Jan. 4 (Bloomberg) -- Last April, Bhushan Lal Behal spotted an ad for cheap tickets on Air Deccan, India's first low-fare carrier. Behal, 53, who'd never flown, went on line and snagged two seats to Chennai from New Delhi for 721 rupees ($16) each.

A month later, he and his wife, Veena, flew to Chennai and visited Tirupati, the site of a 600-year-old shrine.

``I hope more such airlines start so that ordinary people have a chance to fly,'' says Behal, a personal assistant at Bharat Heavy Electricals Ltd., India's biggest power equipment maker. ``Until now, it has been a rich man's privilege.''

At least a dozen new airlines are lining up to accommodate the Behals and the rest of India's 1.1 billion people, buoyed by the nation's 6.9 percent growth in the year ended on March 31, 2005. Indian companies stole the spotlight at the Paris Air Show in June by committing $13.6 billion for 150 new planes, more than any other country.

By 2010, there will be 65 million middle-class Indian households, consisting of 351 million people, or more than the current populations of the U.S. and Canada combined, New York- based consulting firm McKinsey & Co. predicts.

``Economic growth is so strong that domestic demand will pick up, not just for business but for personal travel,'' says Krishan Sehgal, a partner at Singapore-based AMP Capital Investors Ltd., the fund management arm of AMP Ltd., Australia's largest life insurer. AMP Capital owns shares of Jet Airways (India) Ltd., the country's biggest domestic airline, among the $220 million it manages in Indian equities.

Investors Waking Up

The takeoff in air travel is sparking initial public offerings, soaring stock prices and predictions of a shakeout. The aviation frenzy provides more signs that the world's second- most-populous country, after China, is lurching toward modernization, as it has done with computers, software and telecommunications.

``Investors are waking up to the growth in India's aviation industry,'' says K.K. Mital, who manages 2 billion rupees as chief investment officer of Escorts Asset Management Ltd. in New Delhi.

Both government-owned airlines, Air India Ltd. and Indian Airlines Ltd., plan IPOs by March 31 even as airports designed in the 1950s struggle to handle the new crush of passengers and flights.

Tale of Two Terminals

In Mumbai -- India's biggest city, with 16.4 million people -- the domestic private airline terminal sports a gleaming steel- and-glass facade, electronic display boards and granite flooring in the check-in lounge. In the international terminal, meantime, the walls are marred by red stains from people who spit while chewing pan, a preparation that's made from betel nuts and spices.

The domestic private terminal at New Delhi's Indira Gandhi International Airport has crammed new check-in counters into a corner for lack of space. Passengers sit on the floor because there aren't enough seats. Outside, cars and baggage carts clog the road and jam traffic in peak hours.

``For every business in India today, infrastructure is the biggest issue,'' says A.S. Thiyaga Rajan, managing director at Aquarius Investment Advisors Pte in Singapore, which manages $150 million in Indian stocks and is an investor in SpiceJet Ltd.

Shares of SpiceJet more than doubled in 2005 and were trading at 84.05 rupees on Jan. 3 even though the New Delhi-based low-fare carrier started flying only in May.

Citigroup Inc. and Goldman Sachs Group Inc., both based in New York, and ABN Amro Holding NV, based in Amsterdam, are among the SpiceJet investors that bought $91 million of the airline's stock and bonds in 2005.

`Bleeding and Closing'

Investors are placing their bets amid forecasts that many of India's carriers will merge, seek partners or shut down. ``You'll see some airlines bleeding and closing,'' says Kapil Kaul, chief executive officer of the Indian unit of the Centre for Asia Pacific Aviation, or CAPA, a Sydney-based aviation consulting firm.

By 2010, India will have 10 airlines, down from the 21 that are proposed or operating today, he predicts.

The Indian government prohibits overseas airlines from buying stakes in the nation's carriers and limits foreign investors to 49 percent, creating a hustle for funding among India's homegrown companies.

In February 2005, Mumbai-based Jet Airways raised $436 million in its IPO. In May, Deccan Aviation Pvt., which owns Air Deccan, raised as much as $40 million. It sold an undisclosed stake to ICICI Ventures Ltd., a unit of India's ICICI Bank Ltd., and Capital International Inc., a part of U.S. mutual fund firm Capital Group Cos.

In November, Deccan hired JPMorgan Chase & Co. and four other banks to arrange an IPO in 2006 for the airline, which paints ads on its planes to earn additional revenue.

`Enormous Opportunity'

``India has a huge, growing middle class with disposable income that is short on time and likes to travel,'' says Bruce Ashby, who left bankrupt Arlington, Virginia-based US Airways Group Inc. in July to become CEO of Gurgaon, India-based InterGlobe Aviation Pvt.

InterGlobe Aviation, founded and financed by former US Airways CEO Rakesh Gangwal and Indian businessman Rahul Bhatia, plans a budget carrier called IndiGo in 2006.

``There is enormous opportunity here,'' Ashby, 44, says. ``India has 70 cities with a population of more than 1 million. We want to connect 30 of those cities.''

Trouble With Trains

People who travel India's vast distances attest to the appeal of air travel. Right now, trains are the choice for as many as 15 million Indians each day -- an option that can be fraught with inconveniences. The 1,167-kilometer (725-mile) journey from New Delhi, India's capital, to Mumbai takes 15 hours by train compared with two hours by air.

Passengers who want to go from New Delhi to Thiruvananthapuram in the southern state of Kerala during peak times must reserve tickets for an air-conditioned compartment as much as three months in advance. The 50-hour journey in rusty cars takes them through stations with stinking toilets and filthy platforms.

``The railways haven't paid attention to hygiene, stations, food and facilities,'' Mital says. ``Booking train tickets is a big hassle, so people are now switching to flights.''

Numerous obstacles threaten to stall India's skyward ambitions. The average price of jet fuel in the country is 23,284 rupees per kiloliter (264 gallons), 78 percent more than the global average, according to CAPA. A 10 percent duty on imported crude oil and sales taxes that range from 7 percent to 39 percent contribute to the cost.

Glut Ahead?

Since August 2004, when Air Deccan started flying to Mumbai and other major cities, traffic has soared as promotional fares as low as 1 rupee lured first-time fliers.

Some 40.1 million tickets to fly domestically were sold on India's airlines in the year through March 31, 2005, compared with 25.7 million in the period that ended in 2000. CAPA projects that more than 90 million tickets for domestic and international travel will be sold in India in 2010.

Dinesh Keskar, senior vice president in charge of India sales at Chicago-based Boeing Co., the largest U.S. airplane maker, cautions that India may be heading for a glut like the one that has exacerbated U.S. airlines' woes.

Dallas-based Southwest Airlines Co., the largest low-fare carrier, is the only major American airline to remain profitable since the Sept. 11, 2001, terrorist attacks. The biggest U.S. airlines have lost more than $38.2 billion since 2000, most recently as fuel prices hit records and competition held down fares.

Money Trap

Three of the five Indian carriers that have started in the past two years -- GoAirlines (India) Pvt., Air Deccan and SpiceJet -- are budget airlines.

``India could be facing overcapacity, and when that happens, the only way you can steal traffic is to reduce your price,'' Keskar says. ``The moment you do that, you are into this trap of not making money.''

One possible takeover is already in the works. In November, Kingfisher Airlines Ltd. bid $400 million for rival Sahara Airlines Ltd., offering less than the $750 million to $1 billion valuation set by accounting firm Ernst & Young. Kingfisher's founder, Vijay Mallya, 49, is the chairman of UB Group, which makes one of every three bottles of beer sold in India.

Selling Stakes

Sahara Airlines wants to sell a minority stake to raise money to buy planes, says Ronojoy Dutta, president of Sahara and former president of UAL Corp.'s now bankrupt United Airlines. Dutta, 54, says eight companies, among them overseas buyout firms that he declined to name, are evaluating possible investments.

Sahara Airlines -- a part of India's Sahara Group, which runs banking, real estate and media businesses -- flies 26 leased planes. It wants to expand to 75 aircraft by 2010, Dutta says.

Kingfisher is slashing prices to compete with incumbents such as Jet Airways and Indian Airlines. In November, Kingfisher charged 5,500 rupees for a one-way ticket to Delhi from Mumbai booked two days before travel compared with 8,685 rupees on Jet Airways.

Kingfisher's fleet of eight Airbus A320s offers a single type of service the airline calls ``Kingfisher class.'' The seats are wider and have more legroom than Jet Airways' economy class.

Mallya says he can afford to charge passengers less than Jet Airways while providing extras such as a pouch with headphones, a pen, tissues and candy.

Diamond Earrings

Kingfisher is just gearing up and will hire its team from scratch, he says. It also contracts with Indian Airlines to perform aircraft maintenance. Mallya projects that Kingfisher will require fewer than 100 employees per plane compared with Jet Airways' 137.

``My competition, the way we think and the way we act, is Jet Airways,'' says Mallya, who sports diamond studs in each ear and travels with three secretaries and a security guard, who holds his Louis Vuitton men's handbag.

Kingfisher plans to challenge Jet Airways on international routes, too. Mallya has ordered 58 planes from Airbus and 20 turboprops from Rome-based Finmeccanica SpA for a total of $6 billion. Among them are five 555-seat Airbus A380s, the world's largest commercial airliner, with an 80-meter (262-foot) wingspan.

``I want to launch nonstop services between India and the U.S.,'' says Mallya, who is an independent member of the country's upper house of Parliament. Government rules require Indian airlines to fly domestic routes for five years before they can fly overseas.

Indian Airlines, Air India

Five decades ago, it wasn't hard to keep track of India's airlines or to figure out which one offered the cheapest seats or best amenities. There were two: Indian Airlines, for domestic routes, and Air India, for international travel.

Prime Minister Jawaharlal Nehru formed the airlines in 1953 by taking over private companies. Indian Airlines melded eight small airlines with a total of 99 planes. Air India grew out of Tata Airlines, a part of Mumbai-based steel and textile maker Tata Group.

In 1932, Tata Airlines began meeting Imperial Airways' London-to-Karachi flight and then continued to Madras, now called Chennai, via Mumbai. It used a de Havilland Puss Moth monoplane, which had a cabin instead of an open cockpit. J.R.D. Tata, then Tata Group chairman, piloted the inaugural flight, which hauled mail.

The first private airlines since the 1950s emerged in 1992, a year after Prime Minister P.V. Narasimha Rao opened India's economy by ending a system of licenses for starting businesses, easing import controls and letting multinational companies enter the country. Six airlines sprang up.

Two survive: Sahara Airlines and Jet Airways, which went on to supplant Indian Airlines as the nation's largest domestic carrier in 2003.

Mother's Loan

Naresh Goyal, 56, Jet Airways' chairman, says he'd contemplated starting an airline for decades. In 1967, at age 18, he began working as an assistant in his uncle's New Delhi travel agency for 300 rupees a month.

From 1969 to 1974, he was the public relations manager for Iraqi Airways and a regional manager for Royal Jordanian Airlines. In 1974, he founded his own ticketing agency called Jetair Pvt., thanks to his mother's loan of 10,000 rupees, about $600 at the time. Jetair became the Indian ticket sales agent for Air France and Singapore Airlines and went on to represent as many as 20 airlines.

In 1992, Goyal got his chance to fly. He persuaded Gulf Air, the oldest airline in the Persian Gulf, and Kuwait Airways Corp., that Middle Eastern country's national airline, to invest $4 million each in his new carrier.

Skirts vs. Saris

He says he tried and failed to get British Airways Plc, Singapore Airlines Ltd. and Emirates Airlines to invest. Gulf Air and Kuwait Airways gained a domestic Indian airline partner that let them offer connections beyond Delhi and Mumbai. Financial institutions, friends and foreign companies lent $12 million, Goyal says. He refuses to divulge their identities.

Goyal built his airline by attracting business travelers as the government's 1991 move to open the economy took hold. He bought new planes, stressed on-time performance and hired young flight attendants who dressed in blouses and skirts instead of the sari uniforms worn by attendants on rival Indian Airlines.

``Jet is on time, their aircraft are clean and they know how to keep passengers happy,'' says B.V.R. Subbu, president of the Indian unit of Hyundai Motor Co., South Korea's largest carmaker.

In 2004, after 10 years of flying within India's borders, Jet Airways received government approval to go overseas. It made its first international flight to Colombo, the capital of Sri Lanka.

IPO Frenzy

Jet Airways went public in February 2005 and investors bought, in the space of 15 minutes, all of the 17.3 million shares offered. The IPO made Goyal a billionaire. The shares, offered at 1,100 rupees, reached a high of 1,373.35 rupees on April 26. On Jan. 3, they traded at 1,124.8 rupees, making Goyal's 80 percent stake worth $1.7 billion.

Jet Airways now flies to Kathmandu, Nepal; Kuala Lumpur; London; and Singapore. Goyal's plan to add the U.S. hit a snag in March 2005, when the airline submitted an application to the U.S. Department of Transportation.

Nancy Heckerman, CEO of a U.S. company called Jet Airways Inc. in Bethesda, Maryland, opposed the application in letters to the Transportation Department alleging trademark infringement. That litigation is still pending.

In the letters, Jet Airways Inc. called itself a ``fledgling airline.'' Heckerman also contended, in documents available on the Transportation Department's Web site, that Dawood Ibrahim funded Goyal's airline. The U.S. Treasury Department, on its Web site, calls Ibrahim an Indian crime lord with connections to al- Qaeda.

Under Review

India's Central Bureau of Investigation says on its Web site he is wanted in India for March 1993 bombings at the Bombay Stock Exchange and elsewhere in the city, which is now called Mumbai. About 200 people died in the blasts.

Bill Mosley, a Transportation Department spokesman, says the Indian airline's application is under review. Calls to Heckerman's office were unanswered. There was no response to messages left on voice mail and to e-mails seeking comment.

``It's just nonsense,'' Goyal says, referring to Heckerman's charges during a conversation in his Mumbai apartment, with its Indian paintings and a 42-inch television for viewing Bollywood movies. He declined to discuss the matter further.

Targeting Singapore Airlines

Even without U.S. routes, Jet Airways has a market capitalization of $2.16 billion and a fleet of 51 aircraft. At the Paris Air Show, it announced plans to buy 10 planes each from Boeing and Toulouse, France-based Airbus SAS. It has options to purchase another 10 aircraft each from those manufacturers. The total order would be as much as $9.1 billion at list prices.

``I would like to see Jet Airways' valuation in the region of Singapore Airlines,'' Goyal says, referring to his rival's $8.4 billion market capitalization. ``We want to be among the best five airlines in the world in the next five years.''

Air Deccan Managing Director G.R. Gopinath has a different strategy. His budget carrier, which charges for food and has no business class or frequent flier program, is targeting India's smaller cities, betting that people like the Behals will hop a plane if the price is right.

In December, Air Deccan added the cities of Pune, in western India, and Srinagar, in the northern state of Jammu and Kashmir, to the 44 it serves, surpassing Jet Airways as the airline with the largest domestic network. Now it's starting to connect smaller Indian cities to each other.

Deccan charges 3,557 rupees for a round-trip flight from the southern city of Hyderabad, home to development centers for U.S. software makers Oracle Corp. and Microsoft Corp., to Goa, known for its beaches. Jet Airways charges 18,500 rupees because it first takes passengers from Hyderabad to Mumbai and then from Mumbai to Goa.

From Silkworms to Air Deccan

Gopinath, 54, a former Indian army captain, was one of the winners of the Rolex Awards for Enterprise in 1996 for developing natural farming practices in raising silkworms. The awards, initiated in 1976 by Andre Heiniger, the former chairman of watchmaker Rolex Group, are given every two years for initiatives in science, the environment and other fields.

Gopinath caught the aviation bug in 1997. His first effort was a helicopter charter company, an idea that came to him when he saw one of his friends, a former army pilot, struggle to find work. Gopinath says he realized there were many pilots like his friend and not a single helicopter company in India to employ them.

Five years later, Gopinath was on his way to the Grand Canyon when, he says, he saw a banner that proclaimed the Phoenix airport dealt with more than 1,000 flights every day.

``That airport alone was handling more than all the flights in India in a day,'' Gopinath says. ``I thought, Aviation is going to be a huge opportunity in India.''

Leased Turboprop

In September 2003, Gopinath started Air Deccan with a leased turboprop plane. Now, the company is adding one new aircraft every month. S.N. Ladhani, 65, the owner of a Coca-Cola bottler in India, has been his main financier, Gopinath says. Ladhani, vice chairman of Deccan Aviation, owns as much as 19 percent of the company. Gopinath owns 26 percent.

In January 2004, Gopinath and rival carriers got a break. The Indian government removed a 15 percent tax on tickets and halved the excise duty on jet fuel to 8 percent to encourage airlines to cut fares and boost passengers. India's new Congress Party-led alliance, which came to power in the 2004 national elections, is carrying on the aviation-friendly strategy.

``We've come to recognize that aviation is an integral part of the growth process in India,'' says Praful Patel, the government's minister for aviation.

`Accountability to Stock Market'

India's two state-run airlines are bulking up to fight the upstarts. In September, Indian Airlines ordered 43 planes from Airbus to increase flights and replace planes that are as much as 25 years old.

Air India plans to buy 68 aircraft from Boeing that would cost $8.1 billion at list prices. Air India Chairman V. Thulasidas says the airline plans to sign orders for the planes before March 31, the date by which it expects to have completed its IPO. Thulasidas, 57, says going public will force the carrier to become more responsive.

``Air India needs to go beyond being just a government airline and should become a truly business-oriented company,'' he says. ``Accountability to the stock market is one way we can achieve that.'' Air India appointed New York-based Merrill Lynch & Co. to manage its IPO.

CAPA's Kaul says the two state-run carriers should merge to stem their decline in market share. He estimates Indian Airlines is losing 2 percent a quarter.

`Size Is Clout'

Air India now carries 26 percent of passengers that go overseas compared with 40 percent a decade ago. ``If Air India and Indian Airlines don't merge, they will be on the verge of disaster in one year,'' Kaul says.

Thulasidas agrees that a merger would strengthen the airlines. ``In today's competitive environment, size is clout,'' he says.

Patel, the civil aviation minister, says there are no plans for a merger, which the government would have to approve because it owns both carriers. Instead, Patel says, his priority is to fix the airports.

``My challenge is to get infrastructure right by the year 2010 across not only the six major cities but the 35 nonmetro cities,'' he says.

The airport in Mumbai, India's busiest, handled 137,212 takeoffs and landings and 13.3 million passengers in the year through March 31, 2004, the latest figures available. Sydney's airport, which is Australia's busiest and, like Mumbai, isn't a hub for ongoing international passengers, handled 266,746 aircraft and 26.4 million passengers.

`Woefully Inadequate'

Jeh Wadia, managing director at GoAirlines, lays the blame for the lagging performance on management. India's Airports Authority, a division of the civil aviation ministry, runs the nation's airports.

``Mumbai airport has the capacity to turn around 42 to 48 flights an hour; we are doing 27 to 29,'' says Wadia, a member of the Mumbai-based family that owns 115-year-old textile and chemical company Bombay Dyeing & Manufacturing Co. ``The airport can cater to 30 million passengers. Last year, we had 14 million passengers. Our utilization is half of the capacity.''

Ajay Prasad, secretary of the civil aviation ministry, agrees that India's airports need work.

``We share the view that infrastructure currently available at our airports is woefully inadequate,'' Prasad said at a tourism conference in New Delhi on Dec. 2. ``Whatever needs to be done needs to be done very quickly.''

Lost in Fog

In winter, Delhi's airport can come to a standstill when fog envelops the city. ``I've had a KLM aircraft stranded on a taxiway for six hours because fog rolled in suddenly,'' says Ani Gopinath, an air traffic controller in India from 1994 to 2000. ``We sent a jeep to look for the plane and that got lost in the fog.''

Rohit Joshi operates eight cabs that shuttle passengers to and from the airport. Lately, he says, congestion and flight delays mean his vehicles often idle outside the terminal.

``There are too many airlines, and the infrastructure is inadequate,'' Joshi says. ``The planes keep circling the airport, and my drivers keep circling outside because the parking lot is bursting at the seams.''

India's airports don't even match up to those of its smaller neighbors. Bangladesh, with 133 million people, is one of the world's poorest countries. Yet Zia International Airport in the capital of Dhaka is spotless. Polite officers in starched blue shirts and dark trousers staff neat rows of immigration counters. In India, immigration officers in faded light-blue shirts hardly say a word, let alone smile.

Modernization Push

The government has started to modernize airports in Chennai, Kolkata, Mumbai and New Delhi, and it has approved new ones at Bangalore and Hyderabad.

The aviation ministry is also training more air traffic controllers in Sydney so airports can make the most of existing runways, Prasad says. And it raised the retirement age of pilots to 65 from 61 to ease a shortage. India has about 1,800 homegrown pilots, forcing GoAir and others to hire as many as 250 pilots from abroad.

Kaul says he expects a tax cut on aviation fuel within two years, which would bring India's prices on par with those of other countries in Asia. On Dec. 1, India's state-owned refiners reduced jet fuel prices for a second month by an average of 4,100 rupees a kiloliter.

Tourism Boom

Currently, it's cheaper by half to travel to Singapore from New Delhi than it is to fly to Thiruvananthapuram in Kerala, a state known for its natural beauty.

``People were spending two days traveling by train, and that hindered the growth of the economy,'' GoAir's Wadia says. ``Indian tourism is going to boom.''

Airlines are gearing up to tackle international travel, too. In April 2005, India and the U.S. signed a so-called open skies pact. The agreement gives the airlines of both countries the right to operate from any point in one country to any point in the other, as well as to and from third countries. India, which currently gets fewer tourists than Thailand, has similar deals with Australia, Canada, Germany, Singapore and the U.K.

Investors willing to brave the turbulence may be rewarded as the Behals and the rest of India's newly mobile middle class get airborne.

To contact the reporters on this story: Abhay Singh in New Delhi at abhaysingh@bloomberg.net and Anand Krishnamoorthy in New Delhi at anandk@bloomberg.net

Last Updated: January 3, 2006 18:00 EST