Indian Airline Sector Analysis

Last decade saw the Indian Airline industry grow at a breakneck speed. The industry 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, Spice Jet etc. Infact the Indian Aviation Industry was one of
the fastest growing Aviation Industry in the entire world. Economic growth and increasing link with global
businesses resulted in a dramatic increase in passenger traffic. However, the current global economic
slowdown and dramatic rise in aviation fuel prices continues to negatively impact the Aviation Industry
across the world.

Overview of Indian Airline Sector-

The Indian aviation market is booming. The estimated growth of domestic passenger segment is at 50% per
annum and growth for international passenger segment is 25%. The international cargo is likely to grow at
a rate of 12%.

During the period April-September, 2006, international and domestic passengers recorded a growth of 15.8
per cent and 44.6 per cent respectively, leading to an overall growth of 35.5 per cent. Moreover, the
international and domestic cargo recorded growth of 13.8 per cent and 8.7 per cent respectively, resulting in
an overall growth of 12.0 per cent.

According to Ministry of Civil Aviation, India will need 1,500 to 2,000 passenger planes in next 10 years.
Over 135 aircrafts have already been added in the last two years alone. By 2010, India's fleet strength will
stand at 500-550. It is also estimated that the domestic market size will cross 60 million and the
international traffic will reach 20 million in the same period. By 2020, Indian airports are estimated to
handle 100 million passengers, including 60 million domestic passengers. The amount of cargo handled
will fall in the range of 3.4 million tonnes per annum.

AIRLINES: CURRENT FLEET AND ACQUISITION & INVESTMENT PLANS

Airlines Current fleet Acquisition plans Investment in US $billion)

Jet Airways 62 30 by 2012 2
Air Deccan 43 79 by 2010 2.7
Kingfisher 11 100 by 2012 4.5
Spice Jet 6 38 by 2010 1.9
GoAir 4 33 by 2008 2.4

Liberalization on Aviation sector followed a rapid transformation of Indian Airline Industry which has
gone from being a government-owned industry to an industry which is now being dominated by the
privately owned airlines, offering both full services and low cost carriers. The first low cost airline, Air
Deccan was launched in the year 2003 with the key objective to increase their reach to a largely untapped
middle class segment. Low cost carriers were primarily driven by the increasing per capita income,
improved connectivity and affordability. Supportive Government initiatives and increasing private and
public investments further boosted the industry. However, airways still forms only a small part of the
overall transportation services in India, with annual passenger traffic of around 96 million in 2007,
compared to 6 billion passengers carried by railways in the same year.

Month-wise Air passenger traffic trend has shown in the chart below:
Sector structure/Market size

With a growth rate of 18 per cent per annum, the Indian aviation industry is one of the fastest growing
aviation industries in the world. The government's open sky policy has led to many overseas players
entering the market and the industry has been growing both in terms of players and number of aircrafts.
Today, private airlines account for around 75 per cent share of the domestic aviation market.

India has jumped to 9th position in world's aviation market from 12th in 2006. The scheduled domestic air
services are now available from 82 airports as against 75 in 2006.

Classification of Indian Aviation Sector

The Indian aviation sector can be broadly divided into the following main categories:
1. Scheduled air transport service, which includes domestic and international airlines.
2. Non-scheduled air transport service, which includes charter operators and air taxi operators.
3. Air cargo service, which includes air transportation of cargo and mail.

Scheduled air transport service: It is an air transport service undertaken between two or more places and
operated according to a published timetable. It includes:

1. Domestic airlines, which provide scheduled flights within India and to select international destinations.
Air Deccan, Spice Jet, Kingfisher Airline and IndiGo are some of the domestic players in the industry.

2. International airlines, which operate scheduled international air services to and from India.

Non-scheduled air transport service: It is an air transport service other than the scheduled one and may
be on charter basis and/or non-scheduled basis. The operator is not permitted to publish time schedule and
issue tickets to passengers.

Air cargo services: It is an air transportation of cargo and mail. It may be on scheduled or non-scheduled
basis. These operations are to destinations within India. For operation outside India, the operator has to take
specific permission of Directorate General of Civil Aviation demonstrating his capacity for conducting
such an operation.

At present, there are 2 scheduled private airlines (Jet Airways and Air Sahara), which provide regular
domestic air services along with Indian Airlines. In addition there are 47 non-scheduled operators providing
air-taxi/non-scheduled air transport services.

Apart from this, the players in aviation industry can be categorized in three groups:
 • Public players
• Private players
• Start up players

There are three public players: Air India, Indian Airlines and Alliance Air.
The private players include Jet Airways, Air Sahara, Kingfisher Airlines, Spice Jet, Air Deccan and
many more.
The starts up players are those planning to enter the markets. Some of them are Omega Air, Magic Air,
Premier Star Air and MDLR Airlines.

SWOT ANALYSIS:

Strengths:

1. Growing tourism: Due to growth in tourism, there has been an increase in number of the international
and domestic passengers. The estimated growth of domestic passenger segment is at 50% per annum and
growth for international passenger segment is 25%.
2. Rising income levels: Due to the rise in income levels, the disposable income is also higher which are
expected to enhance the number of flyers.
Weaknesses:
1.Under penetrated Market : The total passenger traffic was only 50 million as on 31st Dec 2005
amounting to only 0.05 trips per annum as compared to developed nations like United States have 2.02
trips per annum.
2. Untapped Air Cargo Market: Air cargo market has not yet been fully taped in the Indian markets
and is expected that in the coming year’s large number of players will have dedicated fleets.
3. Infrastructural constraints: The infrastructure development has not kept pace with the growth in
aviation services sector leading to a bottleneck. Huge investment requirement for physical infrastructure
for airports.

Opportunities:
1.Expecting investments: investment of about US $30 billion will be made.
2. Expected Market Size: Average growth of aviation sector is about 25%-30% and the expected market
size is projected to grow upto100 million by 2010.

Threats: Huge investments are expected to take place in aviation sector in near future. It is estimated
that by 2012.
1. Shortage of trained Pilots: There is a shortage of trained pilots, co-pilots and ground staff which is
severely limiting growth prospects.
2. Shortage of Airports: There is a shortage of airport facilities, parking bays,air traffic control facilities
and takeoff and landing slots.
3. High prices: Though enough number of low cost carriers are already existing in the industry, majority
of the population is still not able to fly to other destinations.

Reasons For Boom In Aviation Industry:

1. Foreign equity allowed: Foreign equity up to 49 per cent and NRI (Non-Resident Indian) investment
up to 100 per cent is permissible in domestic airlines without any government approval. However, the
government policy bars foreign airlines from taking a stake in a domestic airline company.
2. Low entry barriers: Nowadays, venture capital of $10 million or less is enough to launch an airline.
Private airlines are known to hire foreign pilots, get expatriates or retired personnel from the Air Force or
PSU airlines in senior management positions. Further, they outsource such functions as ground handling,
check-in, reservation, aircraft maintenance, catering, training, revenue accounting, IT infrastructure,
loyalty and programme management. Airlines are known to take on contract employees such as cabin
crew, ticketing and check-in agents.
3. Attraction of foreign shores: Jet and Sahara have gone international by starting operations, first to
SAARC countries, and then to South-East Asia, the UK, and the US. After five years of domestic
operations, many domestic airlines too will be entitled to fly overseas by using unutilised bilateral
entitlements to Indian carriers.
4. Rising income levels and demographic profile: Though India's GDP (per capita) at $3,100 is still
very low as compared to the developed country standards, India is shining, at least in metro cities and
urban centres, where IT and BPO industries have made the young generation prosperous.
Demographically, India has the highest percentage of people in age group of 20-50 among its 50 million
strong middle class, with high earning potential. All this contributes for the boost in domestic air travel,
particularly from a low base of 18 million passengers.
5. Untapped potential of India's tourism: Currently India attracts 3.2 million tourists every year, while
China gets 10 times the number. Tourist arrivals in India are expected to grow exponentially, especially
due to the open sky policy between India and the SAARC countries and the increase in bilateral
entitlements with European countries, and US.
6. Glamor of the airlines: No industry other than film-making industry is as glamorous as the airlines.
Airline tycoons from the last century, like J. R. D. Tata and Howard Hughes, and Sir Richard Branson
and Dr. Vijaya Mallya today, 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. All the above factors seem
to have resulted in a "me too" rush to launch domestic airlines in India.

Challenges For Aviation Industry

The growth in the aviation sector and capacity expansion by carriers have posed challenges to aviation
industry on several fronts. These include shortage of workers and professionals, safety concerns,
declining returns and the lack of accompanying capacity and infrastructure. Moreover, stiff competition
and rising fuel costs are also negatively impacting the industry.

1. Employee shortage: There is clearly a shortage of trained and skilled manpower in the aviation sector
as a consequence of which there is cut-throat competition for employees which, in turn, is driving wages
to unsustainable levels. Moreover, the industry is unable to retain talented employees.
2. Regional connectivity: One of the biggest challenges facing the aviation sector in India is to be able
to provide regional connectivity. What \is hampering the growth of regional connectivity is the lack of
airports.

3. Rising fuel prices: As fuel prices have climbed, the inverse relationship between fuel prices and
airline stock prices has been demonstrated. Moreover, the rising fuel prices have led to increase in the air
fares.
4.Declining yields: LCCs and other entrants together now command a market share of around 46%.
Legacy carriers are being forced to match LCC fares, during a time of escalating costs. Increasing growth
prospects have attracted & are likely to attract more players, which will lead to more competition. All
this has resulted in lower returns for all operators.
5. Gaps in infrastructure: Airport and air traffic control (ATC) infrastructure is inadequate to support
growth. While a start has been made to upgrade the infrastructure, the results will be visible only after 2 -
3 years.
6. Trunk routes: It is also a matter of concern that the trunk routes, at present, are not fully exploited.
One of the reasons for inability to realize the full potential of the trunk routes is the lack of genuine
competition. The entry of new players would ensure that air fares are brought to realistic levels, as it will
lead to better cost and revenue management, increased productivity and better services. This in turn
would stimulate demand and lead to growth.
7. High input costs: Apart from the above-mentioned factors, the input costs are also high. Some of the
reasons for high input costs are:-

Withholding tax on interest repayments on foreign currency loans for aircraft acquisition. Increasing
manpower costs due to shortage of technical personnel.

Potential for Growth

The Indian Civil Aviation market grew at a compound annual growth rate (CAGR) of 18 per cent, and
was worth US$ 5.6 billion in 2008. The Centre for Asia Pacific Aviation (CAPA) forecasted that
domestic traffic will increase by 25 per cent to 30 per cent till 2010 and international traffic growth by 15
per cent, taking the total market to more than 100 million passengers by 2010. By 2020, Indian airports
are expected to handle more than 100 million passengers including 60 million domestic passengers and
around 3.4 million tonnes of cargo per annum. Moreover, significant measures to propel growth in the
civil aviation sector are on the anvil. The government plans to invest US$ 9 billion to modernize existing
airports by 2010. The government is also planning to develop around 300 unused airstrips.

11th Plan Projections

The airport sector has attracted considerable private interest. According to the 11th Plan projections, of
the total investment requirement of Rs30,968 crore, as much as 70% (Rs21630 crore) is envisaged by
way of private investment. The PPP route has progressively gained importance and is being used either
for modernization or construction of airports or only for city-side development at airports. While the
Cochin Airport was the only privately managed airport till the mid 2000s, there are now four more
privately managed international airports in India viz., Delhi, Mumbai, and the two greenfield airports of
Hyderabad, and Bangalore. More Greenfield airports at Goa, Navi Mumbai, Pune, Greater Noida and
Kannur are being considered for development. The government has further identified 35 non-metro
airports for development, involving the setting up of terminal buildings, car parks, and cargo and other
airside facilities. The development of these airports would be taken up in three phases and the project
model would be that all aeronautical services will be handled by the AAI, while PPP mode would be
adopted for the development of non-aeronautical activities at the city-side of these airports. Further,
proposal for establishment of merchant airports is also being examined. The infrastructure in the
merchant airports is completely developed by the private sector, while the government will be providing
safety and security at these airports. Setting up of dedicated cargo airports which would help the cargo
carriers to avoid the problem of high rentals charged by the metro airports, is also being examined. The
government has taken proactive steps for the development of airport infrastructure. For instance, in the
case of the greenfield airports at Bangalore and Hyderabad, which become operational in 2008, the
connectivity projects were also speeded up. The projected air traffic during 2009-2017 is as under:
 Peer review and performances of some major players for June 2009 Quarter (in crores)

The majority of the market share is with Kingfisher followed by Jet Airways.

Company Jet Airways Kingfisher Spice jet

Revenues 2371 1313 534.4
EPS (26.10) (8.49) 0.117
CMP 318 52 33.5

The airlines scale of operations

SCALE OF OPERATIONS
AIRLINES AIRCRAFTS DESTINATIONS DAILY FLIGHTS
Air India 157 106* 400
Jet Airways 85 63* 380
Kingfisher 73 69* 400
SpiceJet 19 18 (Domestic) 125
 IndiGo 21 17 (Domestic) 137
Paramount 5 16 72
* Domestic and International

The profit and loss of the airlines in crores are as follows

PROFIT/LOSS ACCOUNT (in Rs crore)

AIRLINES 2005-06 2006-07 2007-08
Kingfisher (-) 233.77 (-) 577.31 (-) 408.92
Jet Airways 538.76 27.94 (-) 253.06
Go Air (-) 58.4 (-) 237.47 (-) 174.76
SpiceJet (-) 48.53 (-) 72.14 (-) 133.51
Air Deccan (-) 322.33 (-) 419.57 (-) 798.35
Paramount (-) 17.77 1.63 1.17
IndiGo N/A (-) 201.79 (-) 234.75
JetLite (-) 59.49 (-) 689.66 (-) 441.50
From a Lok Sabha answer by Minister for Civil Aviation, Mr Praful Patel

As one can see that the airline sector is still reeling under pressure of slowdown from the 2nd quarter
results. There are several other factors which are responsible for the losses suffered by this sector.

1) Aviation Turbine Fuel -

The problem of ATF started when just before the recession and Leman Brother crises the oil
prices rose to around $ 140 per barrel. This led to increase in ATF prices which had tremendous impact
on airline companies revenues. State-owned oil firms have raised jet fuel or Aviation Turbine Fuel
(ATF) price by an average of Rs 2,750 per kilolitre or about 10 per cent, making it the second such hike
in 15 days. ATF will now cost Rs 29,926 per kl, against Rs 27,274.95. ATF consist of almost 40% of
airlines operational cost. This move by state owned oil firms will definitely add pressure on the airlines
to increase the air fare which will further add pressure on their bottom lines.

2) High debt burden-

If civil aviation ministry sources are to be believed, the debt position of the three biggies — Jet
Airways, Kingfisher Airlines and Air India — is no smaller than that of the real estate majors, and would
amount to around Rs 30,000 crore ($6 billion) for the financial year ended March 2009. Of this, almost
half (Rs 13,000-15,000 crore) will be working capital loans and borrowings by Air India followed by
around Rs 10,000 crore of debt by Jet Airways (including current liabilities) and another Rs 7,800-8,000
crore or so by Kingfisher Airlines. The losses suffered by these companies are not helping the companies
to repay their debt. KINGFISHER, JET and Spicejet owe Rs 1,726 crore to oil marketing companies.
According to a recent report in a business daily, Jet Airways has not paid service tax on import of
services for the past three years. “The service tax department has asked it to “pay the service tax of Rs
247.47 crore for the period 2005-06 to 2007-08, along with the interest,” said the report

3) Full service model and business class travel –

Most of the analyst think that problem lies with the full service model. Some point out that the full
service model is not relevant beyond six metros. The full service carriers offer meals, lounges etc. On the
Delhi-Mumbai route for instance, the full-service fare for business is around Rs 45,000 return against Rs
8,000 for full fare economy, a substantial difference by any standards. A slump in premium travel is
currently a global phenomenon, with International Air Transport Association (IATA) reporting a 16.7 per
cent decline in January 2009 followed by an even sharper fall of 21 per cent in February. Economy travel
has also fallen, but not as sharply as premium tickets.

Problems faced by Air India

 For the national carrier, the spiral dive began in 2006-07. Air India made a loss of Rs 541 crore
and Indian Airline's loss was Rs 230 crore. In about 700 days, from March 31, 2007 to March 31, 2009
during which the airlines merged the losses rocketed to a mind-boggling Rs 7,200 crore. The 800%
increase in its losses in two years has much to do with the manner in which: Air India and Indian
(formerly Indian Airlines) were merged; aircraft were leased or purchased; capacity was gifted away to
foreign airlines under bilateral agreements; ground-handling in Bangalore and Hyderabad was
relinquished to a proposed joint venture (and attempts are on to do the same elsewhere); flights were
withdrawn from profitable routes; pilots were sent for proper training. Route to bigger losses. The losses
really began from 2006 onwards when a decision to aggressively dry and wet lease aircraft was taken to
increase market share. There was no proper route study, marketing or pricing strategy. The airline took
heavy losses till the market built.
Air India's given up one of its money-spinning operations for no good reason. In Bangalore and
Hyderabad airports, Air India now has to share its revenue from ground handling with Singapore Airport
Terminal Services (SATS). “The airline earned Rs 900 crore in 2007-08 from ground handling. From
next year, the airline will have to pay AI-SATS even to handle its own flights,'' a senior airline official
said. The previous AI chief Raghu Menon opposed the revenue-sharing because it was loaded heavily in
favour of the Singapore company; Menon was removed from AI abruptly.
: But what hit the airline most has been the civil aviation ministry's generosity towards foreign
airlines. Every country in the world protects its interests when it enters into bilateral agreements. But not
India. Thanks to liberal bilaterals, foreign competitors are pounding Indian carriers not just in airports
like Mumbai and Delhi, but also in places like Nagpur, Kochi and Ahmedabad. As a result, AI's share of
the overseas market has been steadily declining.

Airport Infrastructure

• Mumbai and Delhi airports have already been privatized and are being upgraded at an estimated
investment of US$ 4 billion over 2006-16.Greenfield airports are operational at Bangalore and
Hyderabad. These are built by private consortia at a total investment of over US$ 800 million.
• A second greenfield airport being planned at Navi Mumbai is going to be developed using
public-private partnership (PPP) mode at an estimated cost of US$ 2.5 billion.
• 35 other city airports are proposed to be upgraded. The city side development will be
undertaken through PPP mode.
• Over the next five years, AAI has planned a massive investment of US$ 3.07 billion—43 per
cent of which will be for the three metro airports in Kolkata, Chennai and Trivandrum, and the
rest will go into upgrading other non-metro airports and modernising the existing aeronautical
facilities.

Aviation Policy

Many policies supporting infrastructure are now in place.

• 100 per cent FDI under automatic route is permissible for greenfield airports.
• For existing airports, FDI up to 74 per cent is permitted through automatic approvals and up to
100 per cent through special permission (from FIPB).
• Private developers allowed to setup captive airstrips and general airports 150 km away from an
existing airport.
• 100 per cent tax exemption for airport projects for a period of 10 years.
• 49 per cent FDI is permissible in domestic airlines under the automatic route, but not by foreign
airline companies. 100 per cent equity ownership by Non-Resident Indians (NRIs) is permitted.
• 74 per cent FDI is permissible in cargo and non-scheduled airlines.
• The Indian government plans to set up an Airport Economic Regulatory Authority to provide a
level playing field to all players.
Major Investments

Over the past year, various companies have shown an interest in the Indian aviation industry. Investment
in airport infrastructure was over US$ 5 billion in 2008 and will go up US$ 9 billion by 2013, of which
close to US$ 6.8 billion is expected to come through public private partnerships (PPP) model, according
to a study by research firm Frost & Sullivan.

• Tata Advanced System Limited (TAS), a unit of the Tata group, will set up a US$ 113.63
million helicopter manufacturing unit at the Aerospace Special Economic Zone (SEZ) in
Adhibatla village near the Hyderabad international airport.
• Global Vectra Helicopters, a dedicated offshore transportation services company servicing the
oil & gas exploration and production sector in India, plans to invest US$ 130 million during the
next two years to increase its fleet strength as well as consolidate its operations.
• GMR Infrastructure is looking to tap the growing corporate jet market in India with investment
plans to the tune of US$ 151 million. It is also in talks with aircraft component manufacturers
such as Honeywell and Safran to set up a components assembly plant in the country. The
company plans to invest US$ 60 million for the proposed JV.
• US aircraft maker, Boeing Co, will deliver 100 planes worth US$ 17 billion over the next four
to five years to India.
• Changi Airports International is ready to enter into joint ventures with more Indian companies
in developing airports. The company, which has picked up a 26 per cent stake for US$ 20
million in Bengal Aerotropolis Pvt Ltd (BAPL) is looking at other opportunities.

Road Ahead

The Indian aviation sector is likely to see clear skies ahead in the years to come.

• Passenger traffic is projected to grow at a CAGR of over 15 per cent in the next 5 years.
• The Vision 2020 statement announced by the Ministry of Civil Aviation, envisages creating
infrastructure to handle 280 million passengers by 2020.
• Investment opportunities of US$ 110 billion envisaged up to 2020 with US$ 80 billion in new
aircraft and US$ 30 billion in development of airport infrastructure.
• Associated areas such as maintenance, repair and overhaul (MRO) and training offer high
investment potential. A report by Ernst & Young says the MRO category in the aviation sector
can absorb up to US$ 120 billion worth of investments by 2020.
• Aerospace major Boeing forecasts that the Indian market will require 1,000 commercial jets in
the next 20 years, which will represent over 3 per cent of Boeing Commercial Airplanes’
forecasted market worldwide. This makes India a US$ 100 billion market in 20 years

Conclusion – The airline industry is going through turbulant times as many top airline companies are
facing unprecedented losses. Over and above that recently pilots of Jet airways went for mass sick leave
on removal of some employees, as well as employees of Air India went for mass sick leave to oppose the
decision to remove Performance Linked Incentive which further worsened the already suffering
conditions of the Air Sector. Some of the big players are coming out with freash issue to raise additional
capital either through issue of shares or through private placement. It is believed that investors will have
a good response to the fresh issue because of growing market sentiments, but it has to be seen whether
this sector gets the desired response.

References:
1) http://www.ibef.org/industry/aviation.aspx
2) http://4.bp.blogspot.com/_ugWk-rnkqXM/SgrQniS19-
I/AAAAAAAAFMo/01KbKgt3rfY/s400/India+Domestic+Passengers+April+2009+Market+Sh
are.png
3) http://www.naukrihub.com/india/aviation/
4) http://understandingbasicsoffinance.blogspot.com/2009/08/overview-and-challenges-faced-by-
 indian.html
5) http://www.ibef.org/industry/aviation.aspx
6) http://www.tehelka.com/story_main42.asp?filename=Bu150809a_curious.asp