines, and growth of cargo
traffic, and reduction of ramp charges.
1. Liberalization is not a seamless process, but it is possible.
Liberalizing markets over different timescales or removing
restrictions on operations without removing those on ownership
can create distortions and reduce the potential benefits that are
available. The UK Civil Aviation Authority 1 shows that a clear
pathway to full liberalization for the aviation industry, that is
consistent with optimal safety and security standards, does exist.
2. Full liberalization is required to maximize
The potential benefits.
The benefits of liberalization are maximized where both
operational and ownership and control restrictions are removed.
The structure of the aviation industry means that removing
operational restrictions can lower barriers to entry to the
industry. But it will not maximize the potential benefits to
customers, airlines and the wider economy unless ownership
restrictions – and the barriers to exit or to adjust capacity – are
also removed.
3. Further liberalizations can provide substantial consumer
Further operational and ownership liberalizations can protect
and enhance the consumer benefits, in terms of greater choice
and lower fares, already obtained from liberalization so far in
the aviation industry. It can also widen and expand these
consumer benefits to new regions and routes that currently have
highly regulated markets. Therefore, it can continue to provide
benefits for airline users, while also providing significant
benefits for the wider economy. For example, liberalizing some
of the current major restricted country pair routes could increase
traffic by 63% and generate an additional $490 billion of GDP.
4. Greater commercial freedom allows airlines to improve
productivity and efficiency.
Liberalization can create the freedom for airlines to operate on a
fully commercial basis. This will allow them to allocate capital
more efficiently, to respond better to changes in demand in
markets and to improve productivity. It provides a platform for
the aviation industry to expand or rationalize capacity and
ownership in accordance with customer needs. It can also
improve the return on capital invested that is earned by the
aviation industry as a whole.
5. Liberalization can provide benefits for a flexible and efficient
In a fully liberalized market, the key for firms is to recognize
where its competitive advantage lies and to focus on it.
Liberalization provides opportunities for expanding into new
markets as well as threats to existing markets. There will be
winners and losers from liberalization. However, experience
from the other industries has shown that firms who are efficient,
flexible and responsive to customer needs – regardless of their
size – are best placed to benefit.
6. A multilateral approach to liberalization is preferable.
A multilateral approach is likely to have more substantial and
positive implications for both consumers and airlines. Bilateral
negotiations remain the main forum for discussion and a useful
mechanism for reform, but the rationale for more supranational
leadership is strong. Globally brokered agreements (e.g. through
ICAO) are desirable but face practical difficulties. Therefore, at
least for the short- term, co-ordinate bilateral and/or regionally
focused negotiations can offer the best way forward.

After the Liberalization process, as a government of India
opened the sky, a number of private players including Jet
Airways, Air Sahara, Modiluft, Damania Airways, NEPC
airlines and East west Airlines commenced domestic operations.
The Open Skies policy allowed the foreign airline of any
country or ownership to land at any port on any number of
occasions and with east Airlines commenced domestic
operations. The Open Skies policy allowed the foreign airline of
any country or ownership to land at any port on any number of
occasions and with unlimited seat capacityA low-cost carrier or
low-cost airline is an airline that offers generally low fares in
exchange for eliminating much traditional passenger service.
India‘s first low-cost airline, the success of Air Deccan has
spurred the entry of more than a dozen low-cost airlines in India.
Air Deccan now faces stiff competition from other low-cost
Indian carriers. Air Deccan is India‘s first low-cost carrier,
operating 350 flights to 64 destinations a day within India. Its
main base is HAL BANGALORE International Airport, with a
secondary hub at Chennai International Airport, Chennai.
Spice Jet was earlier known as Royal Airways, a reincarnation
of ModiLuft.
The passenger traffic in the Indian aviation industry is growing
day by day. The growth rate of the passenger traffic is an
indication of the growing demand of air services in India. This
growth has evolved over a number of years broadly speaking in
the last 10 years. Let us analyze how the demand as well as
supply has changed in the initials year i.e. during the 1990's
there were not many players in the market specifically because
of the government restriction‘s such the supply was limited
during those years. History speaks for itself that during that time
the air fares were exorbitant making air travel affordable only by
the rich and elite. Now the question arises whether the limited
supply lead to high air fares or the high air fares lead to low
demand. It seems that it was both the ways. The limited number
of airlines was not able to cater to huge demand of India, thus
leading to high prices .and these high prices subsequently lead to
reduction in demand. Indian Aviation Industry is price elastic in
nature as with the reduction in the prices over the years, the
passenger traffic has increased enormously. In 2003 when the
low cost airlines were introduced the passenger traffic had
increased enormously, even the railways were forced to revise
their fares and come out with new schemes in order to face the
stiff competition it was getting from the Airways.
          Aviation Turbine Fuel is far higher than global rates; it
is accounted for 35-40% of operating cost, as against global
average of 20-25%
    Labour accounts for the major cost incurred by the industry
     because large number of operators required and due to
     shortage of technical personnel.
   Interest repayments on foreign currency loans acts as a
    burden on the industry.
   The industry has to take huge loans in order to fund their
    infrastructural costs such as purchase of aircrafts,
    maintenance of airports etc.

Prior to the 1990s, it was felt that monopoly in the aviation
Sector was necessary to reap the benefits of economies of scale,
ensure safety and security and enable the country to achieve
social objectives of equity, welfare and consumer The scope for
privatization in the Indian aviation industry is Limited to the
construction, operation and maintenance of airports and
operation of air services. Since air traffic control is considered to
be closer to a public good and regulatory in nature, India, like
most other countries, has not opened up this sector for
In the year 2000, the Government announced the disinvestment
of Indian Airlines. It has been proposed that 51 per cent of the
equity of Indian Airlines will be disinvested; out of which 26 per
cent will be given to a group/company/individual that has been
referred to as strategic partner.
The new trends emerging in the aviation industry in a global
scenario are the increased globalization of economies,
liberalization of aviation policies, new technological
developments in civil aviation, privatization of airlines and
airports and liberal and open skies bilateral agreements.
Deregulation and intensified global competition are forcing
airlines to become responsive, competitive and efficient by
focusing more closely on their customers and operations. Over
the past few years in India, the attitude of the Government and
Aviation Industry towards the regulation of Air transport has
undergone a profound change in almost all spheres. New
concepts of ownership, financing, management and operation of
air transport are the emerging trends in India. Airport owners
and operators who realize this situation are trying to improve
their facilities and services to attract major airlines. Therefore,
airport owners and operators are devising the privatization of
airports to solve the problem.
The aviation industry is facing one of its most challenging
environments in history. A global economic recession coupled
with the terrorist attacks of September 11, 2001 have led to a
decrease in passenger traffic, reduction in revenue per mile
flown, and rising labor costs. Additionally, a collapse in pricing
power and a shift in the buying behavior of business travelers,
coupled with fierce competition from low cost airlines, are
forcing major airlines to restructure their operations or face the
prospect of going out of business. The aviation industry has
responded to this difficult environment by taking measures to
reduce their costs. Airlines announced layoffs involving more
than 100,000 employees immediately following the attacks. To
make matters worse for the industry, the Federal Aviation
Administration (FAA) predicts only a gradual recovery in
passenger traffic during the coming years.
The U.S. airline industry went through a deregulation process in
1977. Prior to deregulation, 34% of all passengers did not have
a choice of selecting an airline and domestic carriers transported
240 million passengers annually ( website).           After
deregulation, 85% of all passengers in the U.S. had a choice of
two or more carriers and traffic increased to 640 million
passengers annually.
Legal issue relating to liberalization and privatization of aviation
1. Comprehensive and Futuristic Civil Aviation Policy in India:
The Need of the hour
2. Mergers and Acquisitions: Do we need a Single Window
3. Joint Ventures in Civil Aviation Sector: Emerging Legal
4. Leasing and Financing of Aircraft: A Critical Analysis
5. Project Finance in Airlines Industry: Is it a new method of
mobilizing resources?
6. New Trends in Aircraft Insurance: An Overview
7. Environment and Aviation: Issues and Challenges
8. Safety & Security in Aviation: A Cause for Great Concern
9. Air Craft Hijacking: An Analysis of New Legal issues
10. Cargo Aircraft: Perspective and Insight
12. The Survival of Low- Cost Airlines in India: Do we need
new strategy?
13. Fractional Ownership Indian Scenario: A jurisprudential
14. Competition Law Policy Issues in Civil Aviation
15. Foreign Direct Investment and Changing Dimensions of
Ownership Issues
16. Emerging Issues in Code- Sharing Arrangements
17. Consumer Protection in Civil Aviation: Recent Case Laws
18. Indian Judiciary and Civil Aviation: An analysis of various
19. Shortage of Pilots in India: What Steps We Need?
20. IPR Issues Relating to Patents, Trademarks and Designs in
21. Air Carrier‘s liability under the New Montreal Regime.
22. In flight Services, Crew Safety: Issues and Concern.
23. Growing Trends in Air Cargo Business: Legal Issues
24. Taxation of civil aviation; emerging issues
25. Scope and Role of Aviation Consultancies/ Law Firms in
According to an aviation industry association, "Sustainable
development is one of the greatest challenges and opportunities
facing the aviation industry in the 21st Century". With air traffic
expected to double by 2017, environmental concerns are gaining
an increasing importance. Although the aerospace industry has
consistently     made       significant   improvements,      future
technological and operational improvements are not expected to
offset the effect of this anticipated growth. A "business as usual"
approach will not do and without major steps to mitigate these
impacts, the industry's ability to meet demand may become
increasingly constrained not by its runway or terminal capacity
but by its "environmental capacity".
Aircraft noise levels are today around 20dB lower than they
were 40 years ago. This represents a significant reduction in
received acoustic energy. However, the number of air traffic
movements has increased and the disturbance to the public
caused by aircraft noise remains the most significant
environmental impact around airports.
A recent survey of European airports has indicated that up to
two-thirds already have their operations constrained by noise-
related issues and that this figure could increase to 80% during
the next decade. Many airports have implemented noise
charging schemes and have also been forced to close at night or
accept operational night-time restrictions.
Future challenges in this area include proposals for the
development of a Supersonic Business Jet.
Local Air Quality:
Nitrous Oxides (NOx) have been identified as the key
contributor from air transport to the problems of local air
quality. This issue is most evident at Heathrow, the UK's busiest
airport, where NO2 levels currently exceed the EU's annual
average air quality limit for 2010. It is likely that air quality will
be a significant feature in the debate concerning additional
runway capacity. During the last decade, the NOx emissions
certification limits during the landing and take-off cycle have
been reduced by 41% by the ICAO Committee on Aviation
Environmental Protection (CAEP).
Switzerland, Sweden and the UK already apply airport
emissions charging schemes and the adoption of the EU air
quality directives may result in the introduction of more local air
quality management schemes and emissions related charging
regimes in the future.
Many of the world's governments, including those of the EU,
have signed the United Nations Kyoto Protocol which aims to
reduce greenhouse gas emissions to reverse the effects of
climate change. Although international aviation is currently
excluded from the Protocol, its contribution to global warming is
predicted to increase significantly by 2050 due to growth in the
industry and the development of alternate energy efficient
technologies in other sectors.

Future Objectives:
The ultimate aim for the industry must be sustainable
development, where the environment is not sacrificed for growth
and future generations will be able to continue to benefit from
air travel. The aviation industry has already started to tackle this
formidable task but continued and imaginative effort is required
to ensure the industry maximizes the use of its "environmental
   Aviation's impact on the environment and climate change is
    one of the most important challenges now facing the
    industry. This is a global challenge which requires global
Minister Praful Patel took an enlightened approach to opening
markets. In the last 10 years, international frequencies nearly
tripled to nearly 2,300 departures per week. And since 2006,
passengers numbers increased by a third on international
markets, including domestic by 70%. And average fares
dropped by 27% for international travel and 35% overall.
Consumers benefited with more choice and lower costs. Carriers
were challenged to improve their competitiveness. NACIL
combined Air India and Indian Airlines. Jet and Kingfisher
expanded internationally and absorbed several smaller players.
And a low-cost industry was born. In stark contrast to Minister
Patel‘s pragmatic liberalization, is the very old world approach
to foreign direct investment in aviation by the Ministry of
Commerce. India allows 100% foreign direct investment in
mass rapid transport systems, ports and harbors, hotels and
tourism, inland water and ocean transport, and toll roads and
tunnels. But it restricts foreign ownership of airlines to 49%.
And no foreign airline can invest in an Indian airline. Airlines
around the world are cooperating to build economies of scale
and pursuing multi-hub, multi-brand strategies. Joint ventures in
India have a long history. For example, Tata Motors began
producing commercial vehicles with Daimler-Benz in 1954.
And Marti Suzuki captured 45% of the Indian market in a
Japanese-Indian partnership. The success of India‘s airlines
should not be compromised by an investment policy that isolates
it from the world.
Aviation must become a normal business with normal
commercial freedoms. India is moving in the right direction on
market access.
Globalization has also become an umbrella term used for a
complex series of economic, social, technological, cultural and
political changes that are seen as increasing interdependence,
integration and interaction between people and companies in
different locations. In particular, it is due to the increase in
worldwide business and trade between multinational and
transnational corporations, among others, irrespective of their
geographical locations, that the term has gained prominence
(Cooper et al, 1998). It is these inherent characteristics of
globalization that have precipitated national boundaries to be
more fluid or porous with respect to the movement of people
and services.

International Trade

The globalization of the world economy has played a critical
role in bringing about changes in business tourism. As trade and
foreign direct investments require travel abroad, they have
undoubtedly contributed to the further globalization and growth
of the business aviation industry.

Technological Improvements

One of the often cited drivers of globalization is the
improvement in new technology. Improvements in transport and
communications have fundamentally facilitated the growth and
movement of international tourists. According to Shaw and
Williams (2002), the process of globalization has significantly
been advanced through technological developments in the fields
of transport and communications, particularly long range
aircrafts, the internet, computer reservations systems (CRS) and
e-commerce. Microsoft Encarta (2000) also affirmed that a
whole world of new opportunities for business and trade has
been opened up by technological improvements in transport and
communication systems as well as by internet banking. Due to
the exponential growth in air transport, global travel has shrunk
in terms of time and distance, allowing tourists to travel to
distant international destinations with ease [World Tourism
Organization (WTO), 1983]. According to
(2006), these low cost carriers have facilitated travel and are the
fastest growing trend in the to aviation industry. The internet is
probably the most important development underpinning the
process of globalization. The purchase of Internet-based
entertainment has also greatly facilitated the rapid global
dispersal of new forms of leisure activities.
These changes in the Indian aviation policies resulted in an
increase in the share of private airline operators in domestic
passenger carriage to 68.5% in 2005 from 0.4 of 1991. More
recently, over numerous low-cost carriers have entered the
Indian domestic market including Air Deccan, Kingfisher
Airlines, Spice Jet, Go Air, Paramount Airways and Indigo
Airlines since 2004 (O‘Connell and Williams, 2006). Externally,
India has liberalized many of its bilateral agreements, including
signing an Open Skies agreement with the US in 2005 which has
stimulated traffic, a trend that will inevitably continue at India‘s
GDP increases.
The study of airline liberalization in South Korea, Taiwan, Hong
Kong, the Philippines, Thailand, Malaysia, Singapore, and
Indonesia examines the evolving relationships between states
and carriers. The aviation industry of East Asia has been an
arena for significant liberalization initiatives in the last decade.
State-owned carriers have been privatized; new carriers have
been allowed to enter domestic and international markets; and
government controls over such dimensions of airline
competition as equipment choice, fares, and route selection have
been eased. The liberalization process has been influenced by a
variety of factors. Among these are the size and growth of
markets, the need to improve the competitiveness of state-owned
carriers, the political environment, and the relationship of the
aviation   industry   to   economic      development.Given      the
importance of this industry, the region's governments have
sought to balance the risks and benefits of liberalization via
policies that are selective, incremental, pragmatic, and
The liberalization of the Philippine domestic airline industry
                                                         fare =
( / (ln y + ))                                          y is the
average airfare under liberalization. Borenstein (1992) reports
similar findings in markets with at least two active airlines. The
reduction in airfare under liberalization means that regulation is
likely to result in higher fares as observed by Keeler (1972),
Olson and Trapani (1981), Graham et al. (1983), Moore (1986),
Kahn (1988), and Rietveld et al. (2002). Moreover, Moore
(1986) observes that markets with more than four carriers
experienced a reduction in airfares by 24 to 29 percent when
1983 fares are compared to their 1976 levels. Despite the fact
that the maximum number of airlines serving a number of routes
in the Philippines is three after the failure of Grand Air,
liberalization results in lower fares for markets with at least two
airlines. This observation is consistent with findings that
indicate prices are lower in markets with two sellers instead of
only one and that price competition intensifies when the number
of sellers increases from two to three (Besanko et al. 2004).
One has only to compare the Air India launched by J.R.D. Tata
to the Air India currently operated by the government to see the
difference between private and public sector management. When
JRD ran the show, Air India was a boutique airline that was
renowned globally for its service and class aboard flights. In
contrast, Air India is now considered a lame duck. Even Indians
shun this international airline which has become a byword for
inefficiency in the aviation world. Umpteen stories have
appeared in the media about the mishaps that take place owing
to overbooking, prolonged delays and discomfort to passengers
in this airline. The simple fact is that bureaucrats are not
equipped to run airlines and the job needs to be handed over to
professionals in the aviation industry. Any whiff of
privatization, however, elicits strong protests from politicians of
all hues. There is a feeling that selling Indian and Air India
would be like selling the crown jewels of the economy. In fact,
the government could keep a minority stake in the airline while
making a strategic sale to a private operator.

CASE STUDY: AIR DECCAN Implementing the Low –cost
Model in India Background As aviation industry was increasing
at fast rate there was strong competition between various
players. Air Deccan introduced the concept of low cost air
carrier and was initially quite successful in implementing it. The
target customer of Air Deccan was generally unsatisfied
customer of Indian Airlines who did not put much emphasis on
service but were price conscious. The service attracted frequent
air travelers. The case has the following issues: » Studying the
structure of the Indian civil aviation industry. » Developing an
understanding on the operations of low cost carriers in India. »
Examining the viability of low cost business model in the Indian
aviation industry. » Understanding the target market and the
promotional strategy of a low cost airline in India and draw a
comparison with that of full service airline. » Studying the
challenges that a low-cost airline company might face in the
Indian context.
ANALYSIS: Air Deccan's business model was inspired by the
globally successful low cost model pioneered by the US-based
Southwest Airlines in the 1970s.The challenges that the
company has to face are now only beginning. In the initial stages
of the company, many of the established players (Indian
Airlines, Jet Airways and Sahara) would have trivialized the
company and not expected it to reach the level it has reached
now. Suddenly, the company has appeared as a big dot on the
radar screen of these well- established players.

A key reason for the low volume of air travel was primarily the
steep airfares. The perception is that air travel is essentially for
the rich class, who can afford to pay a high price for the
convenience of air travel Low-Cost Airlines (LCA) usually
operate on a 3-pronged policy of low operational costs,
appropriate positioning and no-frills services to harness only
those customers who value cheap fares. Low operating costs are
ensured through cost containment on all aspects of the airline's
operation such as by contracting non-core activities, lower
airport fees, shorter time on the ground through quick
turnarounds, simple boarding processes, higher percentage of
on-line sales of tickets thus, reducing commission payable to
travel agents, more number of seats on the aircraft by optimally
utilizing space on the aircraft, elimination of business class
section on the flight, and ensuring that the flights run to full
capacities. Unlike legacy airlines, low-cost airlines do not use
the traditional hub and spoke model. They offer no inter-line
arrangements for seamless passenger transition or baggage
handling from one airline to another. Innovations to achieve
tight operational cost control through many innovative practices.
• Most of the tickets sold to passengers are through the Internet.
 • A policy of 'Pay and fly' as against the 'Fly and pay' policy
followed by the legacy airlines ensures that there are no cash
flow problems.
• A lower turnaround time of 15 minutes from landing to take-
off of an aircraft ensures that Air Deccan aircraft are air-borne
for a much longer time each day. In contrast, legacy airlines
have turnaround times of 30 to 50 minutes. This translates into
higher frequency of flights, more flying time per day of the
aircraft and consequently more passengers flown per day by
each aircraft.

 • Through its Internet based system, Air Deccan can
dynamically track load factors and adjust fares on an on-line
basis. The advertisement ―everyone can fly‖ Air Deccan
positioned itself as low cost carrier. It has taken good control of
every parameters that there target customers need. Competitions
from other players were there but Air Deccan had made a strong
foothold in aviation
India is waking up to a new revolute Indians have taken to
flying like never before, the year 2006 saw a passenger growth
of a 47% over the previous year. Till the year 2003 flying was
largely restricted to corporate travelers and the rich who could
afford to fly. While attractive low fares has been the primary
reason for tremendous passenger growth, the increased capacity
and declining yields, have put a strain on the entire industry.
The operating costs of an airline in India are approximately
65~70% higher than any other similar operation in any other
part of the world. While attractive low fares has been the
primary reason for tremendous passenger growth, the increased
capacity and declining yields, have put a strain on the entire
industry.Example of the Jet-Sahara merger is just the beginning.
Indian aviation industry is looking forward to more
consolidations. Nowadays, to launch an airline venture capital of
$10 million or less is enough. Private airlines are hiring foreign
pilots, get expatriates or retired personnel from the Air Force or
PSU airlines in senior management positions.
 Many private players like Jet and Sahara have gone
international by starting operations, first to SAARC countries,
and then to South-East Asia, the UK, and the US and many more
domestic airlines too will be entitled to fly overseas by using
unutilized bilateral entitlements to Indian carriers. As compared
to the developed country standards, India's GDP (per capita) at
$3,100 is still very low but as India is shining, at least in metro
cities and urban centers, where IT and BPO industries have
made the young generation prosperous. Demographically, In
India people in age group of 20-50 among its 50 million strong
middle class, has the highest percentage with high earning
potential. It contributes the boost in domestic air travel,
particularly from a low base of 18 million passengers.
 Presently India attracts 3.2 million tourists every year, while
China gets 10 times the number. Due to the open sky policy
Tourist arrivals in India are expected to grow exponentially. An
airline is as glamorous as the film-making industry. Today
Airline tycoons, like J. R. D. Tata and Howard Hughes, Sir
Richard Branson, Dr. Vijay Mallya, have been idolized. Airlines
have an aura of glamour around them, and high net worth
individuals can always toy with the idea of owning an airline.
   Airport privatization of Mumbai and Delhi progress and
    confidence develops in creating tourism infrastructure.
Indian Airline Industry was one of the fastest growing Airline
Industry across the world during the last decade. However,
skyrocketing fuel prices, economic slowdown, slashed corporate
travel budgets over the last 3 years has forced all Indian Airlines
to rethink their business model. The real gains of liberalization
can only be achieved through removal of market distortions and
enhancement of competition and not through a mere change of
ownership from the public to private sector.

   After the post privatization period i.e. the period after 1991
    lot of private players entered the industry under the
    government policy of open sky, which repealed the Air
    Corporations Act of 1953 and came up with Air
    Corporations Act, 1994. Opening up of the Aviation
     industry to 41% FDI in the form of equity stake has also
     increased the competition in the economy. By 1995, Private
     airlines occupied 10% of the domestic air traffic.
If we arriving at Delhi Airport, it was clear that this could be the
decade when Indian aviation will reach the potential that we
have all been waiting for. But there are no guarantees. Success
must be earned with coordinated policies, a responsible position
on climate change, cost-efficient infrastructure, competitive cost
structures, a balanced approach to liberalization, and constant
attention to safety.
Some steps are already being taken by the government for the
development of Aviation Industry. Concluding we can say that
apart from all the challenges Aviation Industry's future is very
bright in India.
(1) Global journal-Southwest Airlines, sheer inventiveness.
(2) Thanks to John for pointing out the glaring contrast
    between aviation aspects of different countries.
(3) Harvard Business School case study (‗best of the best:
    Customer service.)
(4) Newyork Times, article, year 2004 –Globalization impact
    & GROWTH.
(5) Commerce- Ministry of Commerce,              India-skeptical
    perspective on aviation industry.
(6) Wall Street Journal, truly memorable article ―In search of a
    Real, Live Operator-Industry spends billions for global
(7) Open source by an accidental revolutionary, o‘reilly, 1999
    is a fundamental text for the rise of grassroots innovation.
(8) For an overview of the far reaching changes at Procter &
    Gamble-teaching old dog new tricks. Turnaround recipe-
    Find out what the industry wants‘.
(9) ―Grand Opening‖ by Kenneth Klee, IP law and Business.
(10) CSFB thought leaders forum:
    boundary-pushing approach.

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