Through turbulent times, FDI relaxation alone not a game changer Fver
The Indian Aviation Industry has been going through a turbulent phase over the past several years facing multiple headwinds – high oil prices and limited pricing power contributed by industry wide over capacity and periods of subdued demand growth. Over the near term the challenges facing the airline operators are related to high debt burden and liquidity constraints - most operators need significant equity infusion to effect a meaningful improvement in balance sheet. Improved financial profile would also allow these players to focus on steps to improve long term viability and brand building through differentiated customer service. Over the long term the operators need to focus on improving cost structure, through rationalization at all levels including mix of fleet and routes, aimed at cost efficiency. At the industry level, long term viability also requires return of pricing power through better alignment of capacity to the underlying demand growth. While in the beginning of 2008-09, the sector was impacted by sharp rise in crude oil prices, it was the decline in passenger traffic growth which led to severe underperformance during H2, 2008-09 to H1 2009-10. The operating environment improved for a brief period in 2010-11 on back of recovery in passenger traffic, industry-wide capacity discipline and relatively stable fuel prices. However, elevated fuel prices over the last three quarters coupled with intense competition and unfavorable foreign exchange environment has again deteriorated the financial performance of airlines. During this period, while the passenger traffic growth has been steady (averaging 14% in 9m 2011-12), intense competition has impacted yields and forced airlines back into losses in an inflated cost base scenario. To address the concerns surrounding the operating viability of Indian carriers, the Government on its part has recently initiated a series of measures including (a) proposal to allow foreign carriers to make strategic investments (up to 49% stake) in Indian Carriers (b) proposal to allow airlines to directly import ATF (c) lifting the freeze on international expansions of private airlines and (d) financial assistance to the national carrier. However, these steps alone may not be adequate to address the fundamental problems affecting the industry. While the domestic airlines have not been able to attract foreign investors (up to 49% FDI is allowed, though foreign airlines are currently not allowed any stake), foreign airlines may be interested in taking strategic stakes due to their deeper business understanding, longer investment horizons and overall longer term commitment towards the global aviation industry. Healthy passenger traffic growth on account of favorable demographics, rising disposable incomes and low air travel penetration could attract long-term strategic investments in the sector. However, in our opinion, there are two key challenges: i) aviation economics is currently not favorable in India resulting in weak financial performance of airlines and ii) Internationally, too airlines are going through period of stress which could possibly dissuade their investment plans in newer markets. Besides, foreign carriers already enjoy significant market share of profitable international routes and have wide access to Indian market through code-sharing arrangements with domestic players. Given these considerations, we believe, foreign airlines are likely to be more cautious in their investment decisions and strategies are likely to be long drawn rather than focused on short-term valuations. On the proposal to allow import of ATF, we feel that the duty differential between sales tax (averaging around 22-26% for domestic fuel uplifts) being currently paid by airlines on domestic routes and import duty (8.5%10.0%) is an attractive proposition for airlines. However the challenges in importing, storing and transporting jet fuel will be a considerable roadblock for airlines due to OMCs monopoly on infrastructure at most Indian airports. From the working capital standpoint too, airlines will need to deploy significant amount of resources in sourcing fuel which may not be easy given the stretched balance sheets and tight liquidity profile of most airlines.

MARCH 2012


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* Note: Foreign airlines are currently not allowed to participate directly or indirectly in the equity of an Air Transport Undertakings engaged in operating Scheduled.Non-scheduled Air Transport Service . entry of private airlines. Source: ICRA Research Exhibit 2: FDI Regulations FDI Limits Airports . aggressive fleet expansions have impacted profitability and capital structures Despite reforms. frills models and improvement in service standards. In fact. passenger traffic growth which averaged 13% in the first half has increased substantially to 19% CAGR during 2006-2011. the problems have compounded due to industry-wide capacity additions. Private players can operate schedule services Jet. significant congestion at major airports. intense competition has constrained yields. air travel penetration in India remains among the lowest in the world. aggressive fleet expansions (LCCs have added aircrafts mainly on long-term operating leases. Private players permitted to operate as air taxi operators Air Corporation act repealed. rapid economic growth. Kingfisher acquired Air Deccan SpiceJet starts international operations Indigo starts international operations. flying and technical training institutions 49% (NRIs 100%) 74% 100% 74% (NRIs 100%) 100% Automatic Automatic – up to 49% FIPB – 49% to 74% Automatic Automatic – up to 49% FIPB – 49% to 74% Automatic Automatic 100% 100% Approvals Automatic Automatic – up to 74% FIPB .Indian Aviation Industry – Evolution & Recent Updates [1/2] Exhibit 1: Industry Evolution Year Major Milestones < 1953 1953 1986 1994 1995 1997 2001 2003 2005 2007 2010 2011 2012 Nine Airlines existed including Indian Airlines & Air India Nationalization of all private airlines through Air Corporations Act.2 trips per person per year. adoption of low fare . favorable demographics. Kingfisher exits LCC segment Government allows direct ATF imports. Indigo. A comparative statistic in United States. and overall low penetration levels (less than 3%). the Indian aviation sector has been a laggard relative to its growth potential due to excessive regulations and taxations. higher disposable incomes. While most of these factors are not under direct control of airline operators.Helicopter Services / Seaplane services requiring DGCA approval Other Services Ground Handling Services subject to sectoral regulations and security clearance Maintenance and Repair organizations. Jet acquired Sahara. Modiluft. rising disposable incomes and low penetration levels India aviation industry promises huge growth potential due to large and growing middle class population.beyond 74% However domestic airlines operate under high cost environment. Paramount start operations Industry consolidates. We expect passenger demand to remain stable and grow between 12-15% in the medium term. With advent of LCCs and resultant decline in yields. Despite strong growth. Intense competitive pressure from Low cost carriers (focusing on maximizing load factors) and national carrier (looking to regain lost market share) have constrained yields from rising in-sync with the elevated cost base. rising aspirations of the middle class. Sahara. Non-Scheduled and Chartered airlines. much in excess of actual demand. government ownership of airlines and resulting high cost of air travel. Source: Department of Industrial Policy and Promotion (DIPP). the world’s largest domestic aviation market stands at 2 trips per person per year. indicating strong long term growth potential. assuming a no major weakness in GDP growth going forward. Go Air.Greenfield Projects . FSC’s have purchased aircrafts – debt financed. airport modernizations. the domestic aviation sector continues to operate under high cost environment due to high taxes on Aviation Turbine Fuel (ATF).Existing projects Air Transport Services . high airport charges. air travel penetration in India is less than half of that in China where people take 0. East West granted scheduled carrier status 4 out of 6 operators shut down. dearth of experienced commercial pilots. Damania. Strong passenger traffic growth aided by buoyant economy. inflexible labor laws and overall higher cost of capital. ICRA Research ICRA LIMITED .Scheduled Air Transport Services* . air travel is been transformed into a mode of mass transportation and is gradually shedding its elitist image. FDI proposal for allowing foreign carriers to pick up to 49% stake under consideration Historically. Besides. SpiceJet. favorable demographics. Jet & Sahara continue Aviation Turbine Fuel (ATF) prices decontrolled Air Deccan starts operations as India’s first LCC Kingfisher. Like elsewhere in the world. The industry has grown at a 16% CAGR in passenger traffic terms over the past decade. most often backed by guarantees from the US EXIM Bank or Europe’s ECA) to leverage upon the anticipated robust growth and to support international operations have significantly impacted the capital structure and weakened the credit profile of most domestic airlines. this has changed rapidly over the last decade with the sector showing explosive growth supported by structural reforms.

Indigo. 1% 5% 29% 34% 46% 48% 63% 69% 71% 66% 54% 52% 37% 31% Exhibit 4: ATF Price Trends (Mumbai.000 60. These constraint can be resolved only if there significant improvement in infrastructure such that LCCs could operate on secondary airports. LCCs try to achieve a cost advantage in other ways by avoiding the in-flight services.000 40. inventory reduction through use of similar aircraft and lower employees per aircraft.000 depending on aircraft. More seats per flight so spread costs over a larger base. maintenance cost (~12%) and ownership cost (~12-15%).000 to Rs. Primarily on-board sales. This was followed by entry of carriers like Southwest. viability remains to be seen Internationally the LCC model came into existence when the US Congress passed the Airline Deregulation Act in 1978 easing the entry of new companies into the business and giving them freedom to set their own fares and choose routes (Prior to this routes and fares were fixed by a Government Agency). The traditional method of ticketing costs around US$ 4. higher number of seats in the aircraft.000 20.5 per passenger whereas the cost of an e-ticket comes to US$ 1 which helps reduce selling expenses. lower turnaround time due to less congestion. Bloomberg. which can’t be managed by an LCC. Go Air and subsequently low fare offerings from Jet airways and Kingfisher airlines. Lower charges. However. ICRA Research ICRA LIMITED .60. which pioneered the LCC concept. As a result. ICRA Research Ancillary Revenues Source: Company Filings. selling tickets through the internet. 115.Indian Aviation Industry – Evolution & Recent Updates [2/2] Exhibit 3: Growing LCC Market Share 100% 80% 60% 40% 20% 0% 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 FSC (%) LCC (%) 99% 95% Low-cost model now dominating the skies. Helps to keep the costs and hence the fares low.000 70. operating from secondary airports.000 50. The success of Air Deccan spurred the entry of other LCCs like SpiceJet. Exhibit 7: LCC Strategies Categories Single model of aircraft Operate on secondary airport Point to Point Model Single class configuration No In-flight services Fewer employees per aircraft E-Ticketing Remarks Reduces maintenance and inventory cost. Besides.000 30.000 Apr-09 Apr-10 Apr-11 Jan-09 Jan-10 Jan-11 Oct-09 Oct-10 Oct-11 Jan-12 Jul-09 Jul-10 Jul-11 Exhibit 5: Rupee Depreciation (INR/USD) 54 52 50 48 46 44 42 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Exhibit 6: ATF Tax Structure in India Particulars Excise Duty Average Sales Tax Levies by states Margins of Oil Marketing Companies Tax Rates 8% ~23-24% ~15-18% Source: Company Filings. Reduces employee cost and leads to higher employee productivity. The Indian aviation sector was exposed to intense competition with the advent of a low-cost airline Air Deccan back in 2003. the fuel costs forms a larger proportion of overall costs as compared to international standards due to higher central and state government levies (viability of direct ATF imports remains to be seen due to lack of supporting infrastructure) and high congestion at major airports (half an hour hovering at major airport could increase fuel costs by Rs. This includes the fuel cost (~40%). besides impacting aircraft utilizations). Rs/KLitre) 80. Improves aircraft utilization by reducing waiting time at airports. the sector which was completely dominated by full-service airlines till a decade ago is now dominated by low-cost airlines. Majority (~60-65%) of an airline cost are dependent on external factors. Provides alternate source of revenues – helps to reduce break-even PLF. longer term viability of LCCs models in India remains to be seen (Kingfisher exited the segment recently) as airport charges are same for FSCs and LCCs in India.

Indian Aviation Industry – Operating Performance [1/2] Exhibit 8: Domestic Airlines . Lease rentals are also denominated in foreign currency thereby exposed to fluctuation in forex movement. Navigation & Airport Charges Other Expenses Selling & Distribution Expenses General & Administrative Expenses EBITDAR     ATF costs contributes 30-45% of overall operating costs for Full Service Carrier’s (FSC’s) & 40-55% for Low cost carriers (LCCs) Domestic ATF prices are linked to fluctuation in crude oil prices and movement in INR vs. dearth of experienced pilots require airlines to employee foreign pilots which command higher salaries and are often paid in foreign currency Aircraft Lease Rental Depreciation Interest Expense PBT Source: ICRA Research Most airlines follow an operating lease model for large part of their capacity. Depreciation costs mainly for owned aircrafts (Financial Lease) Significant rise in interest expenses due to deterioration in the capital structure. generate free cash flows and deleverage the balance sheet Cost Structure Fuel Cost Employee Cost Aircraft Maintenance Expenses Landing.Operating Matrix Revenues Domestic Revenues International Revenues Other Operating Income Sub-Lease of Aircrafts Cargo. market value of successful aircraft models often exceed book values making sale and lease back (conversion of Financial Lease to Operating Lease) an attractive option to book non-operating incomes. foreign carriers dominate in the longer haulage and premium service offerings  Earnings from aircraft sub-leases (dry or wet) are mostly in $ terms. Robust pax traffic growth. Non-Operating Income Aircraft Sale & Lease back  Domestic revenues are largely INR denominated. cash losses and increased working capital requirements besides overall rise in interest rates ICRA LIMITED . government support to national carrier and customer preference for LCC models  Airlines with international operations generate part of revenues in foreign currency. $ High central and state levies translates into a 60-70% higher ATF prices in India over the global average Significant congestion at major domestic airports increases fuel costs considerably Given the fact that Indian airlines have been in aggressive expansion phase. helps rationalize capacities  Low contributions from cargo and auxiliary revenue due to their modest adoption level With capacity constraints at global aircraft manufacturers & rising commodity prices. Auxiliary Revenues etc. but yields out of sync with cost structures due to intense competition.

the profitability margins of the airlines industry have been severely impacted. With Banks unwilling to enhance their exposure to the industry.0% -20. Besides. while the leading private players like Kingfisher Airlines. rupee depreciation) challenges as evident in the quarterly performance trends of listed airline companies.0% -10. severe competitive pressure from domestic LCC players (rapidly gaining market share) and Air India (trying to maintain market share) have resulted in price wars (at times below cost pricing). Hence.0% Sep-09 Sep-10 Dec-09 Dec-10 Sep-11 -26% Sep-10 Dec-09 Mar-10 Dec-10 Mar-11 Sep-11 Jun-10 Jun-11 Dec-11 Jun-09 Jun-10 Jun-11 Mar-09 Mar-10 Mar-11 Dec-11 -9% 29% 32% 40% 33% 44% 35% 36% 36% 47% 52% 50% 34% Exhibit 11: Domestic Airlines – Reported PAT (% of Gross Sales) 0.0% -5. the steep rupee depreciation (~18. high interest payments and hence mounting losses. besides bringing global expertise and best industry practices over the medium term.0% 20.0% Mar-09 31% 19% 34% 21% 20% 20% The domestic airlines industry is facing significant operating (slowing growth. Jet Airways and SpiceJet are making significant losses. expensive jet fuel.0% -15. The government support required to bailout the loss making Air India has increased substantially. YoY) 40.0% 10.7% depreciation in CY11. Exhibit 10: Domestic Airlines – Fuel Costs (% of Gross Sales) 60. 9% 13% -3% -17% Jun-09 -25% Sep-09 Sep-10 Mar-10 Mar-11 Dec-09 Dec-10 Sep-11 Jun-10 Jun-11 Dec-11 Sales Growth: After a strong rebound in 2010. the government is mulling allowing foreign carriers to pick strategic stakes in domestic airlines to help them stay afloat in these difficult times. Besides. Profit Margins: With combined impact of 1) moderating pax growth 2) lower yields due to excessive competitive 3) rising ATF prices 4) steep rupee depreciation and 5) rising debt levels and interest costs. Rising ATF Prices & Steep Rupee Depreciation: The airlines industry had been severely impacted by the significant increase in ATF prices (up 57% in last 18 months) as Indian Carriers do not hedge fuel prices and have exhibited limited ability to charge fuel surcharges due to irrational and undisciplined pricing dictated by competition rather than costs / demand. worse than the losses of 2008-09 when traffic was declining and crude oil prices spiked to $150 per barrel. the yields have remained weak due to weaker economic conditions and severe competition from global airlines. maintenance.0% -30. ICRA Research ICRA LIMITED .5 billion (~Rs 12.0% 30.0% Mar-09 Jun-09 -26% Sep-09 -14% -11% -4% -11% -3% -1% -4% -10% -7% ATF Import: [Heading] Indian Aviation IndustryAirlines – Operating Performance [2/2] Note: Aggregate Data for Listed Source: Capitaline.0% 20.0% 0. lowered yields and moderated sales growth for the airlines.500 crore) in 2011-12. the pax growth has been moderating over the last few quarters due to moderating economic growth and weak industrial activity.0% 50. Overall. industry needs to come out with strong equity infusion plans.3% YTD appreciation in CY12) acts double whammy as apart from fuel costs.0% -25.0% 10. although partly reversed through 7.Gross Sales Growth (%. expat salaries and a portion of sales commissions are USD-linked or USDdenominated. a weaker rupee.0% 40. substantial portion of other operating costs like lease rentals. the industry has been marred by cost inefficiencies and is bearing the brunt of aggressive price cuts.Indian Aviation Industry – Operating Performance [2/2] Exhibit 9: Domestic Airlines . rising costs.0% 3% 0. recast their loans or pick up equity stakes without viable business plans.0% -20.0% 30. Even on international routes.0% -30. rising fuel costs) and non-operating (interest costs. Indian carriers could be posting staggering losses of $2. As per Centre for Asia Pacific Aviation (CAPA).0% -10.

offer more alternatives. airlines like Air Asia (citing high infrastructure costs) & American Airlines (parent facing financial stress) have recently withdrawn from India. Asia-Pacific Airline index down 25% in last one year). Foreign Carriers: It will not just provide entry into one of the fastest growing aviation market globally but also an opportunity to establish India as their hub for connections between US/Europe and South-East Asian countries. In case of listed airlines. aviation economics currently remain unfavorable in India due to intense competition. mandatory route dispersal guidelines. \Source: ICRA Research ICRA LIMITED .Indian Aviation Industry: Proposed FDI Relaxations [1/2] Exhibit 12: Factors that support investments in Indian Aviation Sector… Strong growth prospects Passenger traffic growth has grown at a CAGR of 16% in India over the past 10 years Relative underpenetrated market Penetration of air travel at <3% is significantly below benchmarks in other markets An opportunity to create India as an hub An opportunity for foreign airlines to create India as their hub for international traffic between Europe and South East Asia. Indian Carriers: The FDI proposal. it would provide more flexibility in international travels when one travels through the same airline domestically as well as internationally. Besides. acquisition of lowcost airlines could help them compete in a market where travelers are highly price sensitive. the move will help bring global expertise and best industry practices over the medium term. if approved. besides higher cost base. such that their stake remains within the 49 % cap. However. airlines in India are also mandatorily required to fly on certain unviable routes Inadequate Infrastructure Development of airport infrastructure has not kept pace with demand. Given these considerations. Additionally offer better connectivity within India with international destinations An opportunity to create India as an MRO centre Foreign airlines could also look at leveraging on India’s low-cost arbitrage by setting up MRO facilities in India Low Valuations Market valuation of listed airlines in India has suffered due to poor performance Exhibit 13: Factors that are not in favor of investments… Aviation economics are not favorable in India Higher taxes on ATF and airport charges continue to be key headwinds for the sector. foreign exchange fluctuation and lack of adequate hedging mechanism (for fuel) have added to the woes Highly competitive & Price Sensitive traveler base FDI in Aviation: Feasibility and Impact Analysis for various stakeholders FDI Proposal: The Civil Aviation Ministry is expected to soon circulate a proposal before the union cabinet to consider allowing up to 49% equity investment by foreign carriers in domestic airlines. if the proposal does not get a waiver from SEBI’s Takeover Code. Lastly. higher taxes on ATF. Besides. due to below trend economic growth across advanced economies and high crude oil prices ($100-125/Barrel). thereby resulting in delays and higher costs for airlines Poor financial health of most airlines Intense competition. attracting investments from foreign airlines may not be easy. For example. we believe. foreign carriers already enjoy significant market share of profitable international routes and have wide domestic access through code sharing agreements. the Global Airline industry is itself currently going through a tough phase (Bloomberg World Airline index down 22%. would certainly be an important milestone in the aviation sector and may provide much-needed relief to the domestic aviation industry reeling under the pressure of mounting losses and rising debt burden. airport related charges and inadequate airport infrastructure. Besides. this could increase competition. reduce tariffs and improve customer service standards over the medium term. Consumers: New players could enter the market as they could now have a strategic foreign player with deep pockets to support the airline in difficult times. While full-service airlines could help them further consolidate their market position on international routes (and improve connectivity within India). sharp fluctuation in ATF prices and high debt burden continue to weigh on the financial performance of Indian airlines. Overall. foreign carriers may have to first make an open offer of 26% stake to public shareholders and later acquire up to 23% stake (from promoters or fresh equity).

foreign carriers already enjoy ~65% market share in international traffic and hence ~27% of total passenger traffic (Domestic + International).000. Jet Airways Kingfisher Airlines SpiceJet Exhibit 15: Foreign Carrier’s Pax market shares in International Routes (FY10 Data) British Airways Thai Airways Cathay Pacific Jet Airways Air India 2. with the domestic carriers left with price conscious no-frills pax traffic.Domestic (%.104 2. SpiceJet up 43% YTD) Source: ICRA Research Source: DGCA.3% 10. LHS) Jet Airways : EBITDAR Margin .767 80% 2. since the airlines stocks have corrected significantly over the last two years.090 20% Total 22.066 39% 1.0x revenue per passenger carried on do mestic route. As a result.254 30% Exhibit 16: Jet Airways – Domestic vs.000.353 4. Company filings.787 9769 Promoter holding post infusion *Assuming Equity infusion @ current share price that has already run-up considerably in anticipation (Jet up 87% YTD.4% 8. Exhibit 17: Promoter Stake dilution incase in fresh equity infusion Jet Airways Kingfisher Total Debt Outstanding – FY11 (Rs Cr) Current Market Capitalization (Rs Cr) Current Promoter holding (%) Fresh Equity infusion for 49% stake* Mcap Post Equity infusion 15.982 4.Indian Aviation Industry: Proposed FDI Relaxations [2/2] Exhibit 14: Significant Erosion in Market Capitalizations (Rs Crore) 8. revenue per passenger carried on international route has been 2. We expect this ratio to be higher on an industry wide basis as foreign carriers dominate longer haulage routes. we estimate that the foreign carriers have already garnered 42-48% of total airline revenues (inbound. the stark difference between Jet Airways’ domestic and International EBITDAR margins indicates that the foreign airlines could be already enjoying majority of the industry profits.5% 21. For Jet Airways.024 2.00% 10.00% 0.000 Dilutions at Current market capitalizations unlikely to solve issues of staggering debt levels and mounting losses Besides.0% 3.6 hrs avg block hours in international routes as compared to ~1.00% Q4 FY10 Q1 Q2 Q3 Q4 Q1 Q2 Q3 FY11 FY11 FY11 FY11 FY12 FY12 FY12 Jet Airways : EBITDAR Margins .5x to 3.00 0.000. Besides.1% 4. low fare offerings & VFR (visiting friends and relatives) traffic prominence of Indian carriers.210 2.6 hrs avg block hours in domestic routes). outbound & within India).150 59% 1. International Operations 30.50 1. LHS) Jet Airways : Rev per pax (International/Domestic) 26% 22% 23% 19% 26% 13% 26% 23% 3.3% 3. the amount of fresh equity that could be raised at current market prices would not be a game-changer considering the staggering debt levels and quarterly losses posted by the airline industry (auditors have already raised concerns over the rapid depletion of networth for all listed airline companies).000 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Foreign carriers already enjoy significant share of international traffic.057 1. foreign carriers can offer enhanced connectivity into Indian cities without acquiring stakes in Indian carriers.00% 20.000 4.000.00 1.000 2. due to longer haulage (~4. ICRA Research ICRA LIMITED .50 - 16% 3% 11% 7% 14% -9% 8% 2% SpiceJet 86 1.00% -10. fresh equity infusions are current market capitalizations (although 50-100% higher YTD) could lead to considerable stake dilution for the existing promoters who have built these businesses over the years. Besides.00 2.50 2.658 5.1% 3. domestic access through code sharing agreements As per DGCA data.8% 12. Besides. full service offerings and business traffic as compared to shorter haulage. due to number of code sharing agreements.000 3.000 4.International (%.425 41% 7.6% 4.000 6.000 6. less viable routes and hence saddled with high operating losses.

According to official data. Rs 9. The move will benefit the private carriers (although may increase competition and losses for the national carrier) as international flights provide better margins owing to the availability of fuel at international rates. Group of ministers (GoM). With the option to import directly. International Routes: Freeze on international permissions to private carrier removed In another major boost to private airlines (especially IndiGo and SpiceJet). Given the monopoly of OMCs at major airports. Rs 22. operation turnaround at ailing national carrier remains critical for overall health of the industry. the availability of infrastructure is likely to be a considerable roadblock. a demand that the airlines have been lobbying for quite some time now. Rs 21. higher auxiliary revenue through in-flight sales and higher fleet utilization. airlines pay on an average 22-26% sales tax on ATF for domestic operations. as international operations could happen during the otherwise idle night hours.200 crore working capital loans .000 crore will remain outside the restructuring exercise. At most airports (barring the private ones). While the cabinet approval is yet come by.320 crore. airlines buy ATF from OMCs which is priced on an import parity formula and is also subject to sales tax varying from 4%-30% depending upon states.Rs 7.guaranteed bonds bearing a coupon rate of 8. The government had imposed the freeze in Mar-2011 with the objective of protecting the financially strained Air India from more competition on foreign routes. Financial guarantees to the debt-ridden national carrier in securing funding at competitive rates As per media reports.400 crore shall be come from the bond issue. the Civil Aviation Ministry has lifted the freeze on their overseas expansions. airlines will also have to engage a fair bit of working capital in sourcing imported ATF as against credit period available from OMCs.800 crore will be converted into long-term debt of 10 to 15 years and the balance Rs 4. For sourcing fuel directly. state-run OMCs own and operate the infrastructure for sourcing. Although the taxation differential (between currently applicable sales tax rates and likely import duty) certainly suggest a large potential saving for airlines. However. airlines will also lose out on volume discounts (ranging between 4-5%) and credit period offered by OMCs and would need to pay in cash for direct imports.Direct ATF Imports: Benefits and near term feasibility remain misty In addition to the proposal on FDI. Of this. While the savings appear to be significant. The ministerial group also decided to restructure the carrier’s Rs 21. Rs 4. storing and transporting ATF. lower utilizations of maximum permissible limits under the bilateral Air Service Agreements (ASAs) have prompted the move to allow eligible domestic airlines (with more than 5 years experience) expand their international operations. ICRA LIMITED . In absolute terms. the empowered group of Minister has also recently approved the proposal for airlines to import Aviation Turbine Fuel (ATF) directly. implying incremental funding requirement. While the financial guarantees may help it overcome near term headwinds.400 crore through government. headed by finance minister cleared the financial restructuring plan for Air India under which the national carrier will be allowed to raise Rs 7. fueling and storing aviation fuel. At present.520 crore. Air India has outstanding loans and dues worth Rs 67.200 crore represents working capital loans. the impact of this development is likely to be a mixed bag.5-9%. In addition. the effective savings could be much lower than what is reflected from tax differential.600 crore dues to vendors and it carries an accumulated loss of Rs 20. the effective taxes on ATF would prima facie reduce as airlines will pay import duties and will be exempted from paying sales tax thus resulting in large savings for airlines. Given the current liquidity constraints. there are various practical issues that airlines will have to sort out before they could start importing ATF directly. the impact will be higher on airlines with higher share of domestic operations like Indigo or SpiceJet.000 crore long -term loans taken for fleet acquisition. airlines will have no other option but to utilize the existing infrastructure possibly on a fee-based structure with OMCs. Given these hurdles. airlines would have to resort to a fee-based structure for utilizing their infrastructure for fueling. At the same time. Given the higher tax rates at major airports. in our opinion. There is also an additional worry that the states may implement an entry tax (as applicable on crude oil in some states) to offset the revenue loss from sales tax. managing additional credit lines from banks is also likely to be a challenge for airlines and overall would reduce the potential savings being envisaged.

0 16.6 81.3 3.3 18.6 --30.8 10.2 2.2 1.4 7.1 15.0 85.3 4.0 ---37 8 5 -31 60 4 -11 --15 -5 -5 -235 236 251 132 108 87 116 140 119 133 -51 -26 37 32 40 16 193 187 202 106 85 58 97 111 93 107 -39 -18 28 27 31 13 82.1 9.0) (0.9 4.7 4.4 5.0 1.5 3.0 5.9 6.2 3.3 9.0 5.4 3.1 80.7 2.5 17.1 6.3 1.6 13.7 --2.1 4.0 ---2.8 3.4 19.3 7.4 --6.3 31.2 -6.1 -75.2 1.7 8.9 2.0 --3.1 7.2 7.0 78.1 3.9 7.8 1.1 0.Annexure 1: Key operating indicators and valuations for the Global Airline Industry Company Name M cap EV Sales CY/FY Current ($ Bn) FSC Carriers Delta Airlines Deutsche Lufthansa Air France-KLM Air China Ltd Singapore Airlines All Nippon Airways Cathay Pacific Airways China Southern Airlines China Eastern Airlines Qantas Airways Korean Airlines Malaysian Airline Thai Airways Garuda Indonesia Asiana Airlines Air New Zealand Jet Airways Kingfisher Airlines LCC Carriers Ryan Air Southwest Airlines Air Asia Cebu Air Tiger Airways SpiceJet 8.8 8.9 1.7 --2.9 6.5 -32.5 0.3 6.0 --23.9 0.6 0.9 7.2 5.4 5.6 0.0 -2.3 6.2 78.8 6.4 2.2 5.2 2.6 2.1 1.2 8.2 17.3 --7.8 2.3 0.6 7.8 8.7 3.8 27.8 0.6 8.5 3.5 5. projected estimates – Bloomberg Consensus estimates ICRA LIMITED .9 1.2 1.2 --0.5 1.6 4.8 0.8 --1.8 3.0 13.5 67.2 7.3 0.4 17.8 1.5 0.5 83.6 5.0 85.9 -1.4 --1.9 2.8 -14.0 (0.8 8.4 78.7 76.7 2.6 --12.8 -6.6 8.5 8.2 31.6 3.7 3.1 1.4 88.0 0.5 17 3 --23 -63 121 26 10 10 10 53 98 21 9 8 9 84.3 3.5 1.1 11.5 0.1 1.9 2.0 41.5 6 15 --6 7 2.2 -7.1 -7.0 -7.2 10.0 80.4 14.0 10.1 8.7 7.8 5.2 10.7 -2.2 0.1 7.9 2.9 6.6 6.8 6.8 1.2 18.2 -3.8 82.4 6.4 0.7 2.4 -7.7 19.8 5.7 7.1 3.0 6.5 4.4 85.9 1.1 0.0 16 --10 9 0 -10 10 11 ---8 -11 9 9 3.2 --7.1 3.8 ---21.1 -0.2 5.4 83.8 --40.9 6.6 14.1 6.6 1.0) (0.1 0.3 -1.6 2.1 6.9 3.3) --0.6 0.1 8.7 12.4 14.9 0.6 22.9 15.8 -12.1 1.1 4.4 0.2 6.4 79.1 79.0 78.7 10.0 0.5 9.2 7.8 1.9 5.3 1.3 3.8 27.0 6.4 7.1 6.6 -2.2 1.2 0.8 2.7 80.2 20.0 (0.0 0.2) 18.3 80.3 5.6 1.0 --3.3 13.6 --Current ($ Bn) 2011 ($ Bn) Net Profits CY/FY 2011 ($ Bn) EBITDAR CY/FY 2011 (%) RoE CY/FY 2011 (%) ASKMs CY/FY 2011 In Bn RPKMs CY/FY 2011 In Bn PLF CY/FY 2011 (%) Yield CY/FY 2011 $ FC/ ASKM CY/FY 2011 $ P/E Ratio CY/FY 2012e x CY/FY 2013e x EV /EBITDA CY/FY 2012e x CY/FY 2013e x P /BV CY/FY 2012e x P /CF CY/FY 2012e X Source: Bloomberg.2 4.4 -71.1 --0.8 -14.6 0.2 5. ICRA Research.2 5.9 80.7 15.4 2.1 0.2 8.1 5.9 8.8 1.1 -2.7 8.2 30.3 16.4 0.4 11.

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