India insight

Question: What domestic challenges must the airfreight sector overcome in order to capitalise on the growing potential of the Indian market?

Expert: John Manners-Bell
Chief executive, Transport Intelligence

Volume control

It is widely recognised that India's logistics industry has made significant progress over the last ten years with emerging private companies driving major developments in the sector. However, the country's recent economic growth has led to acute pressure on India's air transport network, which is currently struggling to cope with the growth in volumes.

On an international basis, the region has experienced a compound annual growth rate of 16.3% over the past five years, with a domestic increase of 12.2%. Forecasts suggest this trend will continue, with India set to grow annually by 10-12% for the foreseeable future.

Cause for concern

One of the most alarming concerns is the lack of investment towards physical infrastructure, which in turn is not helped by local bureaucracy that restricts the level of foreign involvement in the sector. This has led to congestion, poor freight handling facilities, and weak connections with inland markets. Low standards of air traffic control also remains an issue. Despite this, fundamental demand-side trends remain positive and these will force systemic changes in India's transport sector.

The retail revolution will be a key catalyst in this change as increasing organisation of India's retail markets will ultimately sharpen focus on the supply chain. Leaders in the transport sector are responding by establishing sophisticated products in high growth segments, such as cold chain and express, as well as providing sector specific solutions for automotive and consumer goods. In a nutshell, the growth of the Indian air cargo sector is underpinned by the size of the domestically owned air transport sector.

Restricted growth

The sheer geographic scale of the country combined with its old-fashioned railway systems has resulted in a demand for cheap passenger air services, with cargo growing on the back of this. Held back by regulations until the 1990s, the number of airlines has subsequently ballooned and is now one of the most dynamic areas of the Indian economy.

Air cargo also looks well positioned to benefit from the nature of economic activity in India, which being orientated to sectors such as IT services and pharmaceuticals are of limited use for rail or sea freight. It is argued that the restrictive nature of India's land transport system is constraining the growth of other sectors rather than any basic lack of demand. If this proves to be the case than the comparative strength of air cargo may in fact drive the Indian economy.

Foreign talk

This ongoing evolution has inevitably led to much interest from foreign investors in the Indian air transport sector. Recent mergers and acquisitions are evidence of increased activity from global express leaders in the region, namely DHL and FedEx. A notable example is DHL's move to purchase a majority stake in one of India's largest air express operators, Blue Dart Express. Following this, the German giant has expanded its network to 62 routes to and from seven of the major airports in India. Served with a fleet of four Boeing 737s and two Boeing 757s, plans are in place to expand the fleet later this year through the acquisition of a new Boeing 757.

Of similar magnitude, FedEx signed an agreement in November 2006 to buy Prakash Air Freight (PAFEX) for US$30 million. One of India's largest domestic express companies, PAFEX has been the subcontinent's FedEx service provider since 2002 and has more than 384 offices and depots serving nearly 4400 destinations. Alongside such foreign investor developments, incumbent mail operator India Post is beginning to take the express market seriously. Recently leasing a Boeing 737-200 Boeing from Indian Airlines, the freighter will be dedicated to moving express consignments to the North East of the country with Kolkata acting as a regional hub.

Double trouble

Although all the major integrators have their sights set on the fast growing Indian market, its immaturity continues to present risks, especially in regards to its regulatory regime. The Indian government is presently discussing the means to regulate all courier and express operators as well as impose a double tax on them to fund the Universal Service Obligation (USO) of the Department of Posts. Such a move would be disastrous for the industry and perhaps the Indian economy as well.

However, given that integrators continue to position themselves towards expansion in the market, there seems to be a belief that these plans will ultimately be shelved.

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