Aviation

UNNATI

REPORT ON AVIATION SECTOR

This report broadly outlines the value chain, industry dynamics, growth drivers & sector outlook

Aditya Kandoi & Mayank Bukrediwala

Aviation

REPORT ON AVIATION SECTOR

Table of Content

S. No.

Particulars

Page No.

Historical Overview

Current Overview

Segmentation

Major Players in Airline Industry

Current Market Share

Value Chain Analysis

Factors Affecting Airlines Industry

10

Major Cost Drivers

11

Operational Parameters in Aviation

11

10

Companies Overview

13

11

Future Challenges & Outlook

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Aviation

REPORT ON AVIATION SECTOR

Historical Overview
Liberalization of Indian economy has empowered the Indian aviation sector, which has
undergone a sea-change. Today, it is one of the fastest growing sectors in the country. The
Indian government nationalized the aviation industry in 1953 by enacting the Air Corporations
Act. Till the early nineties, Indian aviation industry was dominated by two government-owned
organizations: Indian Airlines (domestic sector) and Air India (International sector). The
government relaxed its hold on the industry after the liberalization of Indian economy began in
1991.
The Air Corporation Act of 1994 had started a new era in Indian aviation sector by allowing
private players to operate schedule services in the domestic market. Since 1986 up to the
repeal of the Air Corporations Act 1953 in March 1994, private airlines were allowed to operate
charter and non-scheduled services under Air Taxi Scheme under which it was allowed to
operate inter-alia i.e. they (private operators) could not publish time schedules, or issue
tickets to passengers. The Air Taxi Scheme was introduced in 1986 to boost tourism and
enhance domestic air services. Later on, the Air Taxi Scheme was further liberalized in March
1994, which removed restrictions on air transport services for private players. The first lot of
new private airlines included Jet Airways, Air Sahara, Modiluft, Damania Airways, NEPC Airlines
and East West Airlines of which only Jet Airways has survived. In August 2003, Air Deccan joined
Jet Airways and Air Sahara in the private airlines segment.
The low cost airline industry has changed the definition of airlines that air travel is a luxury and
it is only for the upper segment of the population. The key objectives of low cost carriers is to
increase their reach and provide the services to a large segment. In India, low cost carriers
came into existence in 2003 when Air Deccan launched its first low cost airline and that was the
first move to open the doors of the airlines industry for middle class.
The government-owned Indian Airlines and Air India, meanwhile, continue to operate alongside
the private players. Foreign airlines, on the other hand, have been largely immune to the flipflops in the domestic sector. Their operations in the country date back to pre-independence
years.

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Current Overview
The Indian aviation industry is one of the fastest-growing aviation industries in the world with
private airlines accounting for more than 75 per cent of the sector of the domestic aviation
market (as of 2006). With a compound annual growth rate (CAGR) of 18 per cent and 454
airports and airstrips in place in the country, of which 16 are designated as international
airports, Union Civil Aviation Minister Mr Praful Patel has stated that the aviation sector will
witness revival by 2011.
Passengers carried by domestic airlines from January-February 2010 stood at 8,056,000 as
against 6,761,000 in the corresponding period of 2009a growth of 19.2 per cent, according to
a report released by the Ministry of Civil Aviation.
Jet Airways, Kingfisher Airlines,Spice Jet, IndiGo Airlines and National Aviation Company of India
Limited [NACIL] (a merged entity of Air India and Indian) are the domestic players in the air
travel. Out of them, Jet, Indian and Kingfisher started operating overseas routes after the
liberalisation of Indian aviation. These airlines connect more than 80 cities across India.
However, a large section of the country's air transport system is still not tapped.
The Indian airline sector is witnessing a significant change in its operational structure with
major full service carriers (FSCs) such as Jet Airways and Kingfisher rapidly converting a majority
of their capacities into low cost. The passenger preference has also tilted towards LFCs as the
preferred mode of travel primarily due to the economic slowdown and high fuel prices in the
past few quarters.
A major development has been the development of a cartel between Jet Airways and kingfisher
Airlines who have entered an operational alliance that would cover more than 50% of the
market share and completely dominate the FSC segment.
Also the RBI has cleared the way for banks to restructure the unsecured loans given to aviation
sector. This will bring lot of relief to some of the aviation companies specifically Kingfisher.

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Aviation

REPORT ON AVIATION SECTOR

Segmentation
Aviation industry can be classified into 3 distinct sectors
1. Airlines
The airlines sector constitutes the biggest segment in Indian aviation. This can be further
classified into
a. Passenger airlines
b. Air Cargo
2. Support Services
Support Services Industry includes Flight personnel training industry and other ground
support activities. They can be further classified as
a. Ground handling
b. Training
c. Catering
3. Aerospace
These include industries on the supply side and also maintenance providers.
a. MRO
b. Design and Manufacture
4. Airports
The aerospace industry is not developed in India and all the airline companies obtain
their fleet from Boeing and Airbus. The MRO segment has been steadily growing.
Airports are very important for the growth of aviation industry and hence in the past
decade government has developed policies to develop the major airports by bringing in
the private players through (PPP) basis.

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Major Players In Airline Industry

1. Jet Airways
Jet Airways (India) Ltd (JAL), Indias largest private sector airline with a domestic market
share of 26.9% in Q3FY10, began its operation in May 1993. The company strengthened
its position in the aviation sector by acquiring Air Sahara (rechristened as JetLite, the alleconomy, no-frills service) in April 2007. At present, JAL operates 112 aircraft, which
flies to more than 61 destinations in India and abroad.

2. Kingfisher Airlines
Kingfisher Airlines is an airline group based in India. Its registered office is the UB Tower
in Bangalore and its head office is Kingfisher House in Vile Parle (East), Mumbai.
Kingfisher Airlines, through its parent company United Breweries Group, has a 50%
stake in low-cost carrier Kingfisher Red.
After acquiring a controlling stake in Air Deccan, Kingfisher Airlines-Deccan Combine is
now the largest airline network in India, with the fleet size of 83 aircrafts providing
connectivity to 65 destinations by operating 476 flights daily.

3. NACIL
The National Aviation Company of India Limited (NACIL) was incorporated under the
Companies Act 1956 on 30 March 2007 and is owned by the Government of India based
at the Air India Building in Nariman Point, Mumbai. The Company was created to
facilitate the merger of the two main state-owned airlines in India: Air India, with its
subsidiary Air-India Express and Indian Airlines, together with its subsidiary Alliance Air.

4. Spice-Jet Airlines
SpiceJet commenced its operation in May 2005 as a budget airline with a strong focus
on the domestic market. The company has emerged as the second largest LFC after
Indigo, with a market share of 12.8% at the end of Q3FY10. The company operates 19
aircraft, which fly to 18 different cities in India.
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REPORT ON AVIATION SECTOR

5. Indigo airways
IndiGo is a private domestic low-cost airline based in Gurgaon, Haryana, India. It
operates domestic services linking 22 destinations. Its main base is Delhi's Indira Gandhi
International Airport. It was awarded the title of Best Domestic Low Cost Carrier in
India for 2008.
6. GoAir
Owned by Jehangir Wadia, the great-grandson of Muhammad Ali Jinnah, founding
father of Pakistan, GoAir is a low-cost airline based in Mumbai, Maharashtra, India. It
operates domestic passenger services to 15 cities with 100 daily flights and
approximately 700 weekly flights. Its main base is Chhatrapati Shivaji International
Airport, Mumbai.
7. Paramount Airways
Paramount Airways is an airline based in Chennai, India, it is a national licensed airline,
currently flying predominatly in southern India. It operates scheduled services, mainly
targeting business travellers. Its hub is Chennai International Airport. It is the first airline
in India to launch the New Generation Embraer 170/190 Family series aircraft.

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REPORT ON AVIATION SECTOR

Current Market Share

Sales
0.3
5.9

Jet airways

25.19

15.7

kingfisher
NACIL
Spice-Jet

12.6

Indigo
21.4

Go air
Paramount

18.2

The figure above gives the combined Domestic + overseas Market Share of the
different Indian aviation companies.

The figure above provides a breakup of the market share of Indian companies in the
domestic segment.
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REPORT ON AVIATION SECTOR

Value Chain Analysis

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REPORT ON AVIATION SECTOR

Factors affecting Airlines Industry

1. Prevailing Economic Condition and GDP growth
The aviation industry is particularly susceptible to external economic factors because
it affects and depends on a substantial number of industries. Also, because the
industry involves operating between borders, then economic factors from other
parts of the world other than the domestic market also affect it. Issues such as fiscal
policies (both within and without the countries of destination), wage inequality and
positive and negative externalities have a way of changing operations within this
industry.

2. Infrastructural Support
The amount of infrastructural investment within the aviation sector has a substantial
effect on the performance of the industry. For instance, if the government makes
large investments in infrastructural facilities that support airlines such as building
more airports or improving the ones that exist, then chances are that such an
industry will perform well.

3. Tourism
The growth in airline and tourism is positively correlated. The growth in tourism
leads to growth in passengers for airlines inevitably. A fall in tourism can severely
affect the aviation industry.

4. Government Regulations and Taxes

A major effect on the Indian Aviation Industry occurs with respect to the
Government Regulations regarding:

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REPORT ON AVIATION SECTOR

a. FDI policy
FDI up to 100 per cent is allowed under the automatic route for greenfield projects.
For existing projects, FDI up to 100 per cent is allowed; while investment up to 74
per cent under the automatic route and beyond 74 per cent under the government
route.

b. Taxes
Tax policy with respect to ATF has a significant effect on Indian Aviation Industry.
The current multiple taxation policy leads to the escalation of costs by 30%, severely
affecting the profitability and growth of Indian aviation industry as ATF accounts for
more than 35% of the total costs.
c. Other policies
Policies regarding criteria for becoming a scheduled air transport carrier
d. Open sky policies
License policies for operating overseas flights
e. ATF
The price of ATF which is controlled by the crude oil prices is possibly the biggest
factor affecting costs of the airlines. An increase in ATF leads to the increase in ticket
prices affecting the demand
f. Fleet supply
Boeing and Airbus are the only aircraft suppliers to the Indian aviation sector. Fleet
costs accrued by them majorly depend upon aluminum costs which then directly
affect Indian aviation.
Also it is a industry with a gestation period as aircraft orders take a long time to get
delivered.

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Aviation

REPORT ON AVIATION SECTOR

Major Cost Drivers

Operating Parameters in Aviation

ASKM - The sum of the products obtained by multiplying the number of passenger - seats
available for sale on each flight stage by the corresponding stage distance.
CASK - Represents total cost divided by the ASKMs
RASK Represents total revenue divided by the ASKMs
RPKM Revenue Passenger Kilometer
Seat Factor - Ratio of used to available capacity: passenger-kilometers / available seat-kilometers.
Yield - Passenger Revenue earned per kilometer flown.

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Aviation

REPORT ON AVIATION SECTOR

Companies Overview
Jet Airways
Jet Airways (India) Limited (JAIL) was incorporated in 1st April of the year 1992 as a private
company with limited liability and it commenced operations as an Air Taxi Operator in 5th May
of the year 1993 with a fleet of four leased Boeing 737 aircraft and also having ISO 9001
certification for its in-flight services. The Company became the first airline in India to operate
the Boeing 737-400 Aircraft in April of the year 1994 and it operates one of the youngest
aircraft fleets in the world today. The Company was granted the scheduled airline status in 14th
January of the year 1995. Jet Airways became a deemed public company in 1st July of the year
1996. jet Airways was reconverted into a private company as at 19th January 2001
Currently Jet airways is the leading airline in india in terms of Market Share. The Company has
traditionally operated in the FSC segment but in view of the economic slowdown it has also
moved into the LCC segment by acquiring Air Sahara and starting Jet Konnect and Jet Lite, two
of its low cost carriers.Jet also operates in the overseas market along with NACIL.

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Aviation

REPORT ON AVIATION SECTOR

Jet had made a loss in the financial year 2009-10, however it has posted substantial gains in the
first quarter of the current financial year. This has been due to
1. Improved economic growth
2. Operational alliance with kingfisher
3. Entry into the low cost segment

Spice-Jet
SpiceJet Ltd is India's best low cost airline, delivering the lowest air fares with the highest
consumer value. The company operates 119 flights daily to 18 cities, namely Ahmedabad,
Bangalore, Bagdogra, Chennai, Coimbatore, Delhi, Guwahati, Goa, Hyderabad, Jammu, Jaipur,
Kochi, Kolkata, Mumbai, Pune, Srinagar, Varanasi and Visakhapatnam.

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The company started their commercial operations of domestic flight services on May 23, 2005
with three leased Boeing 737-800 aircraft. During the year 2004-05, they signed an agreement
with Boeing for acquiring 20 (737-800) aircrafts and in May 4, 2005, the company changed the
name of the company from Royal Airways Ltd to SpiceJet Ltd. In May 5, 2005, they entered into
a strategic tie up with Indian Oil Corporation Ltd.
During the year 2007-08, the inducted eight new aircraft to their fleet taking the total fleet
strength to nineteen aircraft. Out of eight, two were Boeing 737-900, the largest capacity
domestic aircraft having seating capacity of 212 passengers. In May 2007, the company made a
tie up with Tata AIG General Insurance to cover travel related risks of the airlines' domestic
passengers. The insurance cover would be provided for accidental death, emergency medical
treatment, trip cancellation, baggage loss, flight delays and trip interruption.
During the financial year 2009-10 spice jet reported the maximum profits in the aviation sector as it
concentrated completely on low cost service.

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REPORT ON AVIATION SECTOR

Outlook and Future Challenges

The overall outlook of the transport-air sector has seen a change with the passenger traffic
expected to grow with economic stability expected to return soon. The expectation of 7% plus
GDP growth expectation would go down well for the sector. The ATF prices are rising but are
currently at manageable rates, which has buoyed the financial performance of the sector
companies. The passenger number for May 2010 as well as the seat factors is very encouraging.
IATA has also predicted positive bottom line for the sector with only Europe showing signs of
weakness whereas the others recovering faster. The recent stake acquisition in SpiceJet by Sun
Group also indicates sun shining brighter for the sector. However, the sector is still a cash
burner and only those Companies, which can manage their costs, would be able to stay on
longer. Some of the concerns for future are:
Rise in fuel prices:

Since fuel costs constitute about 30-35% of the total operating costs of the company, a
significant rise in fuel prices will negatively impact the profitability. Further, as airlines are
forced to raise ticket prices in a rising fuel price environment, a significant rise in fuel prices will
lead to a slowdown in pax traffic.
Delay in recovery of domestic economy from slowdown

The pax traffic in India is highly sensitive to the performance of the real economy. With the
government talking about the withdrawal of the fiscal stimulus in order to bring down the high
fiscal deficit in India, the full recovery of the domestic economy may be delayed, leading to a
decline in pax traffic as passenger will shift to cheaper modes of transport such as railways.
Strong capacity addition by LFCs may lead to over-supply situation

Pure-play LFCs such as SpiceJet, Indigo and Go air are planning to increase their fleet size during
the period FY10-12. In case of a less-thanexpected recovery in pax traffic, there is fair chance of
an over-supply situation in the sector. This will negatively impact the load factor.
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