Aviation Industry

A Report on the Indian Aviation Industry

Contents
Contents...............................................................................................................................2 Executive Summary.............................................................................................................3 Aviation Industry Overview................................................................................................5 Existing Players in India......................................................................................................7 Domestic Market share of airlines in India..........................................................................8 DRIVERS TO GROWTH:..................................................................................................9 Estimated growth of passengers.........................................................................................11 Growth Rate of Passenger, Airports and Aircrafts............................................................12 Major Concerns..................................................................................................................13 Conclusion.........................................................................................................................16

Executive Summary
The Indian Aviation Sector has witnessed tremendous growth in the recent past which is driven by sound demographic, macroeconomic, government aided reforms & market dynamics. The three fold increase in consumerism, rising disposable income; booming aviation sector; burgeoning middle class; increasing business travel; government reforms; entry of low cost carriers; increasing competition etc have positioned the Indian Aviation Sector in a high growth trajectory. Civil Aviation plays an integral role in development of an economy. It helps in realizing the socio-economic objective of providing connectivity to foster travel & trade. As per International Civil Aviation Organizations estimates, every 100 $ spent on air travel produces benefits worth 325 $ to the Economy. There are some characteristics inherent to this sector that are anti-competitive in nature. For Instance Loyalty Programs like Frequent Flier Programs & Travel Agent Incentive Schemes. Airlines use the above-mentioned loyalty programs to distinguish between business travelers & those traveling for leisure purposes. The ones traveling for Business Purposes have a high opportunity cost of time & therefore have a very inelastic response w.r.t. changes in prices vis--vis Leisure Travelers who are flexible about the days & timings & hence they benefit from a wide choice of routes available & also a higher level of competition. Unlike other industries, capacity in the aviation sector cannot be immediately augmented in face of rising demand. Airports have a capacity constraint binding on them in terms of the landing, take off facilities, air traffic controllers, refueling, maintenance, clearing & catering services etc. It is this capacity constraint that might act as an entry barrier for new entrants. Landing & take off rights are referred to as Slots. These slots are an important consideration for an entrant as peak timed slots register higher passenger load factors as compared to the oddly timed slots. With most of the countrys trunk route airports hitting their capacity mark, only oddly timed slots may be available at major metropolitan city airports to a new entrant which discourages new entry. There are some regulatory barriers inherent in our domestic air transport policy which may constrain new entry & have anticompetitive effects. While the regulations governing minimum fleet size , minimum equity requirements , route dispersal guidelines to the domestic operations are act as an entry barriers; the regulations governing minimum fleet & experience requirements for International Operations & exclusive right to National carriers to fly to Gulf Routes etc are highly discriminative & are constraining new entry & strengthening the incumbents position. The Year-2007 has been the year of M&A in the Indian Skies. First, it was Indian Airlines & Air India then Jet & Air Sahara and last but the least to tie the knot was Kingfisher & Air Deccan. The industry sources favored these mergers as they believed

that these mergers would benefit the already bleeding Industry. It would help to bring in some route; network & fleet rationalization. The merged entities are expected to benefit from joint operations & would share synergies of joint operations. However, equally justified are the consumers groups who are fearing that post consolidation, prices may increase more so after the consummation of Air Deccan. With top 3 players i.e. Indian, Jet and Kingfisher, having more than 80% of market share; chances of Cartelization are more likely with the industry getting consolidated. Such attempts have been made in the past. FIA-Federation of Indian Aviation was set up in 2005 by top airline industry honchos to voice their needs to the government. Among its first meet, the federation had thought of discussing pricing issues.

Aviation Industry Overview

The aviation sector in India is growing at a tremendous rate over the past few years and would continue to do so in the following years. The Government has introduced liberal policies, which has further helped in the growth of the aviation sector. The country is rapidly developing its aviation infrastructure to take-on expansion in passenger and cargo movements. The current infrastructure consists of 126 airports, of which 11 are designated international airports. In 2006-07, Indian airports handled 96 million passengers (including both embarked and disembarked) and 1.4 million tonne cargo. With air travel becoming popular and cheaper, the civil aviation is experiencing a tremendous growth. The Indian aviation sector caters to around 70 million domestic and 25 million international passengers which is growing constantly at a rate of 41% and 15% respectively. The domestic traffic is expected to grow to about 180 million and the international is expected to grow to about 50 million by 2020. Moreover, the growth of domestic and international cargo is also slated at 4.5% and 12% respectively. Apart from this, there is a market for 500 general aircrafts thereby presenting an opportunity of $80bn.

Apart from passenger flights, the cargo plays a major role in the aviation sector, with domestic freight increasing at 30% per annum and the international freight increasing at 13% in the Indian market.

In the next ten years, the Indian aviation sector will attract investments to the tune of US$150bn. This investment will be required for airport modernisation, fleet acquisition and setting up of MRO and other facilities, such as pilot training institutes etc. With the continuous growth of the aviation sector, the ambitious vision for Indian Airports for 2020 is of: -100 million passengers -Cargo in the range of 3.4 million tonne per annum With investments flowing into the aviation sector, the growth prospects for a new entrant in this sector is tremendous.

Existing Players in India

The number of players in the Indian airline segment have increased tremendously over the past few years thereby signaling the prospective growth prospects in the industry. The major existing airlines in India are: 1. Air India : Starting in 1932, Air India marks the birth of the Indian Aviation industry. Initially Air India catered to the domestic segment but over the past few decades the majority of the destinations covered by Air India are international. Recently, a merger between Air India and Indian Airlines took place to challenge the ever increasing competition nationally and globally. 2. Indian: Starting in 1953 after introduction of new policies by the Government, Indian airlines became the undisputed leader in the domestic Indian airline industry. Over the years, Indian airlines started its operations internationally as well. In 2007, Air India and Indian Airlines merged to be known as brand Indian. 3. Jet Airways: Jet commenced its operations in 1993, and became one of the most popular domestic airlines in India. In 2004, Jet airways started flights to international destinations. The number of passengers carried by Jet is around 7 million per annum. Jetlite: After series of controversies, Air Sahara, which started in 2003, was taken over by Jet Airways in 2007. The airline is now renamed as Jet Lite. Kingfisher: Kingfisher airlines operates in the luxury segment as compared to other low priced airlines operating regionally and internationally. Kingfisher Airlines, through one of its holding companies United Breweries Group, has 50% stake in low-cost carrier Kingfisher Red, formerly known as Air Deccan. In July 2008, Kingfisher's share of Indian aviation market stood at 14.3%. Kingfisher Red (Air Deccan): Indias first budget carrier and now the largest flew its first carrier in 2003.The prices offered by the airlines were at par with those offer by the railways. Later, Kingfisher Airlines acquired a stake in Air Deccan. GoAir: Launched in 2005, GoAir, offers competitive prices and provides services to major destinations across India. Indigo:

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Indigo began its operations as a low price no frills airlines in 2006. 9. Spicejet: Another low end airlines, Spicejet was launched in the market in 2005. With cheap rates offered by Spicejet, it gave maximum competition to the rail market.

Domestic Market share of airlines in India.

Source: Directorate General of Civil Aviation (DGCA) report 2007. Kingfisher Jet alliance The main alliance in the Indian aviation took place when Jet Airways ands Kingfisher airlines decided to form an alliance to tackle the unexpected economic crisis and fall in fuel prices. Each Jet and Kingfisher were losing up to Rs. 10 crore daily. Now this deal, which may ultimately lead to a consolidation once one of the players has access to funds to buy out the other, could allow them to cut some losses by having features like codeshare agreements, especially on foreign routes because Kingfisher will now go slow on expanding its international operations. The two airlines may also not compete on domestic sectors by having flights on a sector at close to each other's timings; have better coordination in reducing capacity and hiking fares and possibly do common ground handling at airports to cut costs. The two tied up because of huge losses and no early sign of recovery from the current turmoil. And just

when high oil prices that triggered their troubles started to cool off, the global meltdown has led to twin troubles for cash-strapped airlines: further drop in traffic and banks not willing to lend money to the "risky" aviation business

DRIVERS TO GROWTH:
Over the past decade, the Indian Aviation sector has witnessed tremendous growth due to various government liberalization policies favoring the player wanting to get into the aviation industry. A stable economic growth and also opportunity has lured many organizations to invest in the aviation segment. The major drivers that can be classified are as follows: Increasing per capita incomes Due to better job opportunities, the overall standard of living of the common man has increased manifold over the past few years. This has prompted more and more people to use the airlines facilities as compared to rail and road transport. Increasing Middle Class Population With the middle class incomes increasing, and the number of families turning nuclear also on the rise, the growth of aviation is directly proportional to it. Untapped Market With only a minimal percentage of Indias vast and diverse population getting access to airlines, the potential growth prospects are huge with an enormous untapped market. Travel for business tours Due to globalization, the business of organizations is primarily governed by factors like fast and quick decisions, reports and analysis. Due this, time plays a critical factor. Thus business organizations, prefer to spend a little more of air travel to same them time and to get quicker execution of their plans. Entry of Low Cost Carriers The Indian aviation sector was initially controlled by major airlines Air Indian and Indian Airlines. But the entry of LCC like Spicejet, Indigo, has shown that there cannot be a monopoly even in an ever dominant market like the aviation sector. Increasing Competition With various policies adopted by Airlines of different stature, the level of competition has risen to unparalleled heights, thereby showing tremendous opportunities for growth with the segment. Liberal Government policies The major factor, leading to tremendous expansion in this field are the liberal laws of the Government, thereby allowing foreign investors in investing in the Indian market, thereby giving scope for better facilities and healthy competitive environment.

 Increase in tourism With the ever modernization and changing trends across India, the tourism industry has also increased, with destinations earlier inaccessible, are more frequently visited. In CY07, demand for India's travel and tourism is expected to grow to US$61bn. This accounts for only 0.9% of world travel and tourism demand. However, India's share in global and South Asia's total demand for travel and tourism has been growing. Tourist arrival in India has grown at a CAGR of 18% for the last three years to 4.5 million.

The above mentioned factors have played a pivotal role in increasing the demand in the air traffic segment. Various direct factors like high disposable incomes, cheaper air rates due to competition etc have contributed in the growth of the sector. A 1% increase in the GDP has resulted in 2% growth in the aviation segment. Also, the amount spent on transportation has increased from 6% to 14% over the last 2 decades showing the potential for growth. Apart from that, increasing trade activity and sustainable growth in all sectors globally, has played a part in increasing the demand for air travel. It is expected that the emerging middle class along with upper middle population will grow at 40 % of the total population in 2007, thereby creating huge demand for air-travel services. The Government has also planned to spend Rs.2 Lakh Crore on Civil Aviation, thereby generating employment for 30 lakh people. However, due to lesser per capita purchasing parity in India as compared to USA, Europe or China, the percentage of untapped market will be present at large as still rail and road transport facilitate to the needs of the majority of the population. The Indian civil aviation is one of the fastest growing markets growing at 18% annually, which offers a great potential to the investors. This sector is likely to grow from US$ 5.1 billion to US$ 5.6 billion, as per the International Airport Transport Association (IATA)

estimates. Centre for Asia Pacific Aviation (CAPA) expects that domestic traffic will increase at 25% to 30% annually over the year 2010 and global traffic growth will be 15%. This growth will lead the overall market to 100 million passengers by the end of the decade. Also, India and China are likely to control about 32% of the world air traffic by 2010.

Estimated growth of passengers

The national carriers are growing at a steady rate of 21.7% with projections for domestic airlines to be growing at a steady CAGR of 14.7%.

Also, the CAGR projections for the coming years, for carrying international passengers on the domestic circuit is also stated to grow at 21%.

All these factors collectively show the tremendous opportunities for newer players wanting to enter the aviation sector in the Indian market.

Growth Rate of Passenger, Airports and Aircrafts

It is clearly seen that the amount of increase in the consumer is not directly in proportion with the amount of infrastructure that is provided buy the Government. The number of passengers traveling is ever increasing. Also the number of aircrafts that can be purchased by the existing players can also vary depending upon the capacity of passengers. The major concern is the infrastructure. All three can be classied in the diagram below:

Currently the existing infrastructure is sufficient to support the existing market. But due to a sustainable growth, the facilities like airports, services etc. will come under serious speculation as they would not be able to cope up with the growing demands of the aviation industry, at this brisk pace.

Major Concerns
Despite the huge inflow of money in the aviation sector, the prospects for the aviation industry in the Asia-Pacific region for 2008 do not look good. While the going was good for the aviation sector in the Asia-Pacific region in 2007, hopes were high that 2008 would be even better, especially for the airline industry in the United States that has been having a hard time for long. The storm clouds started to gather towards the end of 2007, as fuel prices continued to climb and the fallout from the US sub-prime crisis started to emerge, and continues to emerge. Following favourable conditions in 2006, the aviation sector in the Asia-Pacific region had made huge earnings in 2007, leading, in many cases, to record profits for many airlines. The Asian Development Bank (ADB), now forecasts that Asian economies will register solid growth in 2008, despite a slowdown in major industrial economies, rising food and fuel prices and the credit crisis in the United States. Developing economies in Asia are expected to expand at the rate of 7.6% in 2008 and 7.8% in 2009 after having registered the highest level of growth in almost two decades in 2007 an average of 8.7%. The International Monetary Fund (IMF), too has been optimistic on the economic prospects of Asia.

However, the aviation sector in the Asia-Pacific region is entering a period of economic uncertainty despite the region having evolved to an airline industry structure that is potentially positioned better to cope with a sharp downturn. Also, it would be the first time that the Asia-Pacific region is facing adverse economic conditions even as the region has at is disposal a number of low cost/low fare airline options. During the so-called Asian Financial Crisis that took place a decade ago, the number of people flying had gone down sharply, leading to the airlines losing in a big way. The major concerns are the rising oil prices. As soon as the oil prices start to level out and then to slide, economies will soften and the US dollar will stabilize. But in reality, the main problem is not costs but revenues the threat of globally softening demand is expanding far beyond the slowing US market. Apart from the above mentioned concerns, some of the other factors which might influence the aviation sector are given below: Route dispersal guidelines constrain profitability As per a Directorate General of Civil Aviation (DGCA) order on route disbursal guidelines, it has been stated that a scheduled air transport service provider operating Category I routes is required to deploy at least 10% of ASKM on Category II routes and at least 50% of ASKM on Category III routes. Subject to approval from the DGCA, concerned operator could meet this obligation by providing services either by aircraft available in its fleet or with aircraft in any other operators' fleet on mutually agreed terms and conditions. Category II comprises routes to destinations like J&K, North-East states and the islands of Andaman & Nicobar. Category III comprises remaining routes. Simply put, Category II routes are unremunerative, and constitute about 6% of the capacity of an airline and can easily drain out 1.2% to 1.5% of an airlines margin. Infrastructure constricting growth The tremendous growth anticipated in the aviation industry is possible only if the country's infrastructure is in place. The industry is already facing problems of congestion during peak hours at major airports. The current airport infrastructure in the country is inadequate to support the tremendous expansion in fleet announced by major players. The ministry of civil aviation has decided to modernise and upgrade 35 non-metro airports across India at an estimated investment of US$ 800m. Any delay in the development of these airports would be a major constraint for the industry's rich fortunes ahead. Further competition cannot be ruled out While there are well intentioned government policies and controls like FDI norms, license control, landing slots and flight schedule allocations that allow ample opportunity for airlines to remain profitable, but the sheer growth in airline capacity can induce competition. This has happened in FY06 and FY07, and its recurrence cannot be ruled out. The need to fill aircrafts with maximum revenue

passengers is the key to making profits. Events that keep passengers away, including a slower than anticipated GDP growth, may trigger another bout of competition. Airline functions need re-engineering Over the years, airlines have been straddled with legacy business processes with hardly any effort at re-engineering innovative solutions. With the IT industry providing a commendable backbone, airlines can now emerge from the inefficiency they have been restrained with. Innovative strategies and new technologies may well offer cost savings, but at the same time they can be hard to implement given the cost. Some of the areas that need re-engineering are: Customer oriented improvements - Self-service kiosks, remote passenger check-in, fast bag drop-off and biometrics are the need of the hour. Improved crew management - Planning and pairing through online rostering. Training module and packs. IT enabled crew control, crew communication and crew records. Improvements in aircraft operation - Clear IT tools that allow uploading of weather and flight plans and downloading of engine performance data help in preflight and post-flight plans. Carbon offsetting practices may add to cost Globally, the aviation industry is under the scanner because it is the fastest growing cause for global warming; and EU aircraft emissions alone have risen by 87% since 1990. The amount of carbon dioxide emitted by air travel doubled between 1990 and 2004; and with huge expansion in air traffic forecasted in both Asia and Europe, predominantly driven by low cost leisure travel, the trend is expected to continue. It is also pertinent to note that the high altitude nature of carbon and other airline emission make air travel potentially more damaging than most other forms of transport. However, the aviation industry only contributes about 2% of all global carbon emission. Also, according to International Air Transport Association (IATA), airlines have been addressing the problem of carbon emission since the early 1970s well before other industries did anything constructive. Aircraft fuel efficiency has improved 20% in the past decade and almost 5% in the last two years alone. New aircrafts, such as the Airbus A380 and Boeing Dreamliner, will continue this trend with further reduction in carbon emission. With the government now taking a liberal view of domestic airlines flying international routes, a number of new players could be in the race to service them. Thus, Indian players flying these routes would be subject to the stringent EU norms. Rising Oil Prices/ Economic Crisis The rise in oil prices alongwith the economic turmoil has been the major factor influencing the aviation industry in the year 2008. This has affected the services of the major players in the industry leading to alliances between the competitors.

Due to such negative situations, the airlines companies are losing approximately Rs10 cr. daily.

Conclusion
The current scenario in the Indian aviation market can cause a dilemma to all those willing to invest into the sector. On one hand, the prospects of an ever increasing industry yielding high returns may lure the investors, but on the other hand the various indirect factors may lead them to think twice before entering into this risky proposition. The tremendous growth in tourism, business organizations, competition amongst existing players show a picture where the returns would be high if investment is considered in the airlines segment. Moreover, with better services and facilities provided, and people willing to shell out more for their own comfort, the airline industry is a gold mine for the investors. The growing infrastructure will also lure newer players to put their money into the Indian aviation segment. Air traffic in India is no longer a mere statistic but a phenomena that is based on the fact that people from every walk of life, demographic, ethnicity and culture have opted to travel because not is the world increasingly getting closer, but quality of time and the productivity is increasingly becoming the focus. A likely slowdown in the aviation sector in India, the point of view states that the growth in air travel globally and in India will be adversely influenced by epidemic outbreaks, economic recession, terrorism, shifts in policy and regulations and competitive markets but not by oil prices. But on the other hand, the sudden and recent developments will present different picture altogether. The rise in oil prices may play a major role in investors backing out. Over the past few years the fuel prices have doubled and the prospects of an increase still looms large. The main barrier that the industry faces is the decaying economy globally. This will make loans from banks and business institutions difficult, thereby forming a barrier to all those willing to step into the market. Apart from this, getting slots the already full air traffic arena can cause problems. Another factor which might go against the investors

is the fact that the infrastructure growth cannot be sustained and that it will reach a point where no more facilities like airports would be provided.