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.

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.

MARKET SIZE Total domestic passengers carried by the scheduled domestic airlines in November 2012 were 5.02 million (465, 000 higher than those carried in October 2012). The number of passengers carried by domestic airlines was 53.4 million between January-November 2012. The market share of scheduled domestic airlines for the month of November 2012 was: Air India-20.7 per cent, Jet Airways-18.3 per cent, JetLite-6.9 per cent, IndiGo-27.3 per cent, Spice Jet- 19.5 per cent and Go Air- 7.4 per cent. The air transport (including air freight) in India has attracted foreign direct investment (FDI) worth US$ 448.40 million from April 2000 to December 2012, as per the data released by Department of Industrial Policy and Promotion (DIPP). KEY DEVELOPMENTS AND INVESTMENTS Jet Airways has ventured with CentrumDirect (one of India's leading financial services groups), to offer Foreign Exchange Services to guests travelling abroad. The clients, or the guests, can avail this facility online by providing the stipulated details on the airline's website www.jetairways.com. They will be then contacted by the authorised representatives from CentrumDirect in order to complete transaction. CentrumDirect offers 30 leading world currencies, travellers' cheques and prepaid travel cards across over 40 cities within India. Singapore's Changi Airport and Switzerland's Zurich International Airport have expressed interest to carry out the operations and maintenance of the modernised terminal of the Netaji Subhas Chandra Bose International Airport, Kolkata. The Rs 2,300-crore (US$ 423.37 million) new integrated terminal has an annual capacity to handle 20 million passengers. It was jointly developed by ITD Cementation India Ltd and its parent company Italian-Thai Development Public Co Ltd, Thailand (ITD). Hong Kong-based full service airline Cathay Pacific has unveiled its plan to add more direct flights from Mumbai to Hong Kong starting April 2013. The airline will also launch its new product line of the premium economy cabin on this route. Cathay that has India route among the top 10 revenue earners, along with its sister airline Dragonair, flies 46 weekly flights from six ports in India. It recently added Hyderabad in its network with four weekly flights. IBS Software has signed a 'multimillion dollar' deal with Turkish Airlines for providing software support to its cargo service. The 10-year contract will make the airline have access to IBS' flagship product for air cargo operations named 'iCargo'. iCargo supports requirements of airline freight business by providing Web-enabled features that optimise operations, enhance profitability and provide scalability. iCargo will empower Turkish airline's air cargo movement worldwide and replace the legacy system. GROWTH IN THE SECTOR The Indian civil aviation sector has continued to witness high passenger growth. Currently, India is the 9th largest aviation market handling 121 million domestic and 41 million international passengers. Today, more than 85 international airlines operate to India and 5 Indian carriers connect over 40 countries. Recording the strongest growth in the world, India's domestic aviation market has tripled in the past five years, according to a latest report of the International Air Transport Association (IATA). India posted a strong domestic growth at 25.6 per cent in the aviation sector, and continuing its trend of high-speed growth for a robust market. The aircraft maintenance, repair and overhaul (MRO) industry is also at a nascent stage. The MRO business in India is currently worth US$ 500 million and estimated to grow over US$ 1500 million by 2020, so as to facilitate the maintenance, repair and overhaul of the rapidly growing number of the aircraft, both in civil and defence sectors, within India. Further, the adoption of open sky policy has resulted in the entry of several new privately owned airlines and increased frequency/flights for international airlines. SECTOR FACTS

The total number of airports or airfields recognisable from the air are 352 (as of 2012)

Passengers carried by domestic airlines in January and February was 100.23 lakhs, according to the latest data released by Directorate General of Civil Aviation (DGCA) The foreign direct investment (FDI) inflow into air transport (including air freight) stood at US$ 448.91 million from April 2000 to February 2013, according to the Department of Industrial Policy and Promotion (DIPP) RECENT INITIATIVES AND DEVELOPMENTS Buoyed by the success of implementation of public private partnership (PPP) model in airport development, the Government plans to invest US$ 12.1 billion at Indian airports under the 12th Five Year Plan, of which a contribution of about US$ 9.3 billion is expected from the private sector. GVK's Chhatrapati Shivaji International Airport (CSIA) managed by Mumbai International Airport Pvt Ltd (MIAL) has been awarded the prestigious ISO 14064-1:2006 certification for its carbon emissions accounting. Delhi's Indira Gandhi International Airport (IGIA) and Hyderabad's Rajiv Gandhi International Airport (RGIA) have bagged Airport Service Quality (ASQ) awards by the Airports Council International (ACI) for 2012. Besides the four Public-Private Partnership (PPP) airports at Delhi, Mumbai, Bengaluru and Hyderabad, the Airports Authority of India (AAI) has also modernised Kolkata and Chennai airports, and is developing 35 other non-metro airports mostly in the state capitals. Building on the success of MRO India 2012, an active initiative for a better aviation MRO scenario, the 3rd International Networking Conference & Exhibition on Maintenance, Repair and Overhaul MRO India 2013 (Civil & Military), is scheduled to be held from 07-09 November 2013 at the Bombay Exhibition Centre, Mumbai, India. Government Initiatives

The Government of India has allowed 100 per cent FDI, under the automatic route, for greenfield airports. FDI up to 49 per cent is allowed in the domestic airlines sector under the automatic route. The Government has also relaxed rules to allow foreign carriers to buy up to 49 per cent stake in Indian airlines Private investors are allowed to establish general airports and captive airstrips while keeping a distance of 150 km from the existing ones. Complete tax exemption is also granted for 10 years Prime Minister Manmohan Singh has approved a detailed roadmap for 7 major infrastructure projects to revive demand for goods and services as well as to boost economic growth. In aviation, new airports being built at Navi Mumbai, Mopa in Goa and Kannur in Kerala are being directly monitored by the Prime Minister The government is also trying to create policies that will enable creation of micro, small and medium enterprises (MSME) clusters with quality infrastructure and building capabilities. There are around 500 MSMEs across different clusters in the aerospace sector, but the clusters are fragmented and yet to evolve Recently, the Foreign Investment Promotion Board (FIPB) has cleared Malaysian low-cost carrier (LCC) Air Asia's proposal to form a budget airline in a joint venture (JV) with the Tatas and Telstra Tradeplace at an initial outlay of Rs 80 crore (US$ 14.77 million). The proposal will be sent to the Directorate General of Civil Aviation (DGCA) for the necessary license after which the JV can commence its operations To facilitate the growth of MRO Business and to make it competitive, the government has announced several concessions in budget 2013-14 which include extension of time period allowed for utilisation of aircraft parts and equipment from three months to one year, exemption of custom duty on parts, equipment, accessories, spares required for MRO purposes to private category aircrafts

SWOT ANALYSIS

Challenges

Challenges - Airport Infrastructure

Collaboration Private Sector Participation

Collaboration Private Sector Innovation

PUBLIC SECTOR
The Ministry of Civil Aviation has the following public sector undertakings/companies/autonomous bodies under its administrative control:1. National Aviation Company of India Limited (NACIL) :- is a company incorporated under the Companies Act, 1956 and has the functions and responsibilities of providing safe, efficient, adequate, economical and properly coordinated international air transport services. It has been set up after the merger of Air India and Indian Airlines in 2007. This merger aims to create the largest airline in India. The name of the new airline is Air India and its logo is Maharaja. NACIL is carrying its operations under two operating permits, viz., NACIL-A and NACIL-I. It has following wholly owned subsidiaries, namely, Hotel Corporation of India Limited, Air India Charters Limited (AICL), Air India Engineering Services Ltd (AIESL); Air India Air Transport Services Limited (AIATSL); and Alliance Air. 2. Airports Authority of India (AAI) :- was constituted in 1995 for creating, upgrading, maintaining and managing civil aviation infrastructure, both on the ground and air space of the country. It aims at providing world class airport services for efficient operation of air transport in the country. It manages 127 airports, which include 16 international airports, 8 customs and 79 domestic airports and 24 civil enclaves at defence airfields. It controls the entire Indian airspace of 2.8 million square nautical miles. 3. Pawan Hans Helicopters Limited (PHHL) :- was established in 1985 as the country's national helicopter company for providing helicopter support services to the Oil Sector; operate scheduled/non-scheduled helicopter services in inaccessible areas and difficult terrains; as well as provide charters for promotion of travel and tourism. It has a well balanced fleet of 35 helicopters consisting of Bell 206L4, Bell 407, Dauphin SA 365N & AS 365N3 and Mi-172, which are most appropriate for multi-farious jobs. It is the only aviation company in India being awarded ISO 9001:2000 certification for its entire gamut of activities. 4. Indira Gandhi Rashtriya Uran Akademi (IGRUA) :- was established by the Government with the objective of improving the flying training standards in civil aviation and to impart line oriented flying training of international standards. It has been set up at Fursatganj in Rai Bareilly District of Uttar Pradesh. It is equipped with modern and sophisticated trainer aircraft, flight simulators, computer based training

system, runway with modern navigational and landing aids and its own airspace. It is manned by highly qualified flying and ground instructors, with long experience in the field of aviation and flying training. With liberalisation of the Indian economy and its global integration, continuous upgradation and modernisation of the aviation sector has become critically important. Accordingly, the current policy focus of the Government is on modernisation of the existing airports as well as the construction of new ones. For instance, the international airports in Delhi and Mumbai are being restructured through public-private partnership. Two greenfield airport projects at Bangalore and Hyderabad are being implemented on Build Own Operate Transfer (BOOT) basis. The AAI has decided to develop and modernise 35 non-metro airports to world class standards. Also, the bilateral arrangements are being strengthened for ensuring better international connectivity.

COMMERCIAL AVIATION
There is a strong correlation between the gross domestic product (GDP) and the aviation industry. As a countrys per capita GDP grows, so does its residents desire and ability to afford travel, and this desire in turn fuels the demand for aircraft. It is now well-acknowledged that economies outside North America and Europe are expected to lead the world in GDP growth. By 2030, more than 50% of the top 10 economies are expected to be outside the Western Europe and US region. Countries of Asia-Pacific, Latin America and Russia, where long-term GDP growth is forecast above average are expected to have a profound impact on commercial aviation. Global business and tourism rely heavily on air transport. It facilitates world trade and helps to increase access to international markets and allows globalisation of production. According to a recent report by the Air Transport Action Group (ATAG), the total value of goods transported by air represents 35%1 of the world trade. With increasing liberalisation across the world in emerging economies, trade is expected to increase at an accelerated rate with India, China and other emerging countries giving further boost to the commercial aviation sector in these countries. Globally, airline revenues have increased throughout the period of economic recovery, from 476 billion USD in 2009 to 597 billion USD in 2011, representing a 9.3%2 year-on-year increase. In terms of the total net profits too, airlines have recovered from a net loss of ~26 billion USD in 2008 to a net profit of ~7.93 billion USD in 2011. The International Air Transport Associations (IATA) Director General Tony Tyler was recently quoted in a press report, The industry has reshaped itself to cope by investing in new fleets, adopting more efficient processes, carefully managing capacity and consolidating. IATA has increased its profits forecast for global airlines in 2012 to over 4 billion USD. From an Indian perspective, a global recovery will not only encourage foreign interest but also help in strengthening alliances and joint business agreements that might have been put on hold earlier owing to the industry downturn.

INDIAN COMMERCIAL AVIATION SECTOR The Indian aviation sector has continued to experience high passenger growth over the last few years.

Between 2009 and 2011, the total domestic passenger traffic in India has grown at a CAGR of over 17% and if this growth were to continue, India is estimated to be among the top three aviation markets in the world by 2020. Freight traffic is expected to increase six-fold over the next decade. This is consistent with the emergence of lowcost carriers such as Indigo, Go Air and SpiceJet, besides freight players such as Blue Dart and Deccan Express Logistics which has provided an impetus to air and freight traffic. Indian carriers have placed orders for an additional 436 aircraft to cater to increasing domestic and international travel demand. However, due to lack of proper infrastructure and training facilities, other than growth in terms of traffic, aircraft and MRO, there is little scope for creating a supply chain in India. Currently, six domestic carriers operate in the Indian aviation space with a total fleet of over 369 aircraft

Note: The market share of Kingfisher Airlines as per November 2012 is depicted as zero per DCGA statistics owing to the suspension of its licence by the DGCA. CHALLENGES IN THE SECTOR With the exception of Indigo, all major airlines have posted losses on a consistent basis over the last few years.

The airline industry is faced with numerous challenges which can be broadly classified into three heads: Global challenges: Volatility in fuel prices has been the foremost challenge for airlines. Aviation turbine fuel (ATF) represents the single largest expense for airlines, on an average amounting to about 34% of the operating costs5. IATA estimates that a 1 USD increase in the average price of a barrel requires the industry to recover an additional 1.6 billion USD in revenue. From an average price of 80 USD a barrel in 2010, oil prices rose by 20 USD per barrel in 2011 and by another 10 to 12 USD by the end of 2012. The airline industrys fuel bill rose to 177 billion USD in 2011. The situation has been exacerbated by the steep depreciation of the rupee versus the US dollar (~18.7% depreciation in FY11, although partly recovered in FY12) adding further burden on the Indian airlines.. National policy related challenges: India has among the highest tax on ATF imposed by state governments (3 to 30%). This along with the social obligation to fly uneconomic routes deals a double whammy on airlines. The high interest rate regime has particularly hit airlines with a large debt. Poor infrastructure at the airports resulting in delays in take-off and landing, high airport charges, interference in pricing, imposing a five-year track record requirement for

international flying, etc. have all contributed to stifling growth, raising costs and making airlines unviable. As per the IATA estimates, many countries including India earned an increased 2.2 billion USD in tax revenues in 2011 from the aviation sector on account of taxes imposed in various forms. This is ironic considering most domestic airlines made losses that year. The government has in the last six months addressed some of these concerns. Airlines have been allowed direct imports of ATF, FDI by foreign carriers in domestic airlines has been allowed, but this has been clubbed with FII investment, thereby diluting the impact of liberalisation (this is discussed in detail in the section on regulatory regime). Airlines have also been allowed to raise working capital through cheaper overseas borrowings. Company-specific challenges: Lack of focus, faulty M&A decisions and failed mergers are perhaps the top three reasons for poor performance of Indian carriers. In 2007, Kingfisher acquired Air Deccan at 550 crore INR, Jet acquired Air Sahara at 1,450 crore INR and the national carriers (Air India and Indian Airlines) were forcefully merged. What followed was a sequence of largely unsuccessful attempts to integrate the merged entities. Attempts to run two different kinds of services, full-cost carriers as well as low-cost within the same airline created serious problems as there were differences in costs, the turnaround time of aircraft and the distribution models. In essence, each had a different DNA. 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. Low-cost model now dominating the skies; viability remains to be seen Internationally the LCC model came into existence when the US Congress passed the Airline Deregulation Act in 1978 easing the entry of new companies into the business and giving them freedom to set their own fares and choose routes (Prior to this routes and fares were fixed by a Government Agency). 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. The domestic airlines industry is facing significant operating (slowing growth, rising fuel costs) and nonoperating (interest costs, rupee depreciation) challenges as evident in the quarterly performance trends of listed airline companies. 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 USD-denominated. 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.

DOMESTIC AIRLINES OPERATING PERFORMANCES

FLEET AND EQUITY REQUIREMENTS FOR DOMESTIC PASSENGER AIR SERVICE: A. Regulation Indias Civil Aviation Requirement (CAR) Section 3, Part II and III mandates that a scheduled service operator that applies to provide services using aircraft with a takeoff mass of 40,000 kg or more must purchase or lease a minimum of five aircraft with start-up equity requirement of Rs 50 crore. Additionally, as an airlines fleet grows in increments of up to five planes, equity requirements grow by Rs 20 crore. With regards to aircraft with take-off mass of less than 40,000 kg, the start-up fleet minimum remains at five aircraft - purchased or leased - with the minimum equity requirement starting at Rs 20 crore and growing by Rs 10 crore with every five additional aircraft.32 For non-scheduled operators, the fleet requirements as stated in Civil Aviation Requirement Section 3, Series C, Part III Section 4.2 are minimal - requires possession of just one aircraft there exist equity requirements based on the number of aircraft owned or leased by the operator, which create an additional financial barrier to entry. B. Impact on Competition Given that the cost of entry into the civil aviation sector is naturally high (even in the absence of fleet and equity requirements), these regulations unnecessarily raise barriers to entry. Therefore, fleet and equity requirements instituted by these regulations limit not only the number of new market entrants, but also the size of firms that enter, as they should possess enough capital to fulfill these requirements. Incumbent market participants are cognizant of these barriers, thus their business decisions take into account a reduced chance of new market competitors that may potentially enter and reduce the incumbent carriers market share. Since all market participants will likely come to similar conclusions, incumbent market participants will feel no urgency to change their prices, services and business models. In the case of Indias civil aviation sector, there are relatively few market participants, who are fairly large service providers and are generally familiar with their competitors strategies, tactics and pricing. Without new and unfamiliar competitors entering the market, there exists no incentive to change the way these established airlines operate and therefore, customer service and choice are adversely affected. C. Comparison-International and Cargo Regulations in India In countries like Australia, the European Union and the United States, the fleet requirement is minimal (one aircraft) and equity requirements do not exist; rather financial viability of the potential entrant is taken into consideration.33 For example, the US Federal Aviation Administration (FAA) requires financial information regarding assets and liabilities, ongoing litigation, insurance policy information, as well as a six month plan of operation34 from applicants for the Air Carrier Certificate.35 Similarly, both Australia and EU require no fixed paid-up capital; potential market entrants must only provide information on the firms financial background. These international regulations are similar to Indias operational requirements for cargo air carriers. An Indian company that wants to engage in providing air cargo carrier services needs a minimum of one plane leased or purchased - and has to submit details of proposed operations, a project feasibility report, proposed financial structure, proof that the applicant firm can run air cargo services on a sustained basis, and a timeline of the firms proposed realization of various stages of the project. The Civil Aviation Requirement Section 3, Series C, Part IV, states that barriers to entry for cargo air carrier services have been removed. According to AERAs assessment of the size of Indias civil aviation sector, the minimum fleet requirements were introduced to ensure that only viable carriers enter the market; competition within the sector was not a priority at that time. However, there are instances in other countries where a viable airline started its operation with a single aircraft. D. Recommendation While minimum fleet and equity requirements, with respect to air carrier service providers are one way of assessing the firms viability in the market, we suggest an alternative approach. Instead of fleet and equity requirements, new and incumbent air carrier service providers can submit financial information which establishes their financial viability and illustrates how they plan on succeeding within the civil aviation sector. Financial disclosures of potential airlines should demonstrate the new entrants knowledge of Indias aviation sectors dynamics and adequate liquidity to cover aviation business startup and initial operational costs. As in the United States, UK Europe, Australia in order to demonstrate viability potential air carriers in India should disclose assets, liabilities, past and ongoing litigation, and operational insurance. Furthermore, new market entrants should also submit a concrete six month or yearlong business

plan detailing how the firm plans to finance its operational expenses. Lastly, Indias cargo sector regulations can serve as a model for reduction of artificial barriers to entry in the industry.

A LOW-COST CARRIER OR LOW-COST AIRLINE

A low-cost carrier or low-cost airline (also known as a no-frills, discount or budget carrier or airline or cheap flight) is an airline that generally has lower fares and fewer comforts. To make up for revenue lost in decreased ticket prices, the airline may charge for extras like food, priority boarding, seat allocating, and baggage etc. The term originated within the airline industry referring to airlines with a lower operating cost structure than their competitors. While the term is often applied to any carrier with low ticket prices and limited services, regardless of their operating models, low-cost carriers should not be confused with regional airlines that operate short flights without service, or with full-service airlines offering some reduced fares. No-frills airlines are airlines that offer low fares but eliminate all non - essential services, such as complimentary drinks, snacks, in - flight entertainment systems, business-class seating etc. A no-frills airline will typically cut overheads by flying from more remote airports (with lower access charges) and by using one single type of aircraft. Aircraft cabin interiors may be fitted out with minimum comforts, dispensing with luxuries such as seat-back video screens, reclining seats and blinds. Some airlines choose to carry advertising inside the cabin to increase revenue. Defining Low Cost Carriers No meals, drinks and snacks for free Narrow seating (greater capacity) No seat reservation; free-seating No frequent-flyer programs Non-business passengers, price-conscious business passengers Aggressive marketing Secondary airports Low costs for maintenance, cockpit training and standby crews due to homogeneous fleet High resource productivity: short ground waits due to simple boarding processes, no air freight, no hub services, short cleaning times Lower staff costs due to greater productivity, generally lower wages and smaller staff (no service) Lower airport fees at secondary airports and smaller cities No sales commissions due to web sales Air Deccan was the first Low Cost carrier in India. It was started by Captain G. R. Gopinath and its first flight took off on 23 August 2003 from Hyderabad to Vijaywada. It was known popularly as the common man's airline, with is logo showing two palms joined together to signify a bird flying. The tagline of the airline was "Simpli-fly," signifying that it was now possible for the common man to fly. The dream of Captain Gopinath was to enable "every Indian to fly at least once in his lifetime." Air Deccan was the first airline in India to fly to second tier cities like Hubali, Mangalore, Madurai etc. Who are the main players in the low cost carrier market? How do these different airlines differentiate themselves from the other players? -India Expre ss

Air India Express is a low-cost airline subsidiary of Air India, operating mainly from Indian state of Kerala. It operates services mainly to the Middle East and Southeast Asia. The airline belongs to Air India Charters Limited, an whole owned subsidiary of Air India Limited, which was formed in order to facilitate the seamless merger of Air India and Indian. Today Air India Express operates nearly 100 flights per week, mainly from southern states of Tamilnadu and Kerala in India. Despite being a low cost carrier, Air India Express offers a complimentary pre-set snack box or light meal to its passengers with vegetarian and non vegetarian options. Limited entertainment facilities are available for passengers. GoAir is an Indian low-cost airline based in Mumbai, Maharashtra. It operates domestic passenger services to 18 cities with 131 daily flights. Its main base is Chhatrapati Shivaji International Airport, Mumbai. The airline was established in 2005. It launched commercial operations in November 2005. It is now wholly owned by the Wadia Group. Being a no-frills airline, Go does not offer a complimentary meal service to its passengers. However, it does offer a buy-on-board food service where items such as sandwiches, parathas, cookies, nuts, soft drinks and Mineral water can be purchased. But from 9 April 2009 Go has started a new premium service known as Go Business in which the passengers, at a slightly higher fare, are assured of seats in the first two rows of the aircraft and the middle seat is always empty. Go provides free meals on board to passengers travelling on Go Business. IndiGo is a private, low-cost airline based in Gurgaon, Haryana, India. Since commencing operations in August 2006, it has established itself as one of India's leading airlines using its model of efficient, lowcost operations and by attracting customers with low fares. IndiGo operates to 26 destinations in India with 259 flights each day. IndiGo's domestic flights operating within India have no Business class or First class sections. It offers only Economy class seating. As a low-cost carrier, IndiGo offers only complimentary mineral water to passengers on board its domestic flights. Snacks, meals and drinks are available as a buy-on-board option. IndiGo's domestic flights allow only one piece of free check-in baggage per paying passenger. JetLite is a wholly owned subsidiary of Jet Airways. It was established as Sahara Airlines on 20 September 1991 and began operations on 3 December 1993. On 12 April 2007 Jet Airways took over Air Sahara and on 16 April 2007 Air Sahara was renamed as JetLite. The airline operates scheduled services connecting metropolitan centers in India, it operates 110 flights daily. The airline also provides helicopters which are available for charter services and aerial photography. Jet Konnect is the low-cost brand of India-based Jet Airways. It was launched on 8 May 2009. Jet Konnect offers a no frills flight where meals and other refreshments have to be purchased on board. Jet Airways plan to merge JetLite brand into Jet Konnect in the near future. SpiceJet is a low-cost airline headquartered in Gurgaon, India. It began service in May 2005 and by 2008, it was India's second-largest low-cost airline in terms of market share. It was formed by Ajay Singh, Sanjay Malhotra and the Kansagra family. It aims to compete with Indian Railways for those passengers who travel in the air conditioned coaches of the latter. Indian media baron Kalanidhi Maran acquired 37.7% in the business in June 2010. Future of low cost carriers Indias aviation industry is taking off again. Between 2009 and 2011 domestic passenger traffic has grown by 19% - an impressive figure considering the 2008 global financial meltdown that led airlines around the world, including those in India, to ask for government bailouts. Over the last five years, the industry has expanded, but it hasnt been profitable. But analysts think this will change and foresee a future of sustainable growth and profit making. So far the big winners have been the low-cost carriers. Analysts further say in the next decade India will need three times the number of airports that it has today. Since it doesnt have enough skilled labor to build them or pilots to fly the planes, people with the right skills in developed nations with wilting economies may want to look east for opportunities. Moreover low cost airlines are bound to continue doing good business further, facilitated with Kingfisher lessening competition for Indigo and other low cost carriers.

FUTURE OUTLOOK
The Indian market is severely underserved with less than 3% of its population utilsing the air route. The growing passenger numbers and a burgeoning middle class indicate the possibility of healthy passenger load factors (PLFs) for all airlines in the future. Experts believe that the strong market growth rate coupled with the expansion of infrastructure will help the Indian civil aviation space in rebounding as the Indian economy recovers. The latest quarterly results indicate that Spice Jet has also made a profit and is the second airlines after Indigo to become profitable. Therefore, this is a good time for global players to enter the Indian market to target not just the busy trunk routes but also explore the potential of the large unserved market through creating a hub-and-spoke model using smaller aircraft. There are media reports of a potential joint venture between Jet Airways and a foreign airline. But it may be premature to say that these are green shoots of recovery. Opportunities in the Indian market The Indian GA market is small and under-developed as compared to its global peers. The US has around 5,110 active airports (the largest in the world) and the largest number of GA aircraft approximately more than 255,000. On the other hand, India has only around 150 active airports and approximately 700 GA aircraft. The movement for GA comprised a meager 15% of the total aircraft movement in the country. However, India is an emerging market for private jets with its strong economic growth, expanding business interests and increasing number of billionaires. In 2012, it has the second-largest business jet fleet of 165 (up from 26 in 2005) in the Asia-Pacific region, after Chinas 220. The helicopter market in India is equally promising, with growing requirements in tourism, mining, corporate travel, air ambulance, homeland security, etc. However, this market is contingent on development of heliports in the country and standardisation of route operating procedures for helicopters. There was an overall slowdown in the Indian helicopter sector from 2010 to 2012, but Bell Helicopter expects a recovery in 2013 with an annual growth rate of about 10 to 15 %. This is expected to grow at 12% a year. This is higher than most countries worldwide and in the short-term, second only to China. India already has about 270 helicopters operating in various parts of the country. A sharp rise in helicopter sales in the Indian market is in the offing because of an increase in awareness of the potential uses of rotary wing aircraft.

OPERATIONAL STRATEGIES

Airports Authority of India likely to lead greenfield airport development The need for the construction of new airport infrastructure remains unabated if India is to achieve its long term potential. However, questions are emerging about the most appropriate source of funding for the large scale capex required. The publicprivate partnership model that has been adopted for the modernisation of Delhi, Mumbai, Bangalore and Hyderabad Airports has resulted in dramatically improved infrastructure. But there is a growing political, industry and community backlash against the corresponding increase in charges that are being introduced in order to generate a return on capital for the private investors. This is compounded by the overall uncertainty about governance issues within the current administration. As a result, further airport privatisation is likely to slow and the Airports Authority of India may once again become responsible for leading future greenfield development, especially at airports such as Chennai. The exception to this in the shortterm is that the second airport in Mumbai at Navi Mumbai, is likely to be a pursued on a publicprivate partnership basis. Foreign carriers remain interested in the India story despite challenges In the last few months a number of carriers have either suspended services to India (including AirAsiaX, American Airlines and Qantas) or reduced frequencies on certain routes (Air France, Austrian and Lufthansa). Jet Airways recently announced plans to suspend its MumbaiJohannesburg service from Jun12. Reasons for these reductions have included insufficient traffic, poor yields and high airport charges. Aside from AirAsiaX, these are largely carriers that face strong competition from sixth freedom Gulf and Asian carriers on routes to/from India. AirAsiaXs withdrawal was in part due to the weakness of its direct distribution strategy in the Indian market which could no t support the capacity generated by 11 weekly widebody services into Kuala Lumpur. But for every airline that has faced challenges, there are several incumbent carriers that see growth opportunities, primarily those from emerging regions such as Asia, Africa and the Middle East, with examples including: rom Nov12; Ahmedabad services effective Nov12; Mumbai services from Oct12; stop NairobiDelhi service in May12; Mumbai service in May12; Amritsar service in Oct11; Kolkata route in Aug11; additional frequencies to Mumbai in the last year. Virgin Atlantic will benefit from the suspension of Kingfishers MumbaiLondon operation, and is planning to schedule the service so as to facilitate convenient onward connections to at least four US destinations. The airline is expected to emerge as an important player on MumbaiUK and Mumbai US routes. Meanwhile Africa is a region of growing interest. Kenya Airways, which launched its second Indian destination (Delhi) in May12, has already identified Ahmedabad, Bangalore, Chennai and Hyderabad as cities that it plans to expand to over the next few years. Ethiopian Airlines has similar expansion plans and has suggested that its Addis Ababa hub could play an important role in carrying traffic between India and South America. Several airlines that do not currently operate to India are understood to be evaluating the possibility of entering the market in the next 1224 months, these include: Europe: Alitalia and Czech Airlines; Asia: Garuda Indonesia, Jetstar Asia, Lion Air, Myanmar Airways and Vietnam Airlines;

Africa: Air Austral. But it is carriers such as Emirates, Qatar Airways and Turkish Airlines that have the most aggressive expansion plans and are pushing for additional bilaterals as their current entitlements are exhausted. Emirates, the largest foreign carrier in India, already operates 184 weekly services to ten cities across India, not including its low cost subsidiary, flyDubai. Turkish Airlines, which has daily service to Mumbai and Delhi, is seeking to increase these to double daily and wishes to operate to an additional six destinations. Singapore Airlines and Cathay Pacific are also expected to seek increased rights. Jet Airways to lead longhaul expansion by Indian carriers With Kingfishers international operations suspended and Air Indias longhaul services likely to be subject to ongoing industrial action, Jet Airways is expected to seize the opportunity and aggressively expand its international operations. In addition to increasing frequencies to existing destinations in the Gulf and Southeast Asia, other new routes under evaluation include: Asia: Beijing, Ho Chi Minh City, Shanghai; Europe: Amsterdam, Frankfurt, Munich, Paris and Rome (with Frankfurt and Munich being the priority destinations, expected to commence from the Winter 2012/13 schedule); USA: Chicago, San Francisco and Washington; Pacific: Sydney may even be considered. Star Alliance likely to gain its first Indian member....Jet Airways In December 2007 the Board of Star Alliance invited Air India to become a member and after 3.5 years, the longest qualification process any airline had taken to prepare to join, the alliance declared that the carrier had failed to meet requirements for membership. Meanwhile, Jet Airways was also invited by Star, however the Government of India had declared that it could not proceed until Air India had been inducted. Ai r Indias ongoing problems mean that this restriction makes even less sense than it did before and this may force the government to rethink its position. This would pave the way for Jet Airways to become the first Indian carrier to join a global alliance. Its plans to service Frankfurt and Munich are linked to this strategic development. If Jet Airways was to join Star Alliance the other global alliances will have to reevaluate their options. Oneworld has a memberelect in Kingfisher but given its uncertain future (and the possibility of acquisition by an airline either from a competing alliance or opposed to alliances) this is not the ideal strategic platform in such an important market. SkyTeam is understood to have shown some interest in IndiGo, which would provide very strong and complementary domestic and regional feed, without threatening the longhaul services of the incumbent SkyTeam members. In many ways an ideal partner, but IndiGos low cost business and operating model might not permit the linkages and complexities that would be required to participate in a global alliance. Je ts position as the most suitable Indian partner for a global alliance provides it with a strong negotiating position with its preferred Star Alliance.

CONCLUSION
In accordance with the requirements set forth by the Ministry of Corporate Affairs of the Government of India, this report analyzed competition inhibiting provisions of statutes, rules, policies and practices found within the regulatory framework of Indias civil aviation sector. This report broadly analyzes Indias civil aviation sector, while recognizing the necessity that deeper assessments of each sub-sector of Indias civil aviation must be undertaken individually. While assessing Indias civil aviation sectors regulatory framework, certain provisions that limit competition within the industry came to light. All regulations were analyzed and categorized by looking at whether or not they limit the number and range of suppliers, limit the suppliers ability to compete, reduce the incentive of the suppliers to compete, and affect investment. Based on the analysis of the preceding sections of this report we recommend creation of one single civil aviation policy. This civil aviation policy should aim to reduce artificial barriers to entry such as fleet and equity requirements. It should have clear delineation between regulatory authorities that oversee activities in this sector, which would result in clear and predictable regulatory outcomes. Furthermore, it should include a framework for monitoring anticompetitive pricing behavior within the sector. Additionally, this policy should aim to create a more level competitive field between Indias private, national and foreign carriers. It should also aim to introduce market mechanisms and incentives into the distribution of slots and dispersion of routes. Lastly, this policy should aim to attract greater private investment into Indias airports and improve the competitiveness of the government procurement process within this sector. National aviation has a network of 60 operational airports along with seven metro airports for navigating to 92 destinations with a fleet size of 126. Following the deregulation policy, six private carriers have emerged which have three times the fleet size of the national carrier and cover 256 destinations. The analysis of the data on the crude oil imports in the post-liberalization era revealed that imports of crude oil have grown threefold in a short span of six years from 2004 to 2010. The consumption of aviation fuel has also increased during this period. It is observed that over 50 per cent of refined aviation fuel is exported by keeping the cap on refueling capacity of public sector units at 2.1 million barrels per day. Further it is found that the central taxes on import and excise duty are levied on the entire crude oil imports though only 50 per cent of the aviation fuel is consumed in the domestic sector. In addition state levies are found to be highly varied, ranging between 8 per cent to 30 per cent, including those such as Value Added Tax (VAT), sales tax and service tax along with other local taxes with the cumulative burden of 30 per cent on the aviation fuel price in the domestic market. Corresponding to these periods, the passenger data revealed that the private carriers have over 70 per cent higher seat occupancy while the seating occupancy in the national carrier is declining. Further, it is interesting to note from the analysis of the passenger data that over 75 per cent of passenger traffic is concentrated and distributed over seven metro airports while all the other operational airports account for less than 25 per cent. It is also observed from the data that both national and private carriers have attained maximum seat occupancy of 70 per cent in all these years. The post-2000 of privatization. Private public participation is found in three slabs with varying percentages from 49 per cent, 74 per cent, and 100 per cent. Consequent to this there is steep rise in FDI and FII which have grown fourfold in a short span of five years reaching from Rs. 356,874 million in 2005 to Rs. 1,309,820 million in 2009. Various measures that are being taken by the Indian aviation sector such as increasing equity, advancing loans, cost-cutting exercises and noncommercial revenue are found to be similar to the stability strategy. Further merger, acquisition of both private and national carriers and promoting joint ventures through private participation for infrastructure development and closure of private carriers correspond to expansion and retrenchment strategies advocated by Glueck. In addition, other miscellaneous steps that are need are levy of uniform tax of 4 per cent on Aviation Turbine Fuel (ATF) bringing it under the Declared Goods category; tax incentives for the carriers operating in difficult terrain, and modifying code sharing along with bilateral treaties that are the similar to the combination strategy intended for business can be extended to the public sector which has given rise to the concept of resurgence strategies.