AVI ATI ON I NDUSRTY

I NTRODUCTI ON
With a growth rate of 18 per cent per annum, the Indian aviation industry is one of the fastest
growing aviation industries in the world. The government's open sky policy has lead to many
overseas players entering the market and the industry has been growing both in terms of
players and number of aircrafts.
With the liberalisation of the Indian aviation sector, the aviation industry in India has
undergone a rapid transformation. From being primarily a government-owned industry, the
Indian aviation industry is now dominated by privately owned full-service airlines and low-
cost carriers. Private airlines account for around 75 per cent share of the domestic aviation
market.
AAI manages 126 airports, which include 11 international airports, 89 domestic airports and
26 civil enclaves at Defence airfields.
Indian carriers currently have a fleet size of 310 aircrafts, but have 480 aircrafts on order,
scheduled for delivery by 2012. Earlier air travel was a privilege only a few could afford, but
today air travel has become much cheaper and can be afforded by a large number of people.

I MPACT OF RECESSION ON AVI ATI ON SECTOR
The International Air Transport Association (IATA) announced international scheduled
traffic results for January showing a deepening year-on-year demand slump.
International passenger demand fell by 5.6% in January 2009 compared to the same month in
2008. It is also a full percentage point worse than the 4.6% year-on-year drop recorded in
December. The January fall in demand is the fifth consecutive month of contraction.
The 5.6% drop in passenger demand outpaced capacity cuts of 2.0% driving the load factor to
72.8% - 2.8% below what was recorded for January 2008.. The industry is in a global crisis
and we have not yet seen the bottom, said Giovanni Bisignani, IATAs Director General and
CEO.
As the Indian economy has been booming in the last few years, the India aviation industry
was expanding too. As there were more flights coming in to business, the number of job
opportunities in the industry has also gone up. Students started signing up for courses like
airline pilots, flight attendant's, ground crew etc. The job growth rate was good. The salary
and perks were great as well. Everyone was pretty happy.
Then the US economic recession came. India was hoping that it would not be affected by the
global economic recession. But those hopes are not found to be true. Slowly the effects of
recession have reached India too. And it affected the aviation industry of India too. As the
cash starved managements started looking for cost cutting measures, layoffs started to come
in to action. In what appeared as the beginning of cracks in aviation sector, Jet laid off 1900
staff in mid October. The government started mounting pressure on airlines account of oil
bills default. Soon after came the announcement that 1600 Indian Airlines staff members
were asked to proceed on leave without pay. The new recruitments are going at a slow rate.
For the time being, the market is not great for the aviation industry in India. Kingfishers net
losses soared by 48% to Rs 626 crore in the December 2008 quarter. Jet Airways incurred net
losses of Rs 214crore and Spice jets net losses stood at Rs 18 crore in the same quarter.
But this is going to stay the same way for a short term only. As the fundamentals of the
Indian economy are pretty strong, the economy is going to get back on a growing trend soon.
It may take another three months or six months before you will see the change in the
economy. But the economy is going to go back up again. By that time the jobs lost in the
recent recession will be compensated.
As the rupee hit a record low of Rs 51.92 per dollar on Monday, domestic airlines are likely
to revise their breakeven targets. As much
as 30% of an airlines operational expenses, excluding the cost of jet fuel, are denominated in
dollars.

With the dollar appreciating against the rupee, domestic carriers will have to cough up a lot
more and the operating costs will shoot up. Airlines such as Jet Airways, Kingfisher Airlines,
Spice Jet and Air India make substantial payments in dollars towards the rentals of leased
aircraft, maintenance, spare parts, foreign crew and pilots. For the aviation industry,
Citigroup expects the rupee to touch 54 by end-March.
Financial health of domestic carriers has, however, started improving now as fuel prices have
come down nearly 54% since September last year. After initial resistance to bring down fare,
airlines have now started passing on the benefits of lower fuel price to customers. National
carrier Air India slashed its basic fare in the range of 35% to 82% across various domestic
sectors. Other airlines such as Kingfisher, Spice Jet and Indigo also followed suit later.
But airlines are saying that people are not flying even though ticket prices have been cut
drastically. Domestic air traffic declined sharply by 17% in December last year to 3.23
million.

A recent survey by the International Air Transport Association (IATA), a body representing
230 airlines, says though oil price is now near $40 per barrel, the deepening recession and
economic slowdown is driving industry losses through lower passenger traffic, which is down
1.3 per cent since October. IATA expects the industry to post $5 billion in losses in 2008
followed by another $2.5 billion in 2009 the worst scenario in 50 years. Passenger traffic
is forecast to fall 3 per cent and revenues by over 6 per cent in 2009.




Middle Class Perspective
The recent boom In Indian Aviation industry can be attributed to the resurgent and vibrant
middle class involvement. They perceive air travel as luxury.
In recent times the air fares came as low as AC 1 railway charges (with competition from
low frill airlines) this led to a large base of first time flyers or seldom flyers in India.
As India was growing around 8% GDP consistently, people expected their salaries to rise
every year. Hence they did not mind spending on the luxury of air travel.
But in the time of a recession, there is no expectation of a salary increase. As the demand for
luxury goods is inelastic, people are postponing the consumption of air travel luxury


Prioritizes in order to handle the current situation
Costs: India is among the most expensive places on the planet to buy aviation turbine fuel
(ATF). In August, it was 58% more expensive to buy fuel in Mumbai (for domestic flights)
than in Singapore (for international). Excise duties, throughput fees charged by airport
operators and state taxes of up to 30% for domestic flights result in a cost structure that
cannot support a competitive industry. Removing excise tax, implementing a standard 4%
state tax for domestic fuel and greater transparency in overall pricing are urgently needed,
Indias Service Tax on premium class tickets, over flight, landing and airport charges.
Taxing over flight charges breaches Indias international obligations under the Chicago
Convention. Taxing premium class tickets and airport charges is contrary to the International
Civil Aviation Organizations (ICAO) resolution 8632 calling for reductions in taxes. These
are embarrassments for a country that is a long-standing member on the ICAO Council.
There is an estimated 20% over-collection for air traffic control, while international
operations are charged 33% more than domestic flights to land at Indias airports. India must
not waste any more time in establishing an effective Airport Economic Regulatory Authority
(AERA) to achieve cost efficient infrastructure and bring Indias charges in line with ICAO
charges policies,
Infrastructure: Infrastructure investments are urgently needed. While Delhi is moving
towards the capability of handling 100 million passengers, the situation at Mumbai remains
critical. There is no possibility to build an additional parallel runway. The Greenfield site
under consideration with a phase one capacity of 10 million passengers a year will provide
some relief, but it is not a serious long-term solution. Mumbai needs an airport that can
adequately serve the financial capital of the worlds second most populous nation. That
means thinking much, much bigger. We must use the breathing space of the current downturn
to plan for capacity in the 100 million passenger range for Mumbai, like airports in Delhi,
Seoul, Hong Kong, Dubai and other important cities,

Standards: Global standards have played a crucial role in the development of air transport
and should be at the heart of Indias aviation policy and commercial development. But India
has taken a major diversion in security. The non-standard data transmission requirements for
Advance Passenger Information (API) are an added cost burden that provides no additional
benefit. This is a serious flaw for Indias API at a time when increased cooperation is
needed,
In a few years, Asia Pacific will be the largest single aviation market. India is a key driver
of that growth. Indias enormous size makes it an important market. It also gives it a
responsibility to take a leadership role on policy issues. India must be a strong voice for a
global solution on the environment, as envisioned by Kyoto. And it must look beyond its
borders to be a strong voice for global change and greater commercial freedoms,




FUTURE OUTLOOK
It is one of the fastest growing sectors at a rate of 18% annually, the Indian civil aviation
market holds out great promise for potential investors.


The International Air Transport Association (IATA) in its latest estimates this year reckons
India to be a driving force behind the worlds civil aviation business that is globally expected
to grow from $5.1 billion to $5.6 billion this year.
By 2020, Indian airports are estimated to handle more than 100 million passengers Including
60 million domestic passengers Cargo in the range of 3.4 million tonnes per annum.Several
improvements are envisaged to sustain this tremendous growth in the civil aviation sector.
The governments airport modernisation plan proposes investments of $9 billion by 2010.

Aviation Sector Outlook
As per the Investment Commission of India, the aviation sector is likely to boom further in
the coming years, attracting huge investment.
Passenger traffic is projected to grow at a CAGR of over 15 per cent in the next 5
years.
The Vision 2020 statement announced by the Ministry of Civil Aviation, envisages
creating infrastructure to handle 280 million passengers by 2020.
Investment opportunities of US$ 110 billion envisaged up to 2020 with US$ 80
billion in new aircraft and US$ 30 billion in development of airport infrastructure.
Associated areas like maintenance repair and overhaul (MRO) and training offer high
investment potential. A report by Ernst & Young says the MRO category in the
aviation sector can absorb up to US$ 120 billion worth of investments by 2020.
Air cargo traffic will grow at over 11.4 per cent p.a. over the next 5 years to exceed
2.8 million tonnes by 2010.
Foreign air cargo players are betting big on India and many are planning to add
capacity. As part of its expansion, Emirates is increasing its flights to New Delhi,
Mumbai, Bangalore, Hyderabad, Chennai and Kochi over a period of time.
Euro copter, a division of EADS, world leader in aerospace defence and related
services, is keen to enter the emergency medical services (EMS) business in India and
the company is in talks with leading hospital majors like the Manipal group and the
Apollo group. The company has 480 helicopters operating in India in both the civil
and military sectors and the company also hopes to increase its business through
helicopter tourism.
India has signed a new air service pact with the United Arab Emirates (UAE) for the
revision of the air services agreement between the two countries.



Major I nvestments
The Indian civil aviation market holds great promise for potential investors. Over the past
year, various companies have shown an interest in the Indian aviation industry.
Richard Branson, who controls UK carrier Virgin Atlantic Airways Ltd, has sought
permission to start a domestic airline in India.
ETA Star, one of Dubai's household names, will invest over US$ 1 billion to cash in
on booming sectors such as ports and aviation.
The US pioneer in fractional aircraft ownership, Net Jets is planning to expand in
India after foraying into the Middle East market and establishing itself in Europe with
140 aircrafts.
GMR Infrastructure is looking to tap the growing corporate jet market in India, which
is expected to rise from the existing 150-190 to over 500 in the next four years with
investment plans to the tune of US$ 151 million.
Major private equity firm, TPG Capital, figures among the potential investors lining
up to invest over US$ 400 million for a substantial stake in Vijay Mallya-led
Kingfisher Airlines, according to multiple sources. Kingfisher, with over 28 per cent
share of the domestic aviation market, with a fleet of 86 Airbus and ATR aircraft, is
into the 40th month of operations and started flying international, with the maiden
Bangalore-London flight on September 5, 2008.
Jet Airways (India), the country's largest private airline, is looking for an international
funds partner to dilute 10 per cent equity. The company first entered India in 1993 and
is now also operating in overseas destinations.
Clear Skies Ahead
The Indian aviation sector is likely to see clear skies ahead in the years to come.
Giovanni Bisignani, Director General and CEO of the International Air Transport Association
(IATA), has called on India to give direction to the efforts in shaping future aviation policies,
including environment and commercial freedoms. "In a few years, Asia Pacific will be the
largest single aviation market. India is a key driver of that growth. India's enormous size
makes it an important market."
With a growth rate of 18 per cent per annum, the industry will see rapid expansion in terms of
players as well as the number of aircrafts. The strength of the Indian fleet is projected to be
500-550 by 2010.
Cargo transportation is likely to touch 3.4 million tonnes in 2010.
480 aircrafts will be delivered by 2012.
The number of passengers to touch 400 million by 2020.
The government plans to invest US$ 9 billion by 2010 to develop airports.



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

















IMT Nagpur PGDM 2008-2010


Business Environment

AVIATION INDUSTRY IN INDIA

Course Coordinator
Prof D.DATTA

Submitted by:
SEC D
Ravi Walia (08FT060)
Mayank Bhartia (08FN058)
Rishi Talesra (08FT062)
Raju Mishra (08FT057)
Ronald Dominic Anthony(08FT064)