INDIAN AVIATION INDUSTRY

Through
Fverturbulent times, FDI relaxation alone not a game changer

MARCH 2012

Summary
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.

ICRA LIMITED

ICRA RATING FEATURE

Contacts
An j a n G h o s h
+91 22 3047 0006
aghosh@icraindia.com

Analysts
Subrata Ray
+91 22 3047 0027
subrata@icraindia.com
Shamsher Dewan
+91 124 4545 328
shamsherd@icraindia.com
Si d d h a r t h Sh a h
+91 22 3047 0018
siddharth.shah@icraindia.com

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;
Private players permitted to operate as air taxi operators
Air Corporation act repealed; Private players can operate schedule services
Jet, Sahara, Modiluft, Damania, East West granted scheduled carrier status
4 out of 6 operators shut down; Jet & Sahara continue
Aviation Turbine Fuel (ATF) prices decontrolled
Air Deccan starts operations as Indias first LCC
Kingfisher, SpiceJet, Indigo, Go Air, Paramount start operations
Industry consolidates; Jet acquired Sahara; Kingfisher acquired Air Deccan
SpiceJet starts international operations
Indigo starts international operations, Kingfisher exits LCC segment
Government allows direct ATF imports, FDI proposal for allowing foreign carriers
to pick up to 49% stake under consideration

Source: ICRA Research

Exhibit 2: FDI Regulations
FDI
Limits
Airports
- Greenfield Projects
- Existing projects

100%
100%

Approvals
Automatic
Automatic up to 74%
FIPB - beyond 74%

Air Transport Services

- Scheduled Air Transport Services*

49%
(NRIs 100%)

Automatic

- Non-scheduled Air Transport Service

74%

Automatic up to 49%
FIPB 49% to 74%

100%

Automatic

74%
(NRIs 100%)

Automatic up to 49%
FIPB 49% to 74%
Automatic

100%

Automatic

- Helicopter Services / Seaplane services

requiring DGCA approval
Other Services
Ground Handling Services subject to
sectoral
regulations
and
security
clearance
Maintenance and Repair organizations;
flying and technical training institutions

* 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 and Chartered airlines.
Source: Department of Industrial Policy and Promotion (DIPP), ICRA Research

ICRA LIMITED

Historically, the Indian aviation sector has been a laggard relative to its growth potential due to
excessive regulations and taxations, government ownership of airlines and resulting high cost of air
travel. However, this has changed rapidly over the last decade with the sector showing explosive
growth supported by structural reforms, airport modernizations, entry of private airlines, adoption of
low fare - no frills models and improvement in service standards. Like elsewhere in the world, air
travel is been transformed into a mode of mass transportation and is gradually shedding its elitist
image.

Strong passenger traffic growth aided by buoyant economy, favorable demographics,

rising disposable incomes and low penetration levels
India aviation industry promises huge growth potential due to large and growing middle class
population, favorable demographics, rapid economic growth, higher disposable incomes, rising
aspirations of the middle class, and overall low penetration levels (less than 3%). The industry has
grown at a 16% CAGR in passenger traffic terms over the past decade. With advent of LCCs and
resultant decline in yields, passenger traffic growth which averaged 13% in the first half has
increased substantially to 19% CAGR during 2006-2011. Despite strong growth, air travel penetration
in India remains among the lowest in the world. In fact, air travel penetration in India is less than half
of that in China where people take 0.2 trips per person per year; indicating strong long term growth
potential. A comparative statistic in United States, the worlds largest domestic aviation market
stands at 2 trips per person per year. We expect passenger demand to remain stable and grow
between 12-15% in the medium term, assuming a no major weakness in GDP growth going forward.

However domestic airlines operate under high cost environment; intense

competition has constrained yields; aggressive fleet expansions have impacted
profitability and capital structures
Despite reforms, the domestic aviation sector continues to operate under high cost environment due
to high taxes on Aviation Turbine Fuel (ATF), high airport charges, significant congestion at major
airports, dearth of experienced commercial pilots, inflexible labor laws and overall higher cost of
capital. While most of these factors are not under direct control of airline operators, the problems
have compounded due to industry-wide capacity additions, much in excess of actual demand.
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. Besides, aggressive fleet expansions (LCCs have added aircrafts mainly on
long-term operating leases; FSCs have purchased aircrafts debt financed, most often backed by
guarantees from the US EXIM Bank or Europes 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.

Indian Aviation Industry Evolution & Recent Updates [2/2]

Low-cost model now dominating the skies; viability remains to be seen

Exhibit 3: Growing LCC Market Share

100%

1%

5%

29%

80%
60%
40%

99%

95%

71%

34%

66%

20%

46%

48%

54%

52%

63%

69%

37%

31%

0%
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
FSC (%)
LCC (%)

Exhibit 4: ATF Price Trends (Mumbai, Rs/KLitre)

Jan-12

Oct-11

Jul-11

Apr-11

Jan-11

Oct-10

Jul-10

Apr-10

Jan-10

Oct-09

Jul-09

Apr-09

Jan-09

80,000
70,000
60,000
50,000
40,000
30,000
20,000

Exhibit 5: Rupee Depreciation (INR/USD)

54
52
50
48
46
44
42

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). This was followed by entry of carriers like Southwest, which pioneered the LCC
concept. Majority (~60-65%) of an airline cost are dependent on external factors, which cant be
managed by an LCC. This includes the fuel cost (~40%), maintenance cost (~12%) and ownership cost
(~12-15%). LCCs try to achieve a cost advantage in other ways by avoiding the in-flight services,
operating from secondary airports, selling tickets through the internet, higher number of seats in the
aircraft, inventory reduction through use of similar aircraft and lower employees per aircraft.
The Indian aviation sector was exposed to intense competition with the advent of a low-cost airline Air Deccan back in 2003. The success of Air Deccan spurred the entry of other LCCs like SpiceJet,
Indigo, Go Air and subsequently low fare offerings from Jet airways and Kingfisher airlines. As a
result, the sector which was completely dominated by full-service airlines till a decade ago is now
dominated by low-cost airlines. However, 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.
Besides, 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.60,000 to Rs. 115,000 depending on
aircraft, besides impacting aircraft utilizations). These constraint can be resolved only if there
significant improvement in infrastructure such that LCCs could operate on secondary airports.

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 7: LCC Strategies

Categories

Exhibit 6: ATF Tax Structure in India

Particulars

Tax Rates

Excise Duty

8%

Average Sales Tax Levies by states

~23-24%

Margins of Oil Marketing Companies

~15-18%

Source: Company Filings, Bloomberg, ICRA Research

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

Ancillary Revenues

Remarks
Reduces maintenance and inventory cost.
Lower charges, lower turnaround time due to less congestion.
Improves aircraft utilization by reducing waiting time at airports.
More seats per flight so spread costs over a larger base.
Helps to keep the costs and hence the fares low.
Reduces employee cost and leads to higher employee productivity.
The traditional method of ticketing costs around US$ 4.5 per
passenger whereas the cost of an e-ticket comes to US$ 1 which
helps reduce selling expenses.
Primarily on-board sales. Provides alternate source of revenues
helps to reduce break-even PLF.

Source: Company Filings, ICRA Research

ICRA LIMITED

Indian Aviation Industry Operating Performance [1/2]

Exhibit 8: Domestic Airlines - Operating Matrix
Revenues
Domestic Revenues
International Revenues

Domestic revenues are largely INR denominated; Robust pax traffic growth, but yields out of sync with cost structures due to
intense competition, government support to national carrier and customer preference for LCC models
Airlines with international operations generate part of revenues in foreign currency; foreign carriers dominate in the longer
haulage and premium service offerings

Other Operating Income

Sub-Lease of Aircrafts
Cargo, Auxiliary Revenues etc.

Earnings from aircraft sub-leases (dry or wet) are mostly in $ terms, helps rationalize capacities
Low contributions from cargo and auxiliary revenue due to their modest adoption level

Non-Operating Income
Aircraft Sale & Lease back

With capacity constraints at global aircraft manufacturers & rising commodity prices, 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, generate free cash flows and deleverage the balance sheet

Cost Structure
Fuel Cost
Employee Cost
Aircraft Maintenance Expenses
Landing, Navigation & Airport Charges
Other Expenses
Selling & Distribution Expenses
General & Administrative Expenses

ATF costs contributes 30-45% of overall operating costs for Full Service Carriers (FSCs) & 40-55% for Low cost carriers (LCCs)
Domestic ATF prices are linked to fluctuation in crude oil prices and movement in INR vs. $
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, dearth of experienced pilots require airlines to
employee foreign pilots which command higher salaries and are often paid in foreign currency

EBITDAR

Aircraft Lease Rental

Depreciation
Interest Expense
PBT
Source: ICRA Research

ICRA LIMITED

Most airlines follow an operating lease model for large part of their capacity; Lease rentals are also denominated in foreign
currency thereby exposed to fluctuation in forex movement; Depreciation costs mainly for owned aircrafts (Financial Lease)
Significant rise in interest expenses due to deterioration in the capital structure, cash losses and increased working capital
requirements besides overall rise in interest rates

Indian Aviation Industry Operating Performance [2/2]

The domestic airlines industry is facing significant operating (slowing growth, rising fuel costs) and
non-operating (interest costs, rupee depreciation) challenges as evident in the quarterly
performance trends of listed airline companies.

Exhibit 9: Domestic Airlines - Gross Sales Growth (%, YoY)

31%

34%
21%

19%

20%

20%

13%

9%

-3%

Dec-11

Sep-11

Jun-11

Mar-11

Dec-10

Sep-10

Jun-10

Dec-09

Mar-10

-25%
Sep-09

-17%
Jun-09

Mar-09

40.0%
30.0%
20.0%
10.0% 3%
0.0%
-10.0%
-20.0%
-30.0%

Exhibit 10: Domestic Airlines Fuel Costs (% of Gross Sales)

60.0%
50.0%
40.0%
30.0%

44%

40%
29%

33%

32%

35%

36%

36%

47%

52%

50%

34%

20.0%
10.0%
Dec-11

Sep-11

Jun-11

Mar-11

Dec-10

Sep-10

Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

Mar-09

0.0%

Exhibit 11: Domestic Airlines Reported PAT (% of Gross Sales)

0.0%
-5.0%
-10.0%
-15.0%
-20.0%

-3%

-4%
-14%

-1%
-4%
-10%

-11%

-11%

-7%

-9%

-25.0%

Indian
Aviation Industry Operating Performance [2/2]
Note: Aggregate Data for Listed Airlines
Source: Capitaline, ICRA Research

ICRA LIMITED

Dec-11

Sep-11

Jun-11

Mar-11

Dec-10

Sep-10

Jun-10

Mar-10

ATF Import: [Heading]

-26%
Dec-09

Jun-09

Mar-09

Sep-09

-26%

-30.0%

Sales Growth: After a strong rebound in 2010, the pax growth has been moderating over the last few
quarters due to moderating economic growth and weak industrial activity. Besides, 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), lowered yields
and moderated sales growth for the airlines. Even on international routes, the yields have remained
weak due to weaker economic conditions and severe competition from global airlines.
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. Besides, the steep rupee depreciation
(~18.7% depreciation in CY11, although partly reversed through 7.3% YTD appreciation in CY12) acts
double whammy as apart from fuel costs, substantial portion of other operating costs like lease
rentals, maintenance, expat salaries and a portion of sales commissions are USD-linked or USDdenominated.
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, the profitability margins of the airlines industry have been severely impacted. As per Centre
for Asia Pacific Aviation (CAPA), Indian carriers could be posting staggering losses of $2.5 billion (~Rs
12,500 crore) in 2011-12, worse than the losses of 2008-09 when traffic was declining and crude oil
prices spiked to $150 per barrel.
Overall, the industry has been marred by cost inefficiencies and is bearing the brunt of aggressive
price cuts, rising costs, expensive jet fuel, a weaker rupee, high interest payments and hence
mounting losses. The government support required to bailout the loss making Air India has increased
substantially; while the leading private players like Kingfisher Airlines, Jet Airways and SpiceJet are
making significant losses. With Banks unwilling to enhance their exposure to the industry, recast
their loans or pick up equity stakes without viable business plans, industry needs to come out with
strong equity infusion plans. Hence, the government is mulling allowing foreign carriers to pick
strategic stakes in domestic airlines to help them stay afloat in these difficult times, besides bringing
global expertise and best industry practices over the medium term.

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; 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 Indias 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; besides higher cost base, 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, thereby
resulting in delays and higher costs for airlines
Poor financial health of most airlines
Intense competition, sharp fluctuation in ATF prices and high debt burden continue
to weigh on the financial performance of Indian airlines; foreign exchange
fluctuation and lack of adequate hedging mechanism (for fuel) have added to the
woes
Highly competitive & Price Sensitive traveler base

\Source: ICRA Research

ICRA LIMITED

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. In
case of listed airlines, if the proposal does not get a waiver from SEBIs Takeover Code, 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), such that their stake remains within the 49 % cap.
Indian Carriers: The FDI proposal, if approved, 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. Besides, the move will help bring global
expertise and best industry practices over the medium term.
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. While full-service airlines could help them further consolidate their
market position on international routes (and improve connectivity within India), acquisition of lowcost airlines could help them compete in a market where travelers are highly price sensitive.
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. Besides, it would provide more flexibility in
international travels when one travels through the same airline domestically as well as
internationally. Overall, this could increase competition, offer more alternatives, reduce tariffs and
improve customer service standards over the medium term.
However, the Global Airline industry is itself currently going through a tough phase (Bloomberg
World Airline index down 22%, Asia-Pacific Airline index down 25% in last one year), due to below
trend economic growth across advanced economies and high crude oil prices ($100-125/Barrel).
Besides, aviation economics currently remain unfavorable in India due to intense competition,
mandatory route dispersal guidelines, higher taxes on ATF, airport related charges and inadequate
airport infrastructure. For example, airlines like Air Asia (citing high infrastructure costs) & American
Airlines (parent facing financial stress) have recently withdrawn from India. Lastly, foreign carriers
already enjoy significant market share of profitable international routes and have wide domestic
access through code sharing agreements. Given these considerations, we believe, attracting
investments from foreign airlines may not be easy.

Indian Aviation Industry: Proposed FDI Relaxations [2/2]

Foreign carriers already enjoy significant share of international traffic; domestic
access through code sharing agreements

Exhibit 14: Significant Erosion in Market Capitalizations (Rs Crore)

8,000
6,000
4,000
2,000

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

Jet Airways

Kingfisher Airlines

SpiceJet

Exhibit 15: Foreign Carriers Pax market shares in International Routes (FY10 Data)
British Airways

3.0%
3.1%
3.3%
3.6%
4.1%
4.3%

Thai Airways
Cathay Pacific
Jet Airways

Dilutions at Current market capitalizations unlikely to solve issues of staggering debt

levels and mounting losses

10.8%
12.5%

Air India

21.4%
-

2,000,000

4,000,000

6,000,000

8,000,000

Exhibit 16: Jet Airways Domestic vs. International Operations

30.00%
20.00%

26%
22%
23% 19%

26%

26%
23%

16%

13%

10.00%

3%

0.00%

11%
7%

14%
-9%

8%
2%

-10.00%
Q4
FY10

Q1
Q2
Q3
Q4
Q1
Q2
Q3
FY11 FY11 FY11 FY11 FY12 FY12 FY12
Jet Airways : EBITDAR Margins - Domestic (%, LHS)
Jet Airways : EBITDAR Margin - International (%, LHS)
Jet Airways : Rev per pax (International/Domestic)

Source: DGCA, Company filings, ICRA Research

ICRA LIMITED

As per DGCA data, foreign carriers already enjoy ~65% market share in international traffic and hence
~27% of total passenger traffic (Domestic + International). For Jet Airways, due to longer haulage (~4.6 hrs
avg block hours in international routes as compared to ~1.6 hrs avg block hours in domestic routes),
revenue per passenger carried on international route has been 2.5x to 3.0x revenue per passenger carried
on do
mestic route. We expect this ratio to be higher on an industry wide basis as foreign carriers
dominate longer haulage routes, full service offerings and business traffic as compared to shorter haulage,
low fare offerings & VFR (visiting friends and relatives) traffic prominence of Indian carriers. As a result, we
estimate that the foreign carriers have already garnered 42-48% of total airline revenues (inbound,
outbound & within India). Besides, 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, with the domestic carriers left with price conscious no-frills pax traffic, less viable routes and hence
saddled with high operating losses. Besides, due to number of code sharing agreements, foreign carriers
can offer enhanced connectivity into Indian cities without acquiring stakes in Indian carriers.

3.00
2.50
2.00
1.50
1.00
0.50
-

Besides, since the airlines stocks have corrected significantly over the last two years, 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, 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).
Exhibit 17: Promoter Stake dilution incase in fresh equity infusion
Jet Airways
Kingfisher

SpiceJet

Total

Total Debt Outstanding FY11 (Rs Cr)

15,210

7,057

86

22,353

Current Market Capitalization (Rs Cr)

2,767

1,150

1,066

4,982

80%

59%

39%

Fresh Equity infusion for 49% stake*

2,658

1,104

1,024

4,787

Mcap Post Equity infusion

5,425

2,254

2,090

9769

41%

30%

20%

Current Promoter holding (%)

Promoter holding post infusion

*Assuming Equity infusion @ current share price that has already run-up considerably in anticipation (Jet
up 87% YTD, SpiceJet up 43% YTD)
Source: ICRA Research

Direct ATF Imports: Benefits and near term feasibility remain misty
In addition to the proposal on FDI, the empowered group of Minister has also recently approved the proposal for airlines to import Aviation Turbine Fuel (ATF) directly, a demand that the
airlines have been lobbying for quite some time now. While the cabinet approval is yet come by, in our opinion, the impact of this development is likely to be a mixed bag. Although the
taxation differential (between currently applicable sales tax rates and likely import duty) certainly suggest a large potential saving for airlines, the availability of infrastructure is likely to be
a considerable roadblock. Given the monopoly of OMCs at major airports, airlines would have to resort to a fee-based structure for utilizing their infrastructure for fueling, storing and
transporting ATF. At the same time, airlines will also have to engage a fair bit of working capital in sourcing imported ATF as against credit period available from OMCs. Given the current
liquidity constraints, managing additional credit lines from banks is also likely to be a challenge for airlines and overall would reduce the potential savings being envisaged.
At present, 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. Given the higher tax rates
at major airports, airlines pay on an average 22-26% sales tax on ATF for domestic operations. With the option to import directly, 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. While the savings appear to be significant, there are various practical
issues that airlines will have to sort out before they could start importing ATF directly. At most airports (barring the private ones), state-run OMCs own and operate the infrastructure for
sourcing, fueling and storing aviation fuel. For sourcing fuel directly, airlines will have no other option but to utilize the existing infrastructure possibly on a fee-based structure with OMCs.
In addition, 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, implying
incremental funding requirement. 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. Given these hurdles, the effective savings could be much lower than what is reflected from tax differential. In absolute terms, the impact will be higher on airlines with higher
share of domestic operations like Indigo or SpiceJet.

International Routes: Freeze on international permissions to private carrier removed

In another major boost to private airlines (especially IndiGo and SpiceJet), the Civil Aviation Ministry has lifted the freeze on their overseas expansions. 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. However, 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.
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, higher auxiliary revenue through in-flight sales and higher fleet utilization, as international operations could happen during the otherwise idle night hours.

Financial guarantees to the debt-ridden national carrier in securing funding at competitive rates
As per media reports, Group of ministers (GoM), headed by finance minister cleared the financial restructuring plan for Air India under which the national carrier will be allowed to raise Rs
7,400 crore through government- guaranteed bonds bearing a coupon rate of 8.5-9%. According to official data, Air India has outstanding loans and dues worth Rs 67,520 crore. Of this, Rs
21,200 crore represents working capital loans, Rs 22,000 crore long -term loans taken for fleet acquisition, Rs 4,600 crore dues to vendors and it carries an accumulated loss of Rs 20,320
crore. The ministerial group also decided to restructure the carriers Rs 21,200 crore working capital loans - Rs 7,400 crore shall be come from the bond issue, Rs 9,800 crore will be
converted into long-term debt of 10 to 15 years and the balance Rs 4,000 crore will remain outside the restructuring exercise. While the financial guarantees may help it overcome near
term headwinds, operation turnaround at ailing national carrier remains critical for overall health of the industry.

ICRA LIMITED

Annexure 1: Key operating indicators and valuations for the Global Airline Industry
Company Name

Sales

Net
Profits

EBITDAR

RoE

ASKMs

RPKMs

PLF

Yield

FC/ ASKM

CY/FY

CY/FY

CY/FY

CY/FY

CY/FY

CY/FY

CY/FY

CY/FY

CY/FY

CY/FY

CY/FY

CY/FY

2011

2011

2011

2011

2011

2011

2011

2011

2011

2012e

2013e

2012e

($ Bn)

($ Bn)

($ Bn)

(%)

(%)

In Bn

In Bn

(%)

7.9

18.0

8.4

0.4

18.8

--

235

193

82.1

16

3.7

4.2

6.3

--

--

--

--

--

236

187

79.3

--

--

20.8

M cap

EV

Current

Current

($ Bn)

Delta Airlines
Deutsche Lufthansa

P/E
Ratio

EV
/EBITDA
CY/FY

P
/BV
CY/FY

P
/CF
CY/FY

2013e

2012e

2012e

3.5

3.9

3.9

7.4

2.4

9.1

2.8

2.4

0.6

2.2

FSC Carriers

Air France-KLM

1.7

--

--

--

--

--

251

202

80.7

--

--

--

--

8.1

5.1

0.3

1.5

Air China Ltd

12.2

23.6

6.7

1.1

40.3

37

132

106

80.0

10

2.8

6.8

7.7

7.5

7.2

1.1

3.4

Singapore Airlines

10.2

7.1

2.8

0.1

31.6

108

85

78.5

3.1

27.2

19.5

4.2

3.8

1.0

6.9

All Nippon Airways

7.7

15.8

8.2

0.1

22.5

87

58

67.5

3.6

30.4

17.2

5.9

5.3

1.2

4.4

Cathay Pacific Airways

7.7

--

--

--

--

--

116

97

83.4

--

--

14.5

10.6

7.1

5.9

1.0

5.6

China Southern Airlines

7.0

14.7

6.3

0.6

32.2

31

140

111

79.2

10

2.6

5.8

6.9

6.4

6.1

0.9

2.1

China Eastern Airlines

6.3

15.2

6.1

0.5

31.4

60

119

93

78.0

10

2.7

5.3

6.1

7.4

6.8

1.2

1.9

Qantas Airways

4.1

7.6

6.7

0.0

19.8

133

107

80.1

11

3.0

13.1

8.6

3.9

3.2

0.6

2.4

Korean Airlines

3.6

14.6

10.7

(0.3)

--

-11

--

--

--

--

--

8.8

8.4

8.3

7.4

1.2

2.2

Malaysian Airline

1.5

3.0

--

--

--

--

51

39

75.4

--

--

--

85.0

16.2

7.2

2.4

17.2

Thai Airways

1.8

5.8

--

--

--

--

--

--

--

--

--

14.4

10.6

5.9

5.3

0.8

2.1

Garuda Indonesia

1.5

1.9

2.2

0.1

21.8

15

26

18

71.7

2.7

14.8

8.6

7.9

6.0

1.8

--

Asiana Airlines

1.3

--

4.8

0.0

--

--

37

28

76.4

--

--

6.9

5.5

6.7

5.7

1.2

2.9

Air New Zealand

0.8

1.3

1.5

(0.0)

12.8

32

27

83.4

11

2.8

15.0

8.0

3.4

2.8

0.6

2.6

Jet Airways

0.6

3.1

3.2

(0.0)

27.0

-5

40

31

78.6

2.9

--

--

88.2

10.2

4.0

--

Kingfisher Airlines

0.2

1.7

1.4

(0.2)

13.0

--

16

13

81.0

3.1

--

--

--

--

--

--

Ryan Air

8.1

8.8

1.1

0.0

41.4

17

63

53

84.1

2.7

13.1

12.8

7.3

7.1

1.9

7.1

Southwest Airlines

6.3

6.9

4.1

0.2

17.6

121

98

80.9

15

4.8

11.4

8.3

3.7

3.3

0.9

5.0

Air Asia

3.3

5.1

--

--

--

--

26

21

80.0

--

--

11.1

9.2

8.2

7.2

1.9

6.2

Cebu Air

0.9

1.1

--

--

--

--

10

85.0

--

--

9.6

8.0

6.2

5.0

1.7

5.3

Tiger Airways

0.5

0.8

0.5

0.0

30.3

23

10

85.8

1.8

--

78.0

--

16.3

2.4

--

SpiceJet

0.2

0.2

0.6

0.0

18.5

--

10

82.5

2.6

--

--

--

--

--

--

LCC Carriers

Source: Bloomberg, ICRA Research; projected estimates Bloomberg Consensus estimates

ICRA LIMITED

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