CAA Report on India Showcases the Benefits of Aviation Liberalisation

Date: 22 November 2006

A study published today by the CAA examines the dramatic impact of the liberalisation of air services between the UK and India since 2004 and finds that there has been a doubling in the number of people travelling directly between the UK and India from just over one million passengers for the year before liberalisation to just over two million for the twelve months up to July 2006. This is due to the greater choice and capacity available, combined with cheaper fares.

Between October 2004 and October 2006, the number of direct services between India and the UK more than tripled from 34 to 112 services per week, provided by a combination of pre-existing carriers offering more flights and the arrival of new carriers in the market. As a result of liberalisation, India has moved from seventh to fourth most popular long-haul destination after the US, Canada and the United Arab Emirates.

The CAA report, published to coincide with the EU-India summit in Delhi on aviation relations, examines the available evidence to gauge the impact on consumers, airlines, airports and the wider economy of the changes brought about by liberalisation. It finds that the benefits have been wide-ranging, with UK consumers, airports and the wider economy all benefiting significantly from the opening up of the market. While the focus of airlines’ expansion plans has been on London-Mumbai, other city pair routes such as London-Delhi and London-Bangalore have also been introduced.

Consumers in particular have benefited from more frequent services to a wider range of destinations in India, with increased competition and capacity leading to substantial reductions in fares for both leisure and business passengers. The report estimates that these changes amounted to benefits equivalent to £39 million for UK resident passengers in 2005, with total consumer benefits likely to be much higher were the impact on foreign passengers also taken into account.

The report has also examined the evidence for the indirect impacts of liberalisation on trade and investment between the two countries, and found that companies place considerable value on the quality of aviation links in their investment decisions. Trade and investment has been growing at a considerable rate since liberalisation, and the report notes that better aviation links are likely to have contributed to this growth. The increase in direct business travel between the two countries is particularly notable in this regard.

There has also been a big increase in leisure travel, particularly travel from the UK to India, and, as a result of the overall increase in traffic, UK airports are gaining more revenue from landing charges and consumer expenditure at airports. The vast majority of new services have been concentrated on Heathrow, with Birmingham the only regional airport benefiting from new direct services. Since liberalisation, the number of direct city pair routes has increased from five to eight, and it is anticipated that further new direct city pair routes will be opened up over coming years.

The only group to have been negatively affected are those airlines already serving India from the UK, either directly or indirectly, where previously lucrative profit levels have been reduced as a result of the enhanced competition in the market. However, the increased greater commercial freedom for airlines to operate direct services, combined with the new opportunities created for growth in these markets, has led to a surge in revenues and UK and Indian carriers are now regaining market share from indirect carriers.

The CAA’s Group Director, Economic Regulation, Dr Harry Bush said:

“The clear and significant benefits set out in this report have come about because Governments on both sides have looked beyond the narrow interests of their flag-carriers when deciding what is in the national interest, and set policy on the basis of the bigger picture. The findings of this report validate their approach. We see more competition, lower fares and greater route choice driving growth in trade and tourism, helping strengthen the already close ties between the UK and India. There is no reason why benefits of this sort cannot be generated by similar liberalisation in other countries.”

The report is available on the CAA website at: www.caa.co.uk/india_liberalisation

For media enquiries, contact the CAA Press Office on 020 7453 6030.

Notes to editors:

1 The publication of this paper has been timed to coincide with the start of a two-day summit on EU:India aviation relations taking place in Delhi on 23 and 24 November. Further details of that conference are available from the organisers’ website: www.euindiaaviationsummit.com

2 The report summarises the main benefits of liberalisation as: Summary of key impacts

3 The background to UK:India liberalisation is that in late 2004 and early 2005, UK and India agreed to a phased liberalisation of their aviation relations that included the loosening of restrictions on the number of services that could be operated between the two countries, and substantial reform of other aspects of the regulatory arrangements.

4 Prior to these agreements, traffic rights between the two countries were tightly capped at 16 services for each side to be allocated as desired by the countries concerned, with the addition of 3 services per week (spw) to Kolkota for each side agreed extra-bilaterally. Of the 38 services allowed to both sides, British Airways operated 19, Virgin Atlantic 3 and Air India 13.

5 The 2004 agreement alone more than doubled flights from 16 to 42, utilisable from the summer 2005 IATA traffic season. These rights were strongly contested by UK carriers, leading to the CAA holding a scarce capacity hearing in November 2004 to allocate the rights between the competing applicants, BA, Virgin and British Midland.

6 A further agreement in April 2005, confirmed in August 2005, brought into effect a completely new Air Service Agreement (ASA) which modernised arrangements on areas such as tariffs, competition enforcement, security and safety.

a) Traffic rights between London Heathrow – Delhi and London Heathrow – Mumbai

With effect from the start of IATA traffic season: Number of frequencies for the designated airlines of each side

Winter 2005: 42
Summer 2006: 49
Winter 2006: 56

b) Traffic rights other than London Heathrow – Delhi and London Heathrow – Mumbai.

(i) For UK carriers: from the beginning of the IATA Winter season 2005, a total frequency limit of 7 services per week to/from each airport in India will apply, except for Bangalore and Chennai, where the total capacity limit will be increased to 14 services per week each from the beginning of the IATA Summer Season 2006.

(ii) For Indian carriers: from the beginning of the IATA Winter Season 2005, airlines of India may operate without capacity limits on any route between India and the UK.

7 These rights presented another opportunity for major increases in capacity. When viewed together with the earlier round of discussions, it can be seen that rights for airlines operating between India and the UK on the core routes between Delhi-Mumbai and London Heathrow have more than tripled between 2004 and 2006 and permitted capacity on most other routes is almost unrestricted. The reaction of the market to this loosening of regulatory constraints has been a rapid increase in passengers, suggesting that the previously tight regulation had significantly suppressed demand.