Aviation Last Updated: December 2010

The Indian aviation industry has witnessed an impressive growth during the past few years,
with major contribution from the civil aviation segment. The market has been strongly
supported by the government and the private sector. Availability of skilled manpower along
with favourable business environment will position India as one of the most attractive
investment destinations in the coming years. It is currently the 9th largest aviation market in
the world. On the basis of strong market fundamentals, it is anticipated that the civil aviation
market will register more than 16 per cent CAGR during 2010-2013.

Mr Praful Patel, Union Civil Aviation Minister has stated that the airline industry in India has
grown by 400 per cent in a short span of about six-and-a-half years. He said in 10 years
Indian market will be the third largest aviation market after the US and China

Passengers carried by domestic airlines from January – June 2010 were 46.8 million as
against 39.4 million in the corresponding period of year 2009 thereby registering a growth of
18.9 per cent - according to data released by the Directorate General of Civil Aviation
(DGCA).

In terms of market share, private carrier Jet Airways was the market leader with 19.2 per cent
share, closely followed by Kingfisher Airlines with 19.1 per cent, Indigo with 17.3 per cent,
National Aviation Company Limited (NACIL) with 17.1 per cent, Indigo with 16.4 per cent,
SpiceJet with 13.3 per cent, JetLite with 7.0 per cent and GoAir with 6.9 per cent during the
month of November 2010.

Significantly, Delhi's IGI airport is the busiest airport in the country at present, handling an
average of about 843 flights per day. On November 29, 2010, it handled its highest ever
traffic with 865 operations.

Some US$ 100 billion in aircraft orders will be up for grabs over the next 20 years. Boeing's
current market outlook (2009-2028) predicts that the country will require 1,000 aircraft worth
US$ 100 billion over the next two decades, according to Dinesh Keskar, President of Boeing
and FICCI Aviation Committee chairman.

Leading aircraft manufacturers Airbus and Boeing have expressed optimism over the growth
of the civil aviation industry in India. As per Airbus, the country would need 1,032 new
aircrafts worth around US$ 138 billion by 2028. On a similar note, Boeing has also predicted
that the sector would require 1,150 commercial jets worth US$ 135 billion in the next 20
years.

The Hyderabad International Airport has been ranked amongst the world's top five in the
annual Airport Service Quality (ASQ) passenger survey along with airports at Seoul,
Singapore, Hong Kong and Beijing. The Hyderabad International Airport is being managed
by a public-private joint venture of the GMR Group, Malaysia Airports Holdings Berhad and
the State Government of Andhra Pradesh along with the Airports Authority of India (AAI).

Timothy J Roemer, the US Ambassador to India has said that the US will work with the
Indian government and the domestic private sector to make the country an aviation hub.
Speaking at India Aviation 2010, Roemer said that the public-private initiative, US-India
Aviation Programme, would work together with the DGCA on helicopter aviation security.

The AAI is set to spend over US$ 1.02 billion in 2010, towards modernisation of non-metro
airports. AAI is planning the city-side development of 24 airports, including those at
Ahmedabad and Amritsar. Additionally, 11 new greenfield airports have been identified to
reduce passenger load on existing airports, according to Praveen Seth, member-operations,
AAI. AAI also plans to spend around US$ 3.07 billion in the next five years for developing,
upgrading and modernising metro and non-metro airports.

With the growth in the industry, airport retailing has also gained pace in the recent times.
Development of new terminals and airports such as the recently inaugurated T3 in New Delhi
has provided added impetus to this segment. The highest margin earners in this segment are
food and beverages, beauty product, electronic items, apparel etc. It has been predicted that
airports would provide around 300,000-400,000 square feet retail space by 2015. Many
companies are also planning to leverage on this growing segment by launching specific
products for air travellers. For instance, French premium skincare brand L'Occitane is
planning to develop a special range to cater to the airport retailing segment.

Investment Policy

The consolidated document on FDI policy was released on March 31, 2010.

Currently, for the civil aviation sector (Airports):

• 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.

Government initiatives

• To create world class airports, the government has recognised the need for the
involvement of private players in the development of airport infrastructure.
Development of airports at Delhi and Mumbai has been taken up under Public Private
Partnership (PPP) mode. The capital expenditure is funded through private equity,
borrowings, and internal resources of joint venture companies. The development work
of Mumbai airport is likely to be completed by 2012 whereas the work of a new
terminal (Terminal 3) at Indira Gandhi International Airport at Delhi got completed in
July 2010. The development work of Kolkata and Chennai International airport has
been taken up by Airport Authority of India whereas Bangaluru and Hydrabad
international airports have been developed on PPP mode as greenfield airports. The
AAI has taken up the development of 35 non metro airports.
• As per the Economic Survey of 2009-10, out of 35 airports, 9 have been completed
and put in operation. The other projects are in progress and likely to be completed by
2010-11
• The adoption of Open Sky Policy has resulted in the entry of several new privately
owned airlines and increased frequency / flights for international airlines.

Road Ahead
Investment opportunities of US$ 110 billion are being envisaged up to 2020 with US$ 80
billion towards new aircraft and US$ 30 billion towards the development of airport
infrastructure, according to the Investment Commission of India.

In the largest deal in civil aviation history, Delhi-based low-cost domestic carrier IndiGo has
placed an order for 180 aircraft with European-aircraft maker, Airbus. The deal is valued at
US$ 15.6 billion.

Lufthansa Cargo and GMR group have signed an agreement to develop Rajiv Gandhi
International Airport as a South Asian cargo hub, with focus on pharmaceutical exports.

Kingfisher Airlines and American Airlines, both members of the Oneworld alliance, will
begin their codeshare and frequent flyer arrangement in 2011, the two airlines have
announced.

Indian domestic market up 20% in 2010

Q1; Jet/Jet Lite still leads Kingfisher
domestically; Emirates top foreign airline
Share0 0 share0 email2 share2

Although Air Asia does not currently make the list of top international airlines serving India,
the airline is growing its presence. In the last week flights were launched between Penang and
Chennai and further Indian launches have been announced to take place later this year.

Domestic air travel in India has reported growth of 20% in the first quarter of 2010. After the
double-digit falls in traffic in the first quarter of 2009, this means that passenger numbers are
up around 7% on the figures reported in the first quarter of 2008. India’s domestic traffic
slump began in June 2008 and lasted 12 months.
Source: Airports Authority of India, DGCA India

The combined might of Jet Airways and its subsidiary Jet Lite continues to have the largest
share of the Indian domestic market based on passenger numbers. In the first quarter of 2010,
the Jet Airways Group has averaged around 26% of the market compared with Kingfisher at
around 23%. These two carriers (which have absorbed the likes of Air Sahara and Air Deccan
in recent years) carry almost one in every two passengers around India.
Source: DGCA India

So far in 2010, there have been no significant developments in the domestic landscape with
the rankings of the nine major domestic airlines remaining unchanged.

Kingfisher looks to increase its share of international

market
While not expanding significantly in the domestic market Kingfisher has recently launched a
raft of new international routes. At the start of the summer season it began daily flights to
London Heathrow from Delhi, followed quickly by Delhi – Hong Kong services, Bangkok
services from both Delhi and Mumbai, Dubai services from Delhi and Mumbai, and
Kathmandu services from Delhi.

These new route launches will increase Kingfisher’s share of the Indian international market
where in the first two months of 2010 it had less than 7% of the market among Indian
carriers. In January and February combined, Kingfisher carried just 106,000 passengers on
international flights, or around one in every 15 international passengers flying with an Indian
airline.

January 2010 February 2010

Jet Airways 364,041 (42.0%) 312,499 (42.3%)
Air India 267,270 (30.8%) 225,135 (30.5%)
Indian Airlines 160,908 (18.6%) 136,306 (18.4%)
Kingfisher 57,316 (6.6%) 48,831 (6.6%)
Total all carriers* 867,361 (100%) 739,336 (100%)
Load factor all carriers* 78.1% 72.4%
Source: DGCA India
*Air India Express figures not yet published for 2010. In 2009 Air India Express carried
around two million passengers, similar to Indian Airlines and behind Air India (2.9 million)
and Jet Airways (3.5 million).

Air India and Indian Airlines combined (or NACIL – National Aviation Company of India
Limited as the combined government controlled entity is catchily named) has around 50% of
the market among the reporting Indian carriers with Jet Airways closing the gap gradually.

Emirates biggest non-Indian carrier serving Indian

international market

Source: OAG Max Online for w/c 12 April 2010

Indian carriers operate around 38% of the scheduled seat capacity on international flights to
and from India. Analysing schedule data for April 2010 reveals that Emirates is the third
largest carrier by weekly seat capacity behind Jet and NACIL (which also includes Air India
Express). Two other Middle Eastern carriers, Air Arabia and Qatar Airways, both rank inside
the top 10, while the leading Asian carriers are Thai Airways and Singapore Airlines. The
leading European carriers are Lufthansa and British Airways. Lufthansa serves seven Indian
airports non-stop from Frankfurt and two from Munich, while British Airways serves five
destinations from London Heathrow. The two destinations that Lufthansa serves but BA does
not are Kolkata and Pune.

NDUSTRY VIEW
Country Industry Forecast-II

It’s clear skies ahead for the Indian aerospace industry, says a Frost and Sullivan Research
Service

The Indian aerospace and defence industries are unique due to the overwhelming
involvement of the government in the demand and supply of defence and aerospace products.
Unlike other industries where reforms began soon after the onset of economic liberalisation
in 1991, major reforms were implemented in the aerospace industry as recently as 2002. The
aerospace industry is in the process of transforming itself into a more export-oriented
industry, which has the capacity to provide outsourcing opportunities for established firms in
the United States and Europe and enhance domestic capability through extensive research and
development programmes.

Chart 1 shows the Indian airline and defence industry model for the year 2006.

Chart 1
Recent Policy Changes

The repeal of the Air Corporation Act in 1994 helped to limit the monopoly of air
corporations, enabled private airlines to operate scheduled services, and facilitated the
conversion of the state-owned Indian Airlines and Air India to limited companies. The year
2002 witnessed a series of reforms in the Indian aerospace industry beginning with t he
government allowing private companies to invest in the civil aviation sector. This resulted in
increased competition and lower airfares. The 2007-2011 five-year plan is expected to stress
on the need to improve the infrastructure at airports in order to cope up with the staggering 20
percent growth rate forecast for the aerospace industry during the same period. Priority is
expected to be given to the development of communication, navigation, surveillance and air
traffic management-areas that are likely to help in enhancing the productivity and efficiency
of airlines and airport operators.

Foreign Direct Investment (FDI) in the Aerospace Industry

Currently, the ceiling on foreign direct investment in the Indian aerospace industry is at 49
per cent and foreign airlines are not allowed to pick up a stake in domestic airlines. Both
these restrictions are expected to be relaxed during the period 2006-2010. However, entry
barriers for new airline operators may be tightened due to the increase of the minimum equity
cap from $6 million to $10 million. Up to 74 per cent of FDI is to be allowed in the
modernisation of existing airports. One hundred per cent FDI is permitted in greenfield
airports.

Growth in Air Passenger Traffic and Airfreight Traffic

Air passenger traffic increased by around 35.0 per cent in February 2006 compared to the
same month last year. This was mainly due to an increase in international air passenger traffic
and introduction of low-cost airlines in the domestic routes.

Airfreight has been growing in India at an average annual rate of about 10 per cent during the
period 2002-2005. The pharmaceuticals and jewellery industries contributed greatly to this
growth. Increase in fuel costs is one of the main restraints for the growth of the airfreight
sector. With the increase in fuel prices expected to affect airfreight charges, it is likely that
there will be a minimal loss of competitiveness against other surface modes of transport .

Chart 2 shows trends in air passenger traffic and airfreight traffic in India from 2000 to 2005.

Chart 2

Chart 3 shows the top airports with regard to air passenger traffic and airfreight traffic in
India for the year 2005

Chart 3
Mumbai, Pune, Kanpur, and Nagpur at an investment of about $2.2 billion. Priority is
expected to be given to upgrading airports in cities such as Delhi, Mumbai, and Bangalore.

• Mumbai Airport

The Mumbai airport acts as a major gateway for the country and services around 46 airlines.
The modernisation of the airport would require a capital investment of $1.16 billion over a
seven-year period. The airport is focusing on upgrading its infrastructure to accommodate the
new Airbus A380. Major areas for modernisation are likely to include the installation of a
two-tiered aerobridge and expansion of taxi bays.

• Delhi Airport

Along with the Mumbai airport, the international airport located in Delhi is one of India's
main domestic and international gateways. The modernisation programme was started after
the companies-the GMR group and Fraport (a Frankfurt operator) deposited bank guarantees
of $5 billion each. The modernisation plan includes the construction of a new passenger
terminal to cater to both domestic and international passengers and provide adequate parking
space in addition to improving the access roads to the airport.

• Chennai Airport

The modernisation and expansion of the Chennai airport is estimated to cost between $500
and $600 million. The state government is pushing hard for the modernisation programme
through a public-private partnership in line with the Delhi and Mumbai airports.
Modernisation plans are expected to include the construction of five night parking bays, an
administrative building, and an integrated cargo complex among others.

• Kolkata Airport
An estimated $7.04 million is expected to be invested in modernising and developing the
Kolkata airport. This will include the construction of an integrated cargo complex and a
linking corridor for 'circular railway' from Dum Dum to the Kolkata airport.

Key Trends and Implications

During the forecast period (2006-2010) of this study, the Indian aerospace industry is
expected to undergo some transformational changes. Several new policy changes, which are
likely to change the face of the aerospace industry and make it more investment friendly, are
expected to be implemented during the period 2006-2010. These changes include increase in
the foreign direct investment cap, incentives for airlines operating in smaller airports, and
fewer restrictions on low-cost airline operations. Though airfare prices are expected to
increase because of the rise in the fuel surcharge, the entry of new participants in the
aerospace market are likely to help in keeping the prices stable.

Airline companies, especially the low-cost airline companies, are likely to be the most
affected by changes in the legislation. New airline companies are likely to find it difficult to
enter the Indian aerospace industry and their entry is expected to become tougher with the
increase in the minimum equity cap from $6 million to $10 million. However, for the existing
participants, it will be possible to invest increased capital with an increase in the FDI limit
from 49 per cent to 74 per cent In addition; it will be possible for low-cost airlines to increase
their revenues as they can extend their operations to international routes after two years of
operation in the domestic routes. Previously, airline companies were required to operate in
domestic routes for five years before they could operate in international routes.

The identified areas for growth in the defence industry are up gradation of the production
capacity, technology transfer, and modernisation of defence infrastructure.

This three-part series on the Indian Aerospace and Defence Industry is part of the Country
Industry Forecast research of Frost & Sullivan that provides a unique service-a bird's-eye
view of the country in focus with unique perspectives of various industries. The valuable
Country-Industry Linkage provides in depth analysis and forecasts of macroeconomic trends
and key industry parameters as well as identification of growth opportunities. Frost &
Sullivan, a global growth consulting company, has been partnering with clients to support the
development of innovative strategies for more than 40 years. The company's industry
expertise integrates growth consulting, growth partnership services, and corporate
management training to identify and develop opportunities.