AVIATION SECTOR

INDUSTRY & STRATEGY ANALYSIS

Global market
The global aerospace industry generated revenues of approximately $382 billion in 2009 The global aerospace market is highly concentrated Revenue for the airlines had been on the rise during the first decade of the 2000s, with a compound Annual growth-rate (CAGR) of 9% between 2001 and 2008. However, airline revenues declined by 15% In 2009, due to the financial crisis, the industry was badly hit, but current forecasts show airline revenues rebounding in 2010

Annual Revenue

Annual Profit

Region-wise distribution of profit

Airline Cost Structure

Changing trends in emerging markets

The developing Asia-Pacific economies are expected to rebound in 2010 grow at a rate of 9.2% in 2010 and 8.5% in 2011 Emerging markets - specifically Asia-Pacific and the Middle East - will outperform the OECD countries in terms of GDP growth

Indian Aviation Industry: Overview

Currently, India is the 9th largest civil aviation market India is poised to be among the top five aviation nations in the world in the next 10 years 125 airports, including 11 international airports In 2010, passenger traffic crossed 100 million & cargo crossed 3.3 million tonnes The demand expected to grow due to rising middle class income, attractive low fares, growth of domestic tourism and increasing outbound travel from India

Stages of Evolution
1946 The birth of Aviation Industry with Tata Airlines, which later got nationalized. 1947 First plan ; Air transport inquiry committee recommended state owned airways. 1953 Nationalization of air transport Air India International Indian Airlines 1972 IAAI (International Airports authority of India) was established.

1981

Airline Vayudoot to connect inaccessible areas of country

Pawan Hans Ltd- Helicopter based transport services

1985

 1991: OPEN SKIES POLICY The liberalization the mid nineties resulted in significant growth due to the entry of private service airlines.

1994-95 : The International Airports Authority of India(IAAI) & the National Airports Authority of India (NAA) merged to from Airports Authority of India (AII)
1994: Enactment of the Airports Authority of India Act

 2003 :A big change with the emergence of Indias first nofrill airlines, Air Deccan, offering fares as low as INR 500
Since then, Spice Jet ,Go Airways and Kingfisher Air have also entered the industry. Paramount Airways is another player, though it is positioned on the other end of the spectrum, as an all business class airline.

April 2007 : Jet Airways agreed to buy out Air Sahara which was renamed JetLite, and was marketed between a low-cost carrier and a full service airline. 2007: GOI announced merged of Air India. Air India Limited was established, into which both Air India (along with Air India Express) and Indian (along with Alliance Air) would be merged.

Market Size
In the last decade, domestic air traffic has quadrupled from 13 million to 52 million and international traffic more than tripled to 38 million Today, 87 foreign airlines fly to and from India and five Indian carriers fly to and from 40 countries Passengers carried by domestic airlines during Jan-Nov 2011 were 55.03 million as against 46.81 million during the corresponding period of previous year thereby registering a growth of 17.6% (DGCA) Attracted FDI worth US$ 423.31 million from April 2000 to September 2011, according to Department of Industrial Policy and Promotion (DIPP)

Airline-wise Market Share - Year 2011

Industry Analysis

Government Policies
The Government's open sky policy has attracted many foreign players leading to growth of both number of players and of aircrafts The present state-owned airport operator Airports Authority of India (AAI) will be replaced by Air traffic control (ATC) from April 2012 India has signed the bilateral Aviation Safety Agreement (BASA) with the USA The Government is bringing in liberal reforms to encourage public-private partnerships (PPP) At present ,there is 100 % FDI for green field airports, via the automatic route

 FDI up to 74 per cent is permissible through direct approvals while special permissions are required for 100 % investment About 49 % FDI is allowed for investment in domestic scheduled passenger airlines and investment up to 100 % by NRI via the automatic route. FDI up to 74 per cent is allowed for non-scheduled and cargo airlines The air transport (including air freight) in India has attracted FDI worth US$ 423.31 million from April 2000 to September 2011, according Department of Industrial Policy and Promotion (DIPP)

Environmental Concerns
The increase concerns for global warming The sudden and unexpected behavior of the atmosphere and the dependency on weather has affected the schedule of airlines and hence, profitability

Technological Changes
Use of internet-online ticket booking, Updated flight information Handling of customers Restructuring the existing airports to world class Satellite base navigation system Modernization and privatization of the airports

Demand-Supply Drivers

Major Observations
Patterns in traffic volume are tied closely to patterns in revenue The downturn in revenue in 2009 follows the downturn in traffic volumes(the amount of revenue per revenue mile) was sharper than the drop in volume Passenger air travel is highly correlated with GDP According to Airbus estimates, a1% rise in a countrys GDP translates into an increase in air travel demand of 1% in developed countries and 2.5% in developing countries Given this high correlation, trends in regional and global economic growth are critical to understanding the future of the industry

( High -ATF Fuel Prices. -Food Inflation affects packaged food provided by airlines Moderate to High -Competitive Pricing is there -Many upcoming players -High exit costs involved

Moderate to High -Indian Railway has improved service level and quality

Low -Very Huge Capital Investment -Strict govt. Regulations

Low -Economic and Demographic Changes. -Higher Disposable Incomes.

Indian Players: Current Scenario

KINGFISHER
On 31 jan,2011 the DGCA has deregistered two Kingfisher aircrafts following a letter from the German lessor of planes (No payments). Kingfisher has defaulted on payment to oil companies ,airport operators & employees salaries. It needs Rs. 3000- 4000 crore to help tide over financial crunch. Several of its aircrafts are grounded , with only 38-39 operational out of 66 aircrafts. Until December 2011, Kingfisher Airlines had been the second largest share in India's domestic air travel market. However due to the severe financial crisis faced by the airline, it has the fifth largest market share currently, only above GoAir.

AIR INDIA LTD Air India is cash strapped, with total debt of Rs 43,777 crore. Accumulated loss of Rs.20,320.86 crore over the last four fiscal years. The govt has agreed to release Rs. 150 crore. Lenders have rejected debt recast proposal. JET AIRWAYS Jet Airways plans to sell and later lease 9-10 Boeing737 planes. Air India & spice jet has already used this method to reduce their debt.

CHALLENGES
Most of the airline operators in India such as Air India, Indian Airlines, Jet Airways and Kingfisher Airlines have reported large losses since 2006, due to:
high aviation turbine fuel (ATF) prices rising labor costs and shortage of skilled labour rapid fleet expansion intense price competition new players entering the industry even before the existing players could stabilize their operations

 Big worry is that the aviation sector is burdened with huge debt With increased competition ,airlines are expanding their network and frequency to the tier 2/3 cities The sector is in dire need of funds to pay for rising operational costs and fleet expansion. The recent FDI limit of could provide some relief

STRATEGY AVIATION INDUSTY

Forecast for global jet fuel prices

Strategy to deal with costs

Increasing per-aircraft productivity by choosing aircrafts that align seat capacity to seat demand; Increasing the use of larger capacity aircraft for high traffic routes Increasing the use of the 32 network cities for long-haul flights. Short-term reductions in fleet size to better match capacity with traffic demand

Internationalization/M&A
In 2007 ,Jet Airways agreed to buy out Air Sahara which was renamed JetLite, and was marketed between a low-cost carrier and a full service airline.

In 2007, GOI announced merged of Air India. Air India Limited was established, into which both Air India (along with Air India Express) and Indian (along with Alliance Air) would be merged. GVK Power & Infrastructure Ltd (GVK PIL) has acquired 108 million equity shares constituting 13.5 per cent in Mumbai International Airport Ltd (MIAL) from its Mauritius partner Bid Services Division for Rs 1,130 crore (US$ 215.28 million) GMR Infrastructure-led Delhi International Airport Ltd (DIAL) is set to approach the Government to expand the permitted land use for 250 acres. The company wants to lease out the land for non-airport related activities SpiceJet has acquired a new fleet of Q400 aircraft from Bombardier and it will use these aircrafts in its new regional service. Under the deal, SpiceJet also has the option of ordering 15 more Q400 NextGen aircraft

THE ROAD AHEAD

The Indian aviation sector is a major economic driver for prosperity, development and employment. Massive investments in airport infrastructure have led to world class airports which have become the symbol of India's growth story. India is poised to emerge as the third largest aviation market in the world by the end of this decade The sector with a growth of 18 % in domestic market is expected to generate approximately 2.6 million jobs in the next one decade (-Secretary, Ministry of Civil Aviation)

CONCLUSION
The growth in the aviation sector in India is driven in part by the rapid economic growth, rise in income levels and the growing spending power of middle class. As long as Indias economy grows , the aviation sector should continue to grow. Indias airlines should be focused and patient specially anticipating break even. While ATF costs drive direct operating costs up, it only reflects in fuel surcharges.

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