Indian Aviation Industry

GEEI Project Report

8/10/2013

Submitted to: Dr. Ravikesh Srivastava

Submitted By: Group 4 Agam Arora Prakhar Gupta 211090 211097

Purnima Choudhry 211104 Sahil Dhussa 211119

Contents

Part A: Industry Performance

Executive summary Capacity Utilization International passenger traffic Review & Outlook Outlook for profitability Domestic airlines sales growth- Review & Outlook Part B: State of the industry

5 8 12 13 14

Industry Overview Growth of LCC Segment Changing domestic competitive landscape PESTLE Analysis Porters Market Share of Top players

17 21 22 23 24 25 28 30

Role of Government Factors affecting profitability

Impact of Fuel Costs Impact of Rupee Depreciation

28 28 30 31

Investment Prospects MRO Reforms Player Profile Jet Airways Spice Jet

33 48

List of Figures and Tables

Figure 1 Figure 2: Figure 3 Figure 4: Figure 5 Figure 6: Figure 7 Figure 8 Figure 9 Figure 10 Figure 11 Figure 12 Figure 13 Figure 14 Figure 15 Figure 16 Figure 17 Figure B-8 Figure 19 Figure 20 Figure 21 Figure 22: Figure 23 Figure 24: Figure 25 Figure 26: Figure 27 8 8 10 10 12 12 13 14 15 20 22 24 25 26 30 31 35 35 40 43 50 50 52 52 53 53 56
4

List of Figures and Tables

Table 1 Table 2 Table B-3 Table 4 Table 5 Table 6 Table 7 Table 8 Table 9 Table 10 Table 11 Table 12 19 35 36 37 38 39 41 42 46 55 55 56

PART A: Executive Summary

India is the 9th largest civil aviation market in the world and ranked 4th in domestic passenger volume. Indias civil aviation market is set to become the worlds 3rd largest by 2020.The aviation sector does not only provide air transport for passengers and goods, but is also a vital strategic element for employment generation. About one-third of world trade by value is delivered by air and about half of international tourism is facilitated by air links.

The Indian Aviation Industry has been facing periods of subdued demand growth over the past years driven by multiple headwinds such as high oil prices and limited pricing power. The airline operators are facing challenges related to high debt burden and liquidity constraints. However in the recent years, the industry has been transformed from an over regulated and an under managed sector to a more open, liberal and investment friendly sector over the years. The entry of low cost carriers, higher disposable incomes, and strong economic growth coupled with the increased FDI inflows supporting government policies have been the major drivers for the growth of aviation sector in India. The domestic airlines have been allowed to fly overseas and forge partnerships with foreign carriers while foreign carriers in turn have been interlining with domestic airlines to access secondary resources. Private participation in expanding air transport network and related infrastructure has propelled growth of air

traffic in a big way in India. The Government on its part has initiated a series of measures including a proposal to allow foreign carriers to make strategic investments that are up to 49% stake in Indian Carriers, allow airlines to directly import ATF, lifting the freeze on international expansions of private airlines and financial assistance to the national carriers.

However, these measures alone are inadequate to address the fundamental problems affecting the industry. There is a need for the operators to focus on improving cost structure by the means of rationalization at all levels including mix of fleet and routes that is aimed at cost efficiency. The long term viability also requires return of pricing power through better alignment of capacity to the underlying demand growth.

Capacity Utilization

Figure 1

Figure 2: Capacity Utilization Revenue Passenger Kilometers (RPK) the number of revenue passengers carried times distance in kilometers.

Source: DGCA

Available Seat Kilometers (ASK) the number of seats available for the transportation of passengers times distance in kilometers.

Passenger Cabin Factor (or Passenger Load Factor) RPK divided by ASK and expressed as a percentage. It describes the utilization level of available seats. Ideally any airlines operator wishes aims at maximizing revenue passenger kilometer and reducing on available seat kilometers. Although this is not a matter of concern for the Indian operators, yet this is one of the more crucial factors in the aviation industry, Passenger traffic 16% CAGR terms over the past decade 13% in the first half has increased substantially to 19% CAGR during 2006-2011. Air travel penetration in India Less than half of that in China where people take 0.2 trips per person per year United States, the worlds largest domestic aviation market stands at 2 trips per person per year. The penetration of the aviation sector in India is merely 3%, which when compared to other nations make India a poor player in this sector. Also for every one Indian travelling though an air carrier there is 6 Chinese and 40 Americans. This shows how the Indian penetration levels are pretty low and the average usage of people is also not comparable. Although this is something that can be looked as a weakness of the industry, yet this is also an opportunity for the same. A mere 3% penetration means huge potential

and untapped user base which if tapped appropriately can trigger a huge industry growth. Apart from the penetration level, the market leader has not taken up the role of creating awareness or expanding the size of the market. This once implemented properly will create massive opportunity.

Figure 3

Figure 4: Passenger Load Factor

Source: DGCA

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Passenger load factor (PLF) or load factor is a measure of the amount of utilization of the total available capacity of a transport vehicle. It is useful for calculating the average occupancy on various routes of airlines, railway trains or bus. The passenger load factor in the Indian aviation industry is a critical aspect which is pretty high considering the international standards for the same. No wonder there are international clients that want to have code sharing agreements with Indian air carriers in an attempt to increase their load factors. For India the usual passenger load factor is somewhere about 75-80%, whereas in the western countries the average is somewhere in the range of 50-60%. The companies in the west are looking at this aspect of the Indian airline carrier and this can be leveraged and hence prove beneficial for the industry as a whole.

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International Passenger Traffic

Figure 5

Figure 6: International Passenger Traffic

Even during the economic downturn in 2008/09, when domestic traffic registered a Double digit decline, international Traffic remained in positive territory, growing at 6. This is one of the strangest factors as during the economic recession all the sectors were failing while the travelling internationally kept strong. There were many factors that

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led to the development of this market. In the FY 08-09 the number of passengers flying internationally the percentage of passengers increased.

Outlook for profitability

145.0 140.0 135.0 130.0 125.0 120.0

Thousand Millions

137.7 132.5 127.8

141.3 142.0 140.6 139.8

Expected Historical Linear (Historical)

2008 2009 2010 2011 2012 2013 2014

Figure 7

Figure 6: Projected Sales Growth

Now let us look at the industry growth over the last five years. Starting from year 2008 when the industry was booming at a 137 thousand million INR not stands at 139 Thousand million. The overall CAGR of the industry stands at a 4$, which is bound to increase in the subsequent years. Looking just at the CAGR we are looking at a 142

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thousand million INR. But as this growth consists of many ups and downs, the industry also touched a minimum of 127. Owing to these slopes and peaks we have calculated the growth of the company using the regression function, which shows the industry average somewhere at 135 Thousand Million INR.

Domestic airlines Sales Growth

Figure 8

Figure 5: MoM Sales Growth

Source: ICRA

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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

Figure 9

Figure 6: PAT as percentage of Sales

Source: ICRA

Losses in an inflated cost base scenario.

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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.

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PART B: STATE OF INDUSTRY Industry Overview

India is the 9th largest civil aviation market in the world. It is ranked 4th in domestic passenger volumes (45.3 million*). Indias civil aviation market is set to become the worlds 3rd largest by 2020. As per AAI, passenger handling capacity has risen two-fold from 72 million (FY 06) to 143 million (FY 11), and freight traffic has risen from 1.5 million MT (FY 06) to 2.3 million MT (FY 11). The Indian government has also proposed investment of US$12.1 billion in the airport infrastructure during the 12th Plan period, of which US$ 9.3 billion is anticipated to come from the private sector. Aviation as an infrastructure segment has played vital role in facilitating the growth of business and economy in India. A robust civil aviation set-up is key to seamless flow of investment, trade and tourism, with significant multiplier effects through the economy. About one-third of world trade (by value) is delivered by air and about half of international tourism is facilitated by air links. The sector relies on the flourishing tourism industry, more outbound tours, financial progress, and lesser airfares because of the introduction of low cost carriers and improved buying power of the people. It is the engine for innovation and technological progress in a world of decreasing barriers to trade.

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Year < 1953 1953 1978 1986 1994

Major milestones Nine Airlines existed including Indian Airlines & Air India Nationalization of all private airlines through Air Corporations Act Airline Deregulation Act Private players permitted to operate as air taxi operators Air Corporation act repealed Private players can operate schedule services

1995

Jet, Sahara, Modiluft, Damania, East West granted scheduled carrier status

1997 2001 2003 2005 2007

4 out of 6 operators shut down; Jet & Sahara continue Aviation Turbine Fuel (ATF) prices decontrolled Air Deccan starts operations as Indias first LCC Kingfisher, SpiceJet, Indigo, Go Air, Paramount start operations Industry consolidates; Jet acquired Sahara; Kingfisher acquired Air Deccan

2010 2011

SpiceJet starts international operations Indigo starts international operations, Kingfisher exits LCC segment

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2012

Government allows direct ATF imports, FDI proposal for allowing foreign carriers to pick up to 49% stake under consideration

Table 1

Table 1: major Milestones

Source: ICRA

According to a study jointly released by Civil Aviation Secretary Nasim Zaidi and IATA DG and CEO Tony Tyler, the India aviation industry has been referred to as The Real World Wide Web It contributes Rs 33,000 crore or 0.5 per cent of India's GDP and supports 1.7 million jobs in the country. Moreover, it is creating the much-needed critical assets as infrastructure. Some of the statistics are as follows: Rs 14,700 crore as direct output Rs 10,700 crore as indirectly through the supply chain Rs 58,200 crore as catalytic benefits through tourism The overall contribution amounts to Rs 91,200 crore or 1.5 per cent of GDP. The industry supports 276,000 jobs directly and 841,000 jobs indirectly through its supply chain. It supports 605,000 jobs through spending by employees of the sector. Overall, 7.1 million people are employed in the industry through the catalytic effects like tourism.

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Airport Authority of India

The Airport Authority of India (AAI) was established in 1994 under the Airport Authority Act. India has 136 airports, out of which 128 are owned by AAI.

International (including JV) AAI Managed Airports (136) (128) Non AAI (8) (14) Others (114)

Domestic (81) Custom (8) Civil Enclaves (25)

Figure 10

Figure 7: Airports in India

Source: AAI WEBSITE

It is responsible for ordering, financing and maintaining all government airports. The remaining airports are governed by the Aircraft Act (1934).

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Growth of the LCC Segment

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). Aviation sector in India experienced liberalization in its late nineties when private airlines like spice jet, jet airways, Kingfisher, Indigo, go air etc. contributed 75 percent to the Indian market. 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 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.

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Changing domestic competitive landscape

PESTLE Analysis

Figure 11

Figure 8: PESTLE Analysis

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Looking at the above model of the aviation industry, we can infer the present state of the industry and see how it is going to come up in the times to come. To understand the environment the scenario in 2000 and the present scenario are compared and how the difference in the two times has been with respect to the influence of the environment. Few of the findings from the analysis are follows; FDI policy has been relaxed. Huge growth in MRO. Tax incentives. Open sky policy. Traffic is likely to increase as tourism is growing as an industry, Marketing and CRM have stepped in. Government in infusing huge amounts in to the industry. The 12th five year plan has a proposed budget of $12.1 BN. There is growth in per passenger profit.

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Porters Five Forces Analysis

Figure 12

Figure 9: Porters Five Forces Analysis The Porters five forces model shows how different factors in the environment are influencing the decisions that are taken in the industry. The power of the consumers is relatively low as compared to the power the substitutes command, and this is quite evident with the amount of penetration this industry has in India.

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Market Share of Top Players

Figure 13

Figure 10: Market Share (Sales) Total domestic passengers carried by the scheduled domestic airlines between January and April 2013 were 20.289 million.

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Reforms by government
1. Proposal to allow foreign carriers to make strategic investments (up to 49% stake) in Indian Carriers To consider allowing up to 49% equity investment by foreign carriers in domestic airlines.In case of listed airlines, if the proposal does not get a waiver from SEBIs Takeover Code, foreign carriers may have to first make an open offer of 26% stake to public shareholders and later acquire up to 23% stake (from promoters or fresh equity), such that their stake remains within the 49 % cap.

Figure 14

Figure 11: Impact of FDI in Aviation

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Proposal to allow airlines to directly import ATF Currently India buys Airline Tribune Fuel from OMCs which is priced on an import parity formula and is also subject to sales tax varying from 4%-30% depending upon states. The airlines pay on an average 22-26% sales tax on ATF for domestic operations. The proposal would r educe effective taxes on ATF, even though the import duties have to be paid. However, some of the disadvantages of this proposal can be realized in the following manner: Fee-based structure for utilizing infrastructure for fueling, storing and transporting ATF Current liquidity constraints of almost all key players. Credit period adherence is necessary. Lose volume discounts (4 to 5 %) may be lost. Entry tax by states may be charged in near future.

2. Lifting the freeze on international expansions of private airlines In another major boost to private airlines (especially IndiGo and SpiceJet), the Civil Aviation Ministry has lifted the freeze on their overseas expansions. The government

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had imposed the freeze in Mar-2011 with the objective of protecting the financially strained Air India from more competition on foreign routes. However, lower utilizations of maximum permissible limits under the bilateral Air Service Agreements (ASAs) have prompted the move to allow eligible domestic airlines (with more than 5 years experience) expand their international operations. The move will benefit the private carriers (although may increase competition and losses for the national carrier) international flights provide better margins owing to the availability of fuel at international rates, higher auxiliary revenue through in-flight sales and higher fleet utilization, as international operations could happen during the otherwise idle night hours. 3. Financial guarantees to the debt-ridden national carrier in securing funding at competitive rates As per media reports, Group of ministers (GoM), headed by finance minister cleared the financial restructuring plan for Air India under which the national carrier will be allowed to raise Rs 7,400 crore through government- guaranteed bonds bearing a coupon rate of 8.5-9%. While the financial guarantees may help it overcome near term headwinds, operation turnaround at ailing national carrier remains critical for overall health of the industry

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MRO Sector Reforms

The Government has made several concessions in the Union Budget for 2013-14 Extension of time period allowed for utilization of aircraft parts and equipments from three months to one year Exemption of custom duty on parts, equipment, accessories, spares required for MRO purposes to private category aircrafts also Inclusion of foreign airlines for the purpose of duty-free imports of parts, etc as applicable for scheduled air transport services The Maintenance and Repair industry is also under limelight as Indian air carriers are outsourcing MRO to smaller subcontinent countries like Sri Lanka. There are various countries which are benefiting from this. Considering the expanding size of the Indian aviation industry, the MRO industry will also have a trickledown effect which will have a positive effect. But this benefit as of now is going through the Indian economy which can be done by promoting the MRO industry and setting up better and efficient MRO suppliers. No matter where the benefit trickle down to, the aviation sector players are bound to look at their benefits and thus will go for cost effective solutions. The only way to compete in such scenario is to make a self sustaining MRO sector in India as well.

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Factors affecting profitability

Impact of Rising Fuel Costs

Figure 15

Figure 12: percentage change in Fuel Costs

The fuel prices constitute to 30-45% of the total cost involved in any aviation industry related operation. More flights would mean more fuel demands and thus even economies of scale are unable to push up Indian airline profits. This can be seen through the constantly increasing fuel prices. There has been a significant increase in ATF prices up to 57% in the last 18 months. Indian Carriers do not hedge fuel prices. There is limited ability to charge fuel surcharges due to

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irrational and undisciplined pricing dictated by competition rather than costs / demand.

Impact of Rupee Depreciation

Figure 16

Figure 12: Percentage change in Rupee Prices

In CY11, 18.7% depreciation was partly reversed through 7.3% YTD appreciation. The fuel costs, MRO, expat salaries and a portion of sales commissions are USD-linked. Low-fare carriers have less international exposure in terms of flights. The reduction in air fares is less than would usually be expected in the lean season. Air India plans to hedge jet fuel in the near future.

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Investment Prospects
Looking at the factors in favor of investments in this industry, firstly the penetration of air travel is less than 3% is significantly below benchmarks in other markets it presents an opportunity for foreign airlines to create India as their hub for international traffic between Europe and South East Asia. Additionally it may offer better connectivity within India with international destinations. The foreign airlines could also look at leveraging on Indias low-cost arbitrage by setting up MRO facilities in India. But, the market valuation of listed airlines in India has suffered due to poor performance But on the other hand, factors such as higher taxes on ATF and airport charges
continue to be key headwinds for the sector. Airlines in India are also mandatorily

required to fly on certain unviable routes. Moreover, the development of airport infrastructure has not kept pace with demand, thereby resulting in delays and higher costs for airlines .Intense competition, sharp fluctuation in ATF prices and high debt burden continue to weigh on the financial performance of Indian airlines; foreign exchange fluctuation and lack of adequate hedging mechanism (for fuel) have added to the woes.

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Player Profile Spicejet Airlines

Company Background Spicejet Ltd. was incorporated as a public limited company on 9 February 1984 as Genius Leasing Finance & Investment Co. Ltd. The name of the company was changed to M G Express Ltd. on 17 February 1993 and then, to Modiluft Ltd. on 12 April 1994. It was renamed as Royal Airways Ltd. on 9 February 2002. The name was again changed to Spicejet Ltd. on 29 April 2005. Equity shares of the company were listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) on 25 February 1994 and 10 May 1995 respectively. The company has its registered office in Chennai and a corporate office in Gurgaon.

Spicejet started operations in 1993 as a domestic airline in technical collaboration with Lufthansa of Germany, where Lufthansa also leased aircrafts to the company. The airline services were marketed under the brand name ModiLuft. However, the Lufthansa alliance fell through in May 1996, resulting in the company incurring huge losses. Services were totally stopped after the break-up. In the mean time the company went through operational and management changes. Royal Holding Services Ltd. became

33

the promoters in 2001. The company re-started its commercial operations on 23 May 2005 with a new brand name 'Spicejet'. It offered various promotional schemes like ticket for only Rs.99 for the first 99 days of its operation, to make Spicejet a known brand.

The company was initially promoted by Satish Kumar Modi of the Modi Group. It was taken over by Royal Holding Services Ltd. (a NRI overseas corporate body (OCB)) in 2001. Satish Kumar Modi resigned as Director of the company on 31 December 2001. The promoters changed again in November 2010, when Kalanithi Maran (owner of Sun TV Network Ltd.) and a company promoted by him, Kal Airways Pvt. Ltd. took over majority stake in the company through a share purchase agreement. By 2012, Spicejet was India's third largest airline in terms of market share, ahead of Air India, Kingfisher Airlines, and GoAir. Spicejet operates as a low cost airline service provider offering passenger and cargo transportation services. The company operates aircraft configured with a single passenger class. Between 2 to 3.5 tons of cargo is ferried on each flight, ensuring maximum utilization of the aircraft. The airline is famous for its on-time performance compared with similar domestic flight services in India. Spicejet MAX is the frequent flyer programmer of the company. It is a combo offer provided by the airline that includes a choice of meal onboard, seat preference at the time of booking and a priority check-in at the airport.

Global Flight Destinations

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The company currently has a fleet size of 52 aircrafts which cover 46 destinations in India and 7 destinations abroad operating around 281 flights daily. The destination coverage can be viewed in the below map.

Figure 17

Figure B-18: Global Destinations of Spicejet As of July 2013, the airline had the following set of fleet:-

Table 2

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Table B-3: Aircraft Fleet of Spicejet

Spicejet has a fleet consisting of Boeing and Bombardier aircrafts with a seat capacity varying from 78 to 212 passengers in an aircraft. All aircrafts under the possession of Spicejet have a single Economy class only.

Product Details Spicejet earns its revenues from various products and services. The bulk of the revenue from transportation services which include transporting passengers and freight and training services. The other revenue sources include lease for aircrafts, sale and hiring of aircrafts to government and private individuals and sale of own shares. The share of revenues from transport services has increased from 97% in 2008 to 99% in 2012. The following table indicates the break-up of revenues of Spicejet over the period.

Product/s (Rs. Million)

manufactured/traded 2008 2009 2010 2011 2012

Services >> Transport services Income From Training Services

12,949.90

16,894.50 21,810.80 28,802.70 39,561.00 33.1 128.4

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Income From Operating Services Airline Freight Services Services >> Financial services

12,949.90

16,283.50 20,733.80 27,139.00 37,463.80 611 1,077.00 1,630.60 1,968.80

including leasing Profit On Sale Of Aircraft Hire Charges Income From Sale Of Own Shares Grand total
Table 4

466.9 438.4 28.5

617.9 617.9

149.3 34.7

40 40

40 40

114.6 13,416.80 17,512.40 21,960.10 28,842.70 39,601.00

Table B-3: Revenue from Different Products and Services of Spicejet

Board of Directors and Shareholding Pattern Kalinithi Maran, owner of the Sun Group, holds the position of the Chairperson of the board of directors of Spicejet and S Natrajhen is the Executive Director of the company. Neil Raymond Mills used to be CEO of the company till he resigned from the position on 3 August 2013. The company has not been able to find his successor till now. The table below provides the details of the members of the board.

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Committee Directors Designation positions held Kalanithi Maran Kavery Kalanithi Chairperson Director Executive S Natrajhen J Ravindran Nicholas Martin Paul M K Harinarayanan S Sridharan R Ravivenkatesh
Table 5

Board meetings attended

Directorships held in other companies 13 13

3 5

3 3

Director Director 10 6 3

Director Director Director Director

6 6

3 6 2

5 1

Table B-3: Board of Directors of Spicejet

The shareholding pattern indicates that the majority stake of 52.13% is held by Kalinithi Maran and his Sun Group in the company. Non-institutions, mutual funds, banks and FIIs are other shareholders in the company. Category of Shareholder Percent share in

total equity

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Promoters Kal Airways Pvt Ltd Kalanithi Maran Non-Promoters Mutual Funds, Banks and FIIs Non-institutions
Table 6

30.08 22.05

14.58 33.28

Table B-3: Shareholding Pattern of Spicejet

Promoter holding for the company has changed from 13% in 2008 to 52% in 2013. The figure below shows the pattern of promoter holding.

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Figure 19

Figure B-18: Global Destinations of SpicejetFigure B-18: Pattern of Promoter Holding of Spicejet Employee Compensation Airline industry is one of the highest paying industries of the country. Air India Ltd. tops the chart with a total annual remuneration of Rs. 3726.87 crore and 28,080 employees as in March 2013. The annual compensation per employee is Rs. 13.27 lakhs. Spicejet ranks fifth in the chart with a total annual remuneration of Rs. 402.87 crore and 4,680 employees. The annual compensation per employee is Rs. 8.60 lakhs.

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Airline Company

Annual

No.

of Annual

Compensation employees Compensation to employees (Rs. crore) ('000s) per employee (Rs. lakhs) 28.08 12.84 13.27 12.45

Air India Ltd. Jet

3726.87

Airways 1599.49

(India) Ltd. Kingfisher Airlines Ltd. Air-India Charters Ltd. Spicejet Ltd.
Table 7

687.98

5.69

12.08

96.76

1.05

9.16

402.87

4.68

8.60

Table B-3: Aircraft Fleet of Spicejet

Financial Performance The financial performance of the company can be measured on a number of parameters. The market capitalization of Spicejet is Rs. 1,430.77 crore as in July 2013, which is one-tenth of the value for Container Corp. with the largest market capitalization
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in the aviation industry. The sales turnover for Spicejet is Rs. 5,714.56 crore which is lower only to Jet Airways having the value of Rs. 16,852.59 crore. Spicejet incurred a net loss of Rs. 191.08 crore with last share price as Rs. 27.50 as on 1 August 2013. The total assets for the company are Rs. 708.20 crore, which are one of the lowest amongst its top competitors. The table below compares the financial performance of different competitors in the aviation industry.

Table 8

Source: www.moneycontrol.com Table B-3: Aircraft Fleet of Spicejet

The stock performance of Spicejet over the period from 2008-13 has been shown in the figure below. While BSE SENSEX has grown by 24.12% from 1 April 2008 to 1 July 2013, the shares of Spicejet lost by 34.23% during the same period. Spicejet saw many ups and downs in this period. As compared to the share price on 1 April 2008, the price
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fell by 74.54% by October 2008 when the CFO of the company resigned to join Whirlpool. Then, the stocks went up to a high in April 2010 when Kalanithi Maran acquired a 37.7% stake in the shareholding patter. The company reached an all time high of around Rs. 90 in November 2010 when there was a proposed announcement of purchase of up to 30 aircrafts by the company. Afterwards, the share price fell to around Rs. 12 by December 2011 when the company suffered losses to the tune of Rs. 39 crore owing to a 90% jump in prices of fuel imported by the company. However, the company came to another high in November 2012 when Kalinithi Maran increased his consolidated stake in the company to 52.13%.

Figure 20

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Figure B-18: Global Destinations of Spicejet

The table below indicates the financial performance of Spicejet in the period of 2008-12. There has been heavy consolidation by the company in this period by increasing its fleet size and improving its operations on key routes, financed by own capital. (Currency: million) Total income Sales 14,509.50 18,219.80 22,436.70 29,663.80 40,193.40 13,282.50 17,242.00 21,961.90 29,125.90 39,908.80 325.5 396.9 262.2 211.4 Rs. 2008 2009 2010 2011 2012

Income from financial 644 services

Total expenses

15,844.50 21,745.50 21,822.20 28,652.20 46,251.10

Profits Profit after tax (PAT) -1,335.00 -3,525.70 614.5 1,011.60 -6,057.70

Total assets/liabilities

13,614.70 7,575.50

9,858.00

11,101.30 19,708.80

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Profitability ratios PAT as % of sales -16.9 -20 -21.8 3.6 2.8 4.1 3 -13.1 -15.2

PAT as % of total -12.5 income

Liquidity (times) Quick ratio Current ratio

ratios

0.538 0.546 19 -18.289 1 160.1

0.425 0.437 0 -31.078 1.5 112.2

0.534 0.544 0 12.426 2.6 111.5

0.281 0.306 0.27 11.755 2.3 93.2

0.375 0.395 0 -11.904 1.8 71.5

Debt to equity ratio Interest cover Debtors (days) Creditors (days)

Efficiency (times)

ratios

Total income / total 1.087

1.72

2.574

2.837

2.616

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assets Total income / 10.024 to 11.364 12.339 11.974 9.966

compensation employees
Table 9

Table B-3: Aircraft Fleet of Spicejet

The total income has seen a growth of 177.01% in this period, where sales have grown by 200.46% and income from financial services has reduced by 67.17%. The total expenses have increased by 191.91% in this period. Profit after tax (PAT) has increased by 353.76%. Total assets or liabilities have increased by 44.76%. Amongst the profitability ratios, PAT as percent of sales has reduced by 22.49% and PAT as percent of total income has increased by 21.60%. Amongst the liquidity ratios, quick ratio has reduced by 30.30%, current ratio has reduced by 27.66%, debt-to-equity ratio has reduced by 100% owing to zero debt, interest coverage has reduced by 34.91%, debtor days have increased by 80% and creditor days have reduced by 55.34%. Amongst the efficiency ratios, the ratio of total income to total assets has increased by 140.66% and ratio of total income to compensation of employees has reduced by 0.58%.

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Company in the News Recently, Spicejet has been in the news in the following scenarios: Reports suggested that Kuwait Airways may pick up around 25% stake of Spicejet. The deal value is pegged around Rs. 1000 crore. However, Spicejet considered it very pre-mature to comment on such possibilities and downplayed it as speculative media reporting. The rupee's slide has come as another blow at a time when the industry is grappling with high operating cost and compressed margins. This would adversely impact airlines which incur 60 percent of their expense in dollar denomination. For smaller carriers like SpiceJet, the impact might be deeper as their international revenues are limited and other dollar-denominated expenses remain high. The Directorate General of Civil Aviation (DGCA) issued a circular to airlines to unbundle services on opt in basis, a method that allows passengers to choose what services they would prefer. Also, seats on 'opt in' basis would not exceed 25 percent of total seats. Thus, Spicejet mentioned that it would charge an additional amount for unaccompanied minors, infants and services like bulk baggage. The company also introduced a combo package including priority check in, complimentary meal, seat selection and early baggage delivery.

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Company Analysis: Jet Airways

Company Background Incorporated in 1992, Jet Airways is the second largest airline company in India. It operates over 1000 flights daily to 76 destinations worldwide. Its main hub is Mumbai, with secondary hubs at Delhi, Kolkata, Chennai, Bengaluru and Pune. It has an international hub at Brussels Airport, Belgium. The company was started as Jetair (Private) Limited in 1974 by Naresh Goyal to provide sales and marketing representation to foreign airlines in India. In 1991, the Indian government de--regulated the aviation sector, Jetair (Private) Limited changed its name to Jet Airways Ltd and commenced commercial airline operations through air taxi operations with 24 daily flights serving 12 destinations in 1993. In 1995 it started offering services as a full--frill airline. Increasing competition in the domestic market compelled the airline to foray into international operations. Jet Airways provides two services namely, air passenger and freight services, the former accounts for a massive 92.1 per cent (2006--07) of the airline's total revenues. In May 2007, Jet Airways became the first and the only airline in Asia to have a European hub at Brussels. Ownership Controversy

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The promoter Naresh Goyal had sold the company to Tail Winds' in 1994. At that point of time he held 60% stake, while foreign airlines Gulf Air and Kuwait Airways held 20% each. In 1997, after a directive on foreign equity and NRI/OCB equity participation in the domestic air transport services sector the foreign airlines divested their stake in favour of Mr Goyal. Promoter Company Tail Winds (owned by Goyal) owns around 80% equity stake in the company while institutional investors held 15.5%.

A serious allegation that delayed Jet Airways being permitted to fly to the United States focused on its opaque ownership structure as well as its alleged links to organized crime in India and abroad. Jet Airways was originally set up as a subsidiary of Tailwinds, an Isle of Man-based holding company designed as a tax shelter, whose sole shareholder was Naresh Goyal, the airline's non-resident Indian (NRI) founder and chairman. Initially, both Gulf Air and Kuwait Airways had acquired minority stakes in the airline. However, the Government of India subsequently decreed that foreign airlines would not be allowed to own any shares in any Indian airline (though other foreign entities and individuals could still acquire or own minority stakes in Indian carriers. Gulf Air and Kuwait Airways subsequently sold their stakes to Naresh Goyal, who then became the airline's sole shareholder. Jet Airways then floated a minority stake of approximately 20% on the Bombay Stock Exchange in 2005 to reduce debt and to fund its fleet expansion programmer. Hence, Tailwind's stake in the airline reduced to just below 80%. According to the company's articles of association, the bulk of Naresh Goyal's shares in Tailwinds are held on behalf of several other individuals who all seem to be resident citizens of India. Indian government officials have been satisfied that
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these arrangements do not compromise Jet Airways' status as an Indian-owned airline that is effectively controlled by Indian citizens.

Global Flight Destinations Jet Airways serves 52 domestic destinations and 21 international destinations, a total of 73 in 19 countries across Asia, Europe and North America. Short-haul destinations are served using Boeing 737 Next Generation. ATR 72-500s are used only on domestic regional routes, while long-haul routes are served using its Airbus A330-200 and Boeing 777-300ER aircraft. London, England was the airline's first long-haul destination and was launched in 2005. Since 2007 Jet Airways has had a scissors hub at Brussels Airport in Belgium for onward trans-Atlantic connections to Canada and the United States.

Figure 21

Figure 22: Global flight destinations of Jet Airways`

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The recession forced Jet Airways to discontinue the following routes: Ahmedabad London, AmritsarLondon, BangaloreBrussels, MumbaiShanghaiSan Francisco and Brussels-New York. Due to the recession all flights to North America were operated on an Airbus A330-200 replacing the Boeing 777-300ERs. It also had to sell a brand-new, yet-to-be-delivered Boeing 777-300ER in 2009 and had to defer all new aircraft deliveries by at least two years. The airline planned to restore the Mumbai-Shanghai route by the end of 2011 but never went through with it. As the economic crisis in the Eurozone countries worsened, Jet also closed the Delhi-Milan route.

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Jet Airways Fleet Following figure gives an overview of the different planes that Jet Airways has in its fleet of aircrafts.

Figure 23

Figure 24: Jet Airways Fleet

Financial Performance The stock performance of Jet Airways over the period from 2008-13 has been shown in the figure below. BSE SENSEX has grown by 24.12% from 1 April 2008 to 1 July 2013. Jet airways saw many ups and downs in this period. The figure below also gives a brief
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about the various reasons that were responsible for the ups and downs in the stock prices.

Figure 25

Figure 26: Jet airways stock performance 2008-2013

The table below indicates the financial performance of Spicejet in the period of 2008-12. There has been heavy consolidation by the company in this period by increasing its fleet size and improving its operations on key routes, financed by own capital. Jet Airways (India) Ltd. Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

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Currency: Crore Annualised) Total income Sales Total expenses

Rs. (Non12 mths 12 mths 12 mths 12 mths 12 mths 12 mths

7,104.09 8,892.15 11,388.32 9,720.89 12,322.23 14,967.45 7,441.76 9,897.36 13,201.20 11,239.89 13,308.54 16,998.16

Power, fuel & water charges Indirect taxes Profits PBDITA Profit (PAT) Total liabilities/assets Growth (%) Total income Total expenses 21.96 31.19 29.11 33 32.71 33.38 -15.83 -14.86 23.63 18.4 18.35 27.72 10,772.10 20,944.10 23,460.73 21,012.33 21,667.29 22,141.65 after tax 27.94 -253.06 -402.34 -467.64 9.69 -1,236.10 759.82 941.54 1,452.64 1,560.53 2,145.54 958.46 2,437.02 3,307.56 4,935.88 3,170.88 4,385.38 6,648.41 47.25 82.05 -254.62 80.6 199.65 452.68

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PBDITA P&E&OI&FI
Table 10

net

of -59.09 -34.14 -83.92 1,109.48 126.39 -85.62

Table 11: Financial performance of Jet Airways The total income grew year on year except in 2009 when recession hit all companies. However Jet Airways has significantly bounced back and increased its sales by 18.35% in 2012 as compared to 2011. As can be seen from the table, total expenses also increased year on year. In FY2010, Jet airways consolidated and hence expenses decreased considerably (14.86%) as compared to 2009. In recent years, Jet has significantly increased its expenses owing to acquiring new assets in terms of fleet etc.

Company in the news Recently, following are a few of the important news articles that Jet Airways was featured in. Etihad deal Etihad Airways planned to buy a stake in Jet Airways. Jet announced that they were ready to sell a 24% stake to Etihad at US$379 million.

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In September 2012, government of India had announced that foreign airlines can take up a stake of up to 49% in Indian airlines

The date passed by and the deal was further postponed

Figure 27

Table 12: Etihad-Jet Airways deal complications

South African Airways ties up with Jet Airways Will operate non-stop flights between Mumbai and Johannesburg with the African carrier assessing the Indian market to expand its presence here A code sharing agreement has been agreed upon between the two parties Frequent flier programmes will be applicable for both Done to improve load factor by seeing current trend on Mumbai-Joburg route

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Jet Airways announces senior management change Jet Airways announced a change in the airlines leadership, with the appointment of Mr. Gary Kenneth Toomey as its new Chief Executive Officer Exit of Ex-Chief Executive Nikos Kardassis occurred without citing a reason

Code share agreement Jet Airways announces Codeshare agreements with Air France, KLM Royal Dutch Airlines to enhance connectivity between Europe & India. This will help Jet increase international reach and also improve its connectivity and coverage.

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