After two decades which saw both

unprecedented growth and stagnation,
the Indian Civil Aviation sector is
entering a new phase of development.
Despite tremendous growth in recent
years, less than 2% of Indians travel by
air each year indicating that much
remains to be explored within the sector.
A Brief History:
1912 Domestic air route between
Karachi and Delhi becomes
o p e r a t i o na l , i ni t i a t e d by
collaboration between Indian
State Air Services and Imperial
Airways UK. In reality just an
extension of the London-Karachi
fli ght operated by Imperi al
1932 J.R.D Tata himself flies a De
Havi l l and Puss Mot h f rom
Karachi to Bombay, carrying
postal mail of Imperial Airlines.
This marks the instigation of the
Indian Aviation Industry in the
form of Tata Airline.
Tata Airline was transformed into
Air India in 1946. At the dawn of
independence, India operated
nine air transport companies
provi di ng bot h car go and
passenger services. 
1953 All airline assets were nationalised
and Indian Airline Corporation
and Air India Corporation were
f or me d f or dome s t i c a nd
international services respectively.
1991 T h e s e t w o c o m p a n i e s
commanded a monopoly in India
until 1991. In this year, private
airlines were allowed to operate
non-schedul ed servi ces and
chartered flights under the ‘air
taxi scheme’ to uplift Indian
tourism. In 1994, resulting from a
repeal of the air corporation act,
pr i vat e ai rl i nes compani es
obtained permission to function
scheduled air services.
2003 2003 proved a landmark year in
Indian Aviation being marked by
the entry of the low-cost carrier
Air Deccan, which slashed prices
up to 17% of existing fares. Since
then the Indian aviation landscape
has witnessed the entry of more
than 12 low –cost players, which
now domi nate the avi ati on
landscape. Such players now
include Spice Jet, Go Airways and
Kingfisher Air.
Current Outlook
The Airlines Industry in India has
displayed explosive growth since 2003,
with average year-on-year growth in
passenger traffic between 2003 and now
touching 20%.
India’s eight domestic airlines carried a
total of 4.08 million passengers in July
this year, compared with 3.59 million a
year earlier. The average number of
flights per person per year for the 1.1
bil l ion Indian popul ation is 0.03
compared to 1.6 in the United States.
This indicates that there is huge room for
further penetration. There are currently
136 airports in India, compared to over
400 in the United States, one of the most
developed markets for air-travel.
Due t o t he gl obal mel t down i n
2007-2008, for the Indian Airlines
Industry and even worldwide the growth
trend in the aviation sector, displayed
since the entry of low cost barriers was
reversed. Following the fuel-price hike in
mid 2008, airlines were forced to raise
fares and the 12 months proceeding July
2009, saw consecutive year on year
declines in passenger traffic.
The airlines industry worldwide, however,
is showing distinct signs of recovery. The
global aviation market is expected to
grow at a CAGR of 5.9% over the next
Overview of the Airline Industry
five years, as estimated by Global
Information Inc. While the market share
of the more mature markets such as the
US and Europe has witnessed a fall to the
present proportion of 52%, emerging
markets of fer tremendous growth
potential. According to Kapil Kaul, CEO
India & Middle East, Centre for Asia
Pacific Aviation (CAPA), India's civil
aviation passenger growth is among the
highest in the world. The sector is slated
to cruise far ahead of other Asian giants
like China or even strong economies like
France and Australia. The number of
passengers who will be airborne by 2020
is a whopping 400 million. This in turn
implies much room for growth within the
in Indian Aviation Sector.
Airport Infrastructure
The present number of airports in India
is 136, of which the Airports Authority of
India (AAI) owns 94. Of these 136
airports, 82 are used for scheduled
services. Wide-scale modernisation of
airports across the country has taken
place recently, with the Hyderabad
International Airport being ranked
amongst the world's top five in the annual
Airport Service Quality (ASQ) passenger
survey along with airports
at Seoul, Singapore, Hong
Kong and Beijing.  The
Airports Authority of India
(AAI) has planned to spend
over US$ 1.02 billion in
2 0 1 0 , t o w a r d s
modernisation of non-
metro airports. The city-
side development of 24
airports is being planned,
i n c l u d i n g t h o s e a t
Ahmedabad and Amritsar.
Moreover, 11 Greenfield
a i r p o r t s h a v e b e e n
identified to reduce the
load on existing airports.
I n 2 0 0 7 – 0 8 , t h e
i nt er nat i onal ai r port s
together handled about 80
pe r c e nt of ai r c r af t
movement, 88 per cent of
passenger traffic and 97
per cent of freight traffic.
I n d u s t r y Ch a r a c t e r i s t i c s
The airline industry business is cyclical,
and the major factors that affect the
earnings are economic conditions, excess
capacity and oil prices. Thus, investment
in this industry is prone to higher risk but
l ower profit abi l i t y, compared t o
investments in other industries.In
addition, the airlines industry is extremely
captital intensive requiring a range of
expensive equipment and facilities
rangi ng f rom ai r pl anes t o fli ght
simulators to maintenance hangars.
Additionally, the industry typically
records high positive cash flows and is
labour intensive, employing a virtual
army of pilots, flight attendant,
mechani cs, baggage handl ers,
reservation agents and the like.
Cost Drivers:
The biggest cost driver in airlines is
typically power and fuel followed by
maintenance and employee costs.
The latter includes the salaries of
pilots as well as costs assosciated with
aircraft and traffic service such as the
sal ari es of baggage handl ers,
dispatchers and airlines gate agents
and passenger service. In addition
given the capital intensive nature of
the industry, depreciation is a critical
expense for all airlines companies. The
amount of depreciation varies across
companies, as some buy aircrafts, others
decide to lease and there are some who
depend on 2
hand aircrafts.
Revenue Drivers:
The primary revenue drivers in Civil
Aviation are Ticket sales. Ancilliary
revenue comes in the form of excess
baggage charges, commissions through
hotel accomodation, travel insurance and
car rentals as also revenue from sales of
food and beverages. Ancilliary revenue
has become increasingly important lately,
given that the Low Cost Carriers derive
much of their income from the same.
With regard to segmentation, the industry
maybe broadly segmented into two
categories based on the airline unit costs
and average fares
1. Low Cost carriers (LCC)
Among the various carriers, the LCC
provide the lowest fares and operate at
the lowest costs. They offer no-frills one-
class service. The entry of LCC into
India was marked by Air Deccan in 2003
and today this category includes players
such as JetLite, Kingfisher Red, Spicejet
and Indigo amongst others.
2. Full Service carriers (FSC)
A Full Service Carrier provides in-flight
meal s, ent er t ai nment and ot her
complementary services. Hence, FSC
fares are typically higher than LCC fares.
It also offers a variety of air travel classes
such as first (F), business (C) and economy
(E) classes. FSC’s in India include Jet
Airways and Indian Airlines.
With intense competition however, the
gap between these two categories appears
to be diminishing. One the one hand, Jet
Airways and Kingfisher have moved
more than 60% their passenger capacities
to no-frills and all economy services. On
the other hand, LCC’s are offering
services and discounts- traditionally
offered only by the FSC’s. While Spice Jet
has introduced online check-in and
f a c i l i t i e s f o r s u p e r v i s i o n o f
unaccompanied minors, GoAir offers
Airports Number
I n t e r n a t i o n a l
airports, including
j o i n t v e n t u r e
Domestic airports 79
Customs airports 8
Civil enclaves 24
Others 8
complimentary beverages at select
airports and Indigo informs passengers of
their flight status through texts messages
on their mobiles.
International vs. Domestic
The industry can also be segmented
as international carriers and domestic
carriers. The major players in the
international segment along with their
capacity contribution are NACIL and Jet
Airways. Kingfisher has recently entered
this segment. All other players have
operations in the domestic segment. In
terms of passenger traffic, 18.5% is
contributed by the international segment
at present and the rest is contributed by
the domestic segment.
The parameters for judging airline
performance are varied and may be as
 Aircraft Utilization: The most basic
metric for an airline is aircraft
utilization. This measures the average
number of hours that each aircraft is
flying in each 24 hour period.
The basic idea is that planes that are in
use are probably making money.
Utilization is a statistic that varies from
carrier to carrier and is normally
considered a closely guarded corporate
trade secret and is not tracked by
government. Part of the "art" in
running an airline is keeping utilization
 Load Factor: This measures the
percentage of available seats that are
filled during a specific period. The
passenger load factor for the aviation
sector in India as a whole towards the
end of 2009 was estimated at about
 Avai l abl e Seat Ki l omet res
(ASKM): ASKM is equal to the
number of available seats times the
number of kilometres flown. The
ASKM metric is used to track seat
supply among airlines.
 Revenue Passenger Kilometres
(RPKM): RPKM measures the
number of seat kilometres flown for
which the company earned revenues.
That is, RPKM equals the number of
filled seats times the number of
kilometres flown.
 Yield: The amount of revenue earned
per RPKM is known as the airline's
yi el d. Thi s metri c i s general l y
expressed in cents and ranged from
9.8-13.1 cents for the major airlines in
the first half of 2007
 Fuel Costs: Most factors that affect
the profitability of airlines are fairly
stable, except for fuel costs. Fuel costs
are facing extreme risk from the threat
of Peak Oil.
 Unit Cost: It is the ratio of operating
expenses to ASKM, an indicator of
unit costs.
 Daily Aircraft Utilization/hr:
Ratio of the number of aircrafts
utilized to the number of operating
hours- indicator of the effectiveness of
fleet utilization by the airline.
 Break Even Seat Factor: Ratio of
Unit Cost to Yield. It signifies the
average number of seats an airline
needs to sell to cover its operating costs,
indicator of operating margins.
Financial Standing and Future
In the aftermath of the financial crisis,
Indians reported a sharp drop in air
travel. Fuel prices were on the rise and so
were costs. All together, Indian airlines
lost an estimated $2 bn in the 2009
financial year. Kingfisher and Jet
postponed the delivery of new planes and
leased out or sold off surplus planes.
But things have changeD since.
Indian carriers are now regaining
altitude. This year, barring February,
traffic has grown at an average of 20%
year-or-year in 2010 so far. In July 2010
the year on year growth in domestic air
pas s enger t r af fic growt h s l owed
marginally to 13.64%, following the end
of the peak travel season.
Passenger loads are at a healthy 78 per
cent, from 65 per cent during the crisis.
Low-cost carriers are doing even better,
with passenger load factors ranging
between 85 to 90%. At industry level,
both the ASKM and RPKM have been
on the rise.
While most airlines were suffering losses
through 2009, things are now starting to
look up. While Kingfisher narrowed its
first quarter losses to Rs. 1.87bn from Rs.
2.37bn last year, Jet Airways even
reported a small profit of Rs.35.2m in the
first quarter of the current financial year,
compared to a loss of Rs.2.25bn at the
same time last year. For Jet, domestic
operations accounted for 44% of total
revenues (or USD 285.1 million) and
grew by 23.8% year-on-year in the
quarter.  Both Jet airways and Jet connect
have now broken even on seat factor and
passenger load factor. Even SpiceJet’s first
quarter net profit more than doubled to
US 11.8 million in the three months
ended Jun-2010.
If the expected projection by Boeing of a
future average growth rate of 8.4% for
South Asia’s Aviation Market for the next
decade materialises, it would translate
into a $ 130bn market for around 1150
planes for the next decade. With such
optimistic projections, expansion plans of
several airlines are in place. While Jet’s
Chairman, Naresh Goyal, recently
announced that Jet plans to expand its
capacity by 10-15% by adding another 5
planes to its fleet, SpiceJet announced
that it has ordered 30 Boeing planes for
delivery from 2014 for $2.7bn.
Growth drivers
The factors contributing to the air traffic
growth may be broadly classified into
economic and policy factors. Entry of
low cost carriers, rise in disposable
income--expected to increase at an
average of 8.5% p.a. till 2015, the 300m
strong middle class, increased FDI
inflows, surging tourist inflow, increased
cargo movement, strong business growth
and supporting government policies are
the major drivers for the growth of
aviation sector in India.
Regulatory Trends
At present, the domestic air transport
policy debars foreign airlines from equity
participation in the companies formed for
domestic air transportation. The policy
al l ows par t i ci pat i on of f or ei gn
individual/companies up to 40 per cent
and the participation of Non-Resident
Indians (NRIs) / Overseas Corporate
Bodies (OCBs) up to 100 per cent in the
domestic air transport services. The issue
relating to permitting foreign airlines
equity investment in companies formed
for domesti c operati ons i s bei ng
reconsidered by the Government at the
behest of both international and Indian
players interested in strategic alliances.
Moreover, overall increase in the foreign
equi ty l i mi t i n domesti c ai rl i nes
operations may also be considered with a
view to attracting new technology and
management expertise.
The f orei gn equi t y l i mi t i n t he
international services is 26 per cent. In
order to attract investment in this sector,
the possibility of increase in foreign
equi ty parti ci pati on may al so be
The Government approved the FDI
limits in the civil aviation sector which are
expected to bring in more foreign
investments to the sector. This includes
upto 49% on automatic route and upto
100% for NRI in air transport services
subj ect t o no di rect or i ndi rect
participation by foreign airlines; upto
74% on automatic route for non-
scheduled airlines, chartered airlines and
cargo airlines and up to 100% for NRIs
subj ect t o no di rect or i ndi rect
participation by foreign airlines in non-
scheduled and chartered airlines; upto
74% for ground handling services and up
to 100% for NRIs on automatic route
subject to sectoral regulations and
security clearance; and upto 100% on
automatic route for maintenance and
repair organisations,flying training
institutes, technical training institutions
and helicopter/seaplane services.
Current regulations also require
domestic airlines to operate for at least 5
years and operate a minimum fleet size of
20 aircraft before being permitted to
operate on international routes.
The government, considering the
strained liquidity positions of the
airlines, has provided
flexibility in clearing dues of oil
companies. Further, custom duties on
ATF have been reduced from 5% to
0%. There is substantial competition
in both domestic and international
segments. The airlines are allowed to
operate any domestic routes with no
restrictions on pricing. The Indian
government has pushed for bilateral
air service agreements with overseas
markets, engendering greater access to
foreign carriers.
A bill to establish the Aviation
Economic Regulatory Authority
(AERA) was passed in Oct'08 with
responsi bi l i ty for regul ati on of
aeronautical changes and to safeguard
the interest of stakeholders at Indian
airports. The Government may issue
fresh licenses for airlines planning to
The Indian Airspace has undergone
tremendous changes since its monopoly
days and today several players exist in the
market offering diversified services and a
range of fares. Jet Airways has the
highest market share among the domestic
carriers. Jet Airways together with its
budget arm Jetlite commands 27% of the
market share among domestic Indian
carriers. Kingfisher comes in second, with
20% of market share. They are followed
by Air India, with a market share of
18.3% and IndiGo with a market share of
Jet Airways:
Widely regarded as India’s biggest and
best airline, Jet Airways is a privately
owned full service airlines which was first
incorporated as an ‘Air Taxi’ on April 1
1992. In January 2006, Jet Airways
launched a $500 million, all-cash deal to
take over Air Sahara, which was then the
second biggest private operator in the
domestic market. After a protracted
acquisition saga, Jet finally completed the
takeover on 12
April 2007 for $340
million. It rebranded Air Sahara as
JetLite and operates it in the VBC
segment. In May 2009, Jet launched Jet
Konnect, its own LCC.
It currently commands 27% in the
Indian Aviation Market and has a fleet of
90 and an average fleet age of 4.82 years,
significantly lower than industry average.
Jet operates 330 daily flights to 50
destinations across the country and 6
overseas flights.
Jet has been increasing its focus on
i nternati onal operati ons, wi th i ts
international air traffic increasing by
20.1% in the year ended March 2010, as
opposed to the 4.2% increase in domestic
air traffic. It now serves 23 international
and 44 domestic locations
The ASKMs reduced to to 29.2 million
in 2009-2010 from 31.6 million in
2008-2009. Passenger Load factor on the
other hand increase from 67.4% in
2008-2009 to 77.4% in 2009-2010
Jet Airways is renowned for its excellent
in-flight service, punctuality and food. Its
pr i mar y s t rengt hs l i e i n s t rong
government networks, its young fleet and
a diversified presence across the globe.
However, there is uncertainty about the
way Jet Airways has positioned itself.
Traditionally it has been seen as a FSC
provider. It has recently launched into
LLC services, with the launch of Jet
Connect. Then there is also JetLite which
is a Value-based provider. There is thus
confusion about its positioning both
within the organisation and outside.
Kingfisher Red
Founded on 25
August 2003, Kingfisher
Red (formerly Air Deccan) has the
distinction of being India’s first low-cost
airline. It is reputed as having brought air
Player profiles
travel within the reach of the common
man, connecting second-rung cities such
as Hubli and Madurai to metros like
Since Kingfisher Airlines took over Air
Deccan in 2007, the latter underwent
massive rebranding first being renamed
Simplifly Deccan and Kingfisher Red in
Kingfisher has a young air fleet, with a
fleet size of 66 and an average fleet age of
around 3.7 years. Kingfisher has seen a
12 percentage points increase in load
factors to 81% from 69%, and a 5%
improvement in yields between Q1 2009
and Q1 2010. It currently has a seat
factor of 80.6%. Kingfisher Airlines
serves 63 domestic destinations and 8
international destinations in 8 countries
across Asia and Europe. 
Kingfisher is known for excellent service.
It is one of the 6 airlines in the world to
have a 5 star rating from Skytrax, a UK
based consulting agency. It is reputed to
be the best in the industry with respect to
timely delivery of baggage as well as its
in-flight services. It has built an image as
a passenger-friendly airline, and presently
Kingfisher Red is the only low-cost
Indian airline to provide complimentary
in-flight meals and bottled water to its
Air India
India’s national carrier, Air India was
founded in 1932, as Tata Airlines by
J.R.D. Tata. Soon after independence,
49% of the airlines was taken over by the
Government of India. Tata Airlines
became a publicly listed company in
1946, under the name Air India. Air
India continued to expand in the
following years and today it is the 16

largest airline in Asia. In 2007, Air India
merger with Indian Airlines and as a part
of the process, a new company called
the  National Aviation Company of India
Limited (NACIL) was established.
Air India has a total fleet of 135 of which
it owns 108. The average fleet age is
about 9.5 years.
In July 2010, Air India carried 7.08 lakh
passengers on its domestic network. The
air-carrier clocked a robust 43.1 per cent
growth in revenue on domestic operations
during this period compared to the
previous year.  On the other hand, the
revenue from international operations
increased by 16.2%.
Simultaneously, the country's flagship
car ri er al s o recorded s i gni ficant
improvements in its seat factor and yields
across its domestic and international
operations.  The seat factor on the
domestic routes rose to 71.4% in the
April-July period as compared to 63.8%
last year, the seat factor on international
routes rose to 68.1% from 62.2%," the
source said.  At the same time, the yield
per revenue passenger kilometer (RPK)
on domestic operations registered a 14.8
per cent growth as it stood at Rs 5.45
during the period from Rs 4.74 last year.
The loss-making airline, having a debt of
Rs 40,000 crore mainly on account of
aircraft acquisitions, has embarked on a
turnaround plan, which envisages both
revenue enhancement and cost reduction.
Air India’s brand has been weaker than
competing airlines, despite it often
offering better connectivity, better planes
and more timely service. However, what
is remembered by the customers is the
apathetic nature of the crew, and any
shortfall on the part of airline is
convenient attributed to slow and corrupt
state of affairs in government run
organisations. Questions are also often
rai sed about Ai r Indi a’s di saster
management practises. However, the
airline has been taking active measures
towards building a stronger brand and
the results are likely to emerge favourable.
Low Cost Carriers:
Apart from the three players listed above,
the Indian Air space has players like
IndiGo, SpiceJet and Go Air, all of which
are low cost carriers. While the seat factor
for SpiceJet is currently at 70.3%, the
same is 74.6% for IndiGo.
Each of these airlines historically gained
market share by bringing prices down to
all-time lows. Air Deccan initially offered
price at par with high-end rail ticket
prices, and other airlines followed suit.
SpiceJet gained market share by adopting
means such as offering free services and
concessional fares to students.
The LCC Carriers attempted to reduce
expenses by cutting down on ground-staff
as well as in-flight crew members,
reducing in-flight services, adhering
strictly to on-line booking and bypassing
travel agents. These measures were
similar to those adopted by International
LCC’s. However Indian LCC’s failed to
replicate the profitability of their
international counterparts. A part of the
reason was that India does not have any
secondary airports for LCCs and the
I ndi an LCCs had t o s he l l out
comparatively higher airport charges
than their international peers. Moreover,
the under-developed commodity hedging
market also put a stumbling block on
these companies to hedge against
fluctuating prices of air fuel, unlike their
international counterparts.
Hence, LCC’s in India were faced with
mounting losses and started to hike fares.
As a result of the losses, in 2007, Air
Deccan merged with Kingfisher Airlines
and GoAir moved out of the LCC model,
adding a business class to its aircrafts. Of
the LCC’s that remain, ancillary sources
of revenue have become an increasingly
important means for sustainability- for
instance IndiGo uses the in-flight
magazine and booking of additional
baggage to generate revenue.
Airline Debt Restructuring
The Indian airlines industry exhibited
explosive growth in the period from 2003
to 2007. Thousands of passengers started
flying for the first time, drawn by new
airlines offering bargain flights around
the country. However, the industry was
hard hit by the economic crisis in
2007-08. Passenger growth, which was
touching 40% at the onset of 2007, went
into reverse. Soaring fuel prices in 2008
pushed up ticket prices, which further
reduced demand.
The three major players in the aviation
sector in India - Jet Airways (India) Ltd,
Kingfisher Airlines Ltd and National
Aviation Co. of India Ltd (NACIL)—
which collectively control 65% of
domestic passenger traffic, were the worst
affected. The three airlines currently have
a combined debt of $13.5 billion
(Rs63,315 crore). State-owned NACIL
runs Air India. Other than the exogenous
factors, poor managerial decisions
including predatory pricing by the larger
players and underutilization of capacity
were prime contributors to the huge debt.
Factors Leading to the Debt
Kingfisher Airlines is labouring under a
debt burden of Rs 7,413-crore (as on
December 2009). Out of this, Rs 2,099
crore is short-term debt; the remaining
a mount be i ng l ong - t e r m de bt .
Subsequent to its launch in 2005, the first
year and a half went quite smoothly for
the airline. A lot of Jet passengers shifted
allegiance and joined Kingfisher and the
company registered rising profits.
However, it spent money like water on
onboard service and brand building;
neglecting costs altogether. Things began
to go downhill soon after the airlines
bought a stake in Air Deccan in June,
2007. Not having a CEO further
exacerbated the airline’s problems.
2008 proved to be the final straw in its
operations, and as oil prices hit new
highs, so did the merged entity’s
problems. By end March 2009, the
airline’s debts had touched over a billion
dollars. Senior executives were also at
loggerheads with oil companies, vendors
and the Airports Authority of India.
Jet Airways is slightly better off than its
rival. Although it has a debt of Rs. 14000
crore; short term debts constitute only a
small portion of that amount. In 2009,
Jet’s domestic revenues were 37% higher
and profitabi l i ty was superi or to
Kingfisher due to a higher share of full-
service carrier operations, while the
higher proportion of low-cost operations
in Kingfisher’s operations dragged it
Furthermore, aircraft ownership is a key
difference between the two airline
companies. Jet owns 39 aircraft against
21 owned by Kingfisher Airlines.
Difference in fleet ownership is reflected
in Jet’s higher debt levels. As per Jet’s
management, 85-90% of the debt is
towards purchase of aircraft at long term
interest rates of 5-7%.
In an effort to minimize losses, Jet entered
into sale-and-lease-back of its aircraft, or
the ability to sell off the aircraft it
purchased and continue using them for a
rental fee.
State-run Air India, which enjoyed a
monopoly in the country till the
deregulation of the aviation sector in
1991, is besieged by a debt of Rs. 40000
crore. One of the major factors for this
colossal figure is over employment of
labour. The airline has a workforce of
31,000; which translates into 230
employees per aircraft. According to
international standards, the number
should be 100-150 employees for every
Another major reason for the spiraling
debt are the massive aircraft orders
placed by the beleaguered firm with
aircraft makers — 68 with Boeing and 43
with Airbus. The orders were placed
when the country was beginning to
witness an aviation boom, but the figures
were overestimated even according to the
heydays. The orders cannot be cancelled
now; since cancellation entails a hefty
penalty, which the airline is ill situated to
bear. Poor capacity utilization is another
major issue for the national carrier, with
over 40% of seats going unoccupied in
Braving the Storm
In June this year, SBI had approached
RBI with a proposal to restructure more
than Rs2000 crore of Kingfisher’s debt.
RBI declined to clear that proposal as it
was not comfortable with the idea of
giving any special concessions to any
particular aviation company. In an 18
June meeting with bank executives, the
central bank noted it would be a moral
hazard for RBI to give any regulatory
forbearance for any specific company. It
was made clear that any regulatory
consi derat i on of banks’ request s
regarding restructuring guidelines could
only be for the aviation sector—and not
for any airlines in isolation—in view of
the difficulties faced; and provided the
banks came together in a consortium
arrangement and took a long-term and
holistic view on the restructuring.
This prompted the bank to put forward
the case of the entire airline industry
rather than that of a particular firm,
which was approved by the RBI in
September. The proposal asks for
conversion of the short-term loans into
long-term ones and then extending the
repayment schedule to nine years, with a
one to two-year moratorium. SBI’s
investment banking arm, SBI Capital
Markets Ltd (SBICaps) is working on the
debt recast plan, leading a consortium of
13 banks.
The most significant beneficiary of the
recast would be Kingfisher Airlines, and
will get a much needed respite from the
payment demands of various lenders
including oil companies and airports.
With the restructuring, more time would
become available for repayment of loans
and i ts operati ons woul d not be
encumbered by the cash crunch. Other
options like raising money overseas or
diluting equity to raise cash could also be
explored. In the fiscal ended March, the
airline also reduced its losses to almost
half of those posted in the previous fiscal.
This improved performance was achieved
through better seat occupancy and cost
While the airlines are talking about cost-
cuts and route rationalizations to turn
things around, Jet Airways posted a profit
in the current fiscal year through a
number of innovative strategies. These
include improving aircraft utilization
efficiency, increasing flights on existing
and new routes without adding new
aircraft, reducing the weight of flights to
scale back fuel expenses, and launching a
second low-cost carrier; by converting
some of its full-scale flights into a no-frills
all-economy service under the brand
name of Jet Konnect. Jet Airways has
also sought approval from the Foreign
Investment Promotion Board (FIPB to
rai s e  $400 mi l l i on vi a qual i fied
institutional placement (QIP)  to repay
debt and augment capacity. 
Air India’s debt of Rs. 40000 crore is a
different story altogether. More than any
proposed debt restructuring, measures
taken by the government in terms of
equity infusion and guaranteed loans
would have a larger impact on the public
sector carrier. However, the government
has hinted that the airline should
generate more funds through better
passenger yields and cost-cutting, instead
of expecting further bailouts.
Is the Restructuring Justified?
In the past, the government has extended
support to crisis hit sectors such as real
estate and steel on previous occasions,
and there is no reason not to provide the
same to the domestic airlines.
However, the debt recast should come
with certain riders. A major cause for the
heavy losses was the overcapacity
inducted by the airlines and the
undercutting that followed.
They should commit to keeping costs
under leash and run their operations with
maximum efficiency.
The debt restructuring also makes sense
from the banks’ point of view. Big
players like SBI have an exposure of over
Rs. 3500 crore to the industry. RBI’s
move would help provide relief to banks
as they would not have to classify airline-
sector loans as non-performing assets
(NPAs), giving them an opportunity to
contain the growth of NPAs, while
airlines would get some breathing space
to repay their loans and would not be
compelled to raise costly debt to continue
Overview of the group
The Vedant a group i s a
diversified metals and mining
company, and is the first Indian
manufacturing company to be
listed on the London Stock
As is clear from the graphic, the
group is highly diversified, and
its business can be divided into
five principal verticals - copper,
zinc, aluminium, iron-ore and
power generation business. The
important members of the
consolidated group are:
Copper Business
• Sterlite Industries (India)
• Konkola Copper Mines.
• C o p p e r M i n e s o f
Tasmania Pty Ltd.
Zinc Business
• Hindustan Zinc Limited.
Aluminium Business
• Bharat Aluminium Company
• Vedanta Aluminium Ltd.
Iron-ore Business
• Sesa Goa Limited.
Power Generation Business
• Sterlite Energy Limited.
• Madras Aluminium Company Ltd
Acquisitions Prior to the Cairn
Acquisitions and diversification have
always been a central theme in the
group’s growth, which shot into the
limelight about a decade ago by buying
majority stakes in BALCO for Rs 551
crore in 2001 and Hindustan Zinc for
over Rs 750 crore in 2002. It transformed
the loss-making PSUs into cash rich
companies. Hindustan Zinc (HZL), saw a
400 per cent jump in capacity in seven
years under Agarwal’s leadership to
emerge as the largest zinc maker in the
country with the highest margins. The
group spread its roots to the African
continent by acquiring majority stake in
Konkola Copper Mines in 2004. Later, it
bought Copper Mines of Tasmania to
further augment its position in the copper
The group entered the iron ore business
in 2007 when it acquired Sesa Goa from
Japan's Mitsui for about USD 1 billion.
The move had surprised shareholders,
investors and analysts as they dubbed it a
random buyout by a base metal company.
They felt that by entering into the ferrous
metals industry, the group was moving
away from its core non-ferrous business of
making zinc, copper and aluminium. In
just two years, Sesa Goa is a hugely
profitable entity, with an operating
margin of 60%.
In response to critics, Vedanta Resources
acquired mining assets of another Goa-
based mining firm V S Dempo last year
for Rs 1,750 crore. In May last year,
Vedanta also bought zinc assets of global
rival Anglo American for USD 1.34
The Four Box Strategy
Anil Agrawal, the group’s chairman, is a
firm proponent of the Four Box strategy
– a strategy to create a diversified
portfolio that can generate enough cash
to fund complex and large projects in
cyclical businesses. The strategy consists
of making use of existing assets to
become a low cost producer, investing the
cash flows obtained in greenfield and
large scale brownfield expansions and
taking advantage of any external blue sky
opportunities which may arise (refer
exhibit for explanation of terms).
This approach is based on the 2x2 matrix
approach developed by the Boston
Consulting Group, which divides the
Strategic Business Units in a company’s
portfolio into four broad areas:
Stars - Stars are high growth businesses
or products competing in markets where
they are relatively strong compared with
the competition. They require heavy
investment to sustain growth, which will
eventually slow down.
Cash Cows - Cash cows are low-growth
businesses or products with a relatively
high market share. They have relatively
little need for investment and need to be
managed for continued profit.
Question marks - Question marks are
businesses or products with low market
share but which operate in higher growth
markets. They have potential for growth,
but may require substantial investment.
Dogs – The term "dogs" refers to
businesses or products that have low
relative share in unattractive, low-growth
markets. They are rarely worth investing
The Cairn Deal
Last month, Vedanta Resources Plc
announced its plans to acquire a majority
stake in Cairn India Limited, a unit of
Cairn Energy plc. The Vedanta Group
will pick up 51% stake in Cairn India
from Cairn Energy at Rs405/share. This
includes Rs50/share (i.e., $1bn) as non-
compete fee (Cairn Energy will not
compete in India, Bhutan, Sri Lanka and
Pakistan or poach senior management for
three years). The transaction, which
would be a reverse takeover, is expected
to close by the first quarter of 2011.
Cairn India currently produces about
125,000 barrels of crude oil per day.
According to Vedanta, there is the
potential to more than double this level to
around 240, 000 barrel s per day,
representing about 25% of India's
production. Industry experts have
Vedanta’s Cairn Deal
expressed surprise at Anil Agrawal’s
decision to invest in the Indian oil
exploration sector when most global
majors or domestic players are either
scaling down their Indian operations or
going overseas.
However, t he j our ney f rom bul k
commodities to energy (coal, power and
now oil) is a natural progression. The
group is already involved in commercial
power generation, so picking up stakes in
gas blocks could be backward integration
to fuel its power projects. Furthermore,
having stakes in metals and oil could pay
off as the cyclical nature of the two
industries is complementary. The Cairn
acquisition is also in consonance with
Agarwal’s Four Box strategy – he is
channelizing funds to the tune of USD 3
billion from the cash cow Sesa Goa to
finance the Cairn deal.
The deal has been criticized for being
solely an exercise in empire building -
good for the dominant shareholder but
not necessarily for minority shareholders;
whi ch i n thi s case are the Sesa

!"#$%&'(%)**+,-#./-( - A business oppoitunity without
any impeuiments oi limits.
0,$$.1/$"2%3.4$5-6$.- - An investment in a
manufactuiing, office, oi othei physical company in an
aiea wheie no pievious facilities exist.
!,+7.1/$"2%3.4$5-6$.- - An investment wheie a site
pieviously useu foi a "uiity" business puipose, such as a
steel mill oi oil iefineiy, is cleaneu up anu useu foi a less
polluting puipose, such as commeicial office space
Explanation of Key Terms
Please send in your suggestions and
comments to
Team Consult
Amber Maheshwari
Agam Khurana
Bharati Agarwal
Chaithanya Rao
Girish Gupta
Gurveen Bedi
Hemant Chhabra
Kommu Nageen
Mohit Garg
Murali Nair
Neeraj Huddar
Nilesh Kumar Gupta
Richa Gupta
Simit Batra
Utsav Kheria
Vamsi Krishna
Vivek Iyer

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