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If you can withstand the turbulence of the Jet, Spice of the South and intoxicating debt of Kingfisher, all the returns are yours. Stake is high for airline like Kingfisher but every business goes through this phase once in a lifetime. Aviation Sector an aggressive bet but in medium term will be rewarding. Investor with lots of risk apetite could play with sector. And we feel will give good return in the medium to leong term. The sector is poised for next phase of growth. We expect after allowing foreign airline to buy 49% stake in the Indian carrier there will shift in the policy framework and tax structure. Indian Aviation Major Milestones: Before 1953- Nine Airlines existed including Indian Airlines& Air India 1953- Nationalization of all private airlines through Air Corporation Act 1986 Private players permitted to operate as air taxi operators 1994 Air Corporation Act repealed; Private players can operate scheduled services 1995- Jet, Sahara, Modiluft, Damania, East West granted scheduled carrier status 1997- 4 out of 6 operators shut down Jet & Sahara Continues 2001- Aviation Turbine Fuel (ATF) prices decontrolled 2003- Air Deccan starts operation as Indias first LCC 2005- Kingfisher, SpiceJet, Indigo, Go Air, Paramount starts operation 2007- Industry Consolidates; Jet acquired Sahara, Kingfisher acquired Air Deccan 2010- SpiceJet starts International operation 2011-Indigo starts international operation, Kingfisher exits LCC segment 2012- Government allowed direct ATF import, FDI for foreign carries to pick up 49% stake allowed on 14th September and notified on 20th September Aviation sector ready to take off FDI in Aviation: Government on 14th September, 2012 allowed Foreign Airline to buy 49% stake in the Indian Carrier. This allows breather to the ailing airline in country. Fine points of FDI in aviation: 1. Allow foreign airlines to buy stakes of upto 49% in domestic carriers. 2. The Chairman and at least two-thirds of the Directors of which are citizens of India. 3. The substantial ownership and effective control of which is vested in Indian nationals. Prospective Investors in Indian Carrier: 1. 2. 3. 4. Emirates Airways Eithad Airlines Lufthansa Virgin

Companies Promoters Holding: Jet Airways SpiceJet Kingfisher Promoter Stake 80% 48.59% 35.86%

Debt burden on Companies: Jet Airways SpiceJet Kingfisher Debt Rs 11,030 crore Rs 855 crore Rs 8,030 crore

FDI a sentimental boost: In short term it will provide a sentimental boost to Indian Carrier. Two important positive for the sector are: 1. It could improve the perception of the credit quality of the aviation sector (and thus be a positive for the banks that have credit exposure to the sector). 2. It will bring the best practice of global carrier to the Indian. At same time will trigger more measure from the government in order to fix the problem of Indian carriers. Structural Changes needed before Foreign Airline get interested: Structural challenges overshadow growth opportunities, with high taxes on ATF, escalating passenger surcharges. The industry will have to undergo further consolidation. Also regulatory changes needed. Concerns of Indian Carriers: 1. 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. 2. 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 USD-denominated. 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. Domestic traffic growth, a major attraction: 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%). Domestic passenger traffic has risen 18% CAGR (FY05-FY12). 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. Direct ATF Import a positive: The empowered group of Minister has also recently approved the proposal for airlines to import Aviation Turbine Fuel (ATF) directly. 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. 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. Conclusion: Foreign Airline allowed picking 49%stake Indian Carrier is huge positive for the sector but in medium to long term. Indian Carrier has to go through the capital restructuring exercise and at same time exhibit profitability in order to attract the foreign airline. At the same time government need to do more on the front of taxes. Easing out taxes and giving ATF a declared goods status will bring airline out of red. Dilution of stake to foreign carrier will bring in good international practice to India. It will also help in giving resource starved sector a boost.

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