capa india outlook fy14 highlights

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CAPA India Aviation Outlook FY14 Highlights

Prepared by CAPA India May 2013

www.capaindia.com

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Highlights of CAPA India Aviation Outlook 2013/14 Page 1 May 2013

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Published by Centre for Asia Pacific Aviation India Private Limited, New Delhi, India Tel: +91 11 2341 4440 Fax: +91 11 2341 4441 [email protected] www.capaindia.com © May 2013 Centre for Asia Pacific Aviation India No part of this publication may be reproduced, or transmitted in any form without the prior written permission of the Centre for Asia Pacific Aviation India.

Disclaimer Centre for Asia Pacific Aviation India has made every effort to ensure the accuracy of the information contained in this report. The Centre does not accept any legal responsibility for consequences that may arise from errors, omissions or any opinions given. This document contains “forward‐looking statements’’. Forward‐looking statements may include the words “may”, “will’’, “plans’’, “estimates’’, “anticipates’’, “believes’’, “expects’’, “intends’’ and similar expressions. These statements are made on the basis of current information available and simplistic assumptions. These forward‐looking statements are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those projected or assumed in the forward looking statements. Profit estimates for example are highly sensitive to external variables such as oil prices which are very uncertain. This report is not a substitute for specific professional advice on commercial or other matters.


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Contents

Disclaimer................................................................................................................................................ 1

1 Financial and Traffic Outlook ............................................................................................................... 3

2 Policy & Regulatory Outlook ................................................................................................................ 9

3 Airline Outlook ................................................................................................................................... 16

4 Airports, MRO & GA Outlook ............................................................................................................. 21


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1 Financial and Traffic Outlook Indian carriers lost USD1.65 bn on revenue of USD 9.5

bn in FY13, 40% of annual loss was generated in Q4

This analysis is an extract from the keenly anticipated 2013/14 edition of the annual CAPA India Aviation Outlook Report to be released on 6 June 2013. For more information and to order the full 250+ page report contact Binit Somaia on [email protected] or use the order form at the end of this document.

CAPA estimates that India’s airlines posted a combined loss of USD1.65 billion in FY13

(USD1.15 billion if Kingfisher is excluded), down from approximately USD2.28 billion the

previous year. More than 40% of the loss was incurred in the last quarter alone,

squandering the improved performance posted during the first nine months of the year.

Kingfisher’s exit from the Indian aviation sector was one of the most significant

developments for the market in FY13. It highlighted the fragility of the sector when an

airline that was the largest in the country less than two years earlier and with an excellent

reputation amongst passengers, could fall from grace so swiftly.

But with it came a silver lining for the remaining carriers. As a result of the removal of

Kingfisher’s seats, combined with modest capacity induction by other carriers the

demand/supply dynamics in the market started to favour airlines for the first time since

2004. This was reflected positively in the average fares which increased by 15‐20% y‐o‐y.

India’s airlines were showing signs of a recovery in financial performance during the first

three quarters of FY13, however the 4th quarter spoilt the party. Aggressive discounting

during the traditionally weak period January‐March period resulted in losses of USD700

million during this quarter alone (close to USD500 million if Kingfisher is excluded).

The cost environment remained hostile throughout the year with the weakness of the

Indian Rupee and continued high oil prices being the key challenges. Even though Brent

Crude levels softened towards the end of the year, the depreciation of the Rupee meant

that carriers did not see any benefit from this.

Over the 12 months to 31 March 2013, with carriers moving to fill the space vacated by

Kingfisher, all airlines except Jet Konnect saw an increase in their domestic market share

over the previous year, but none more so than IndiGo which saw a 7 percentage points

improvement.

Indian domestic airline market share FY13 v. FY12

Source: CAPA, DGCA

0%5%

10%15%20%25%30%

Domestic Market Share

FY12 FY13


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However, despite the moderation in capacity in the market, the steep increase in fares

curtailed demand and meant that almost all carriers reported a slight decrease in average

passenger load factors during the year. The sole exception to this was Air India which

achieved a creditable 5 ppts improvement to 69%, although it remained the lowest of all

the carriers that are currently operating. However, its load factors in Economy class were

much higher (as is the case for Jet Airways) with the average being depressed by the

relatively poor performance of business class on domestic routes. IndiGo was once again

the stand‐out performer achieving sustained load factors of above 80% throughout the

year.

Average passenger load factors on domestic routes FY13 v. FY12

Source: CAPA, DGCA

Emirates emerges as India’s leading international airline in FY13

On the international front an important development was the fact that in FY13 for the first

time a foreign carrier, Emirates, claimed the highest market share for traffic to/from India.

Air India, historically the market leader on international routes was impacted by the

grounding of its 787s for most of the last quarter. While India’s second largest

international carrier, Jet Airways, saw only a marginal increase in traffic as it consolidated

its network and dropped services to points such as New York JFK, Milan, Johannesburg

and Kuala Lumpur.

Airline Market Share on International Routes to/from India FY13

Source: CAPA, DGCA

50%

55%

60%

65%

70%

75%

80%

85%

Passenger Load

Factor

FY12 FY13

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%

Lufthansa

SriLankan

Thai Airways

Singapore Airlines

Air Arabia

Qatar Airways

AI Express

Jet Airways

Air India

Emirates

International market share %


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Industry lost an estimated USD1.65 bn on revenue of USD9.5 bn, but IndiGo was

exceptional with an estimated USD100‐110 mn profit on revenue of USD1.5‐1.6 bn

India’s airlines lost USD1.65 billion on total revenue of approximately USD9.5 billion.

Despite the magnitude of the loss there were year‐on‐year improvements almost across

the board.

Reported and Estimated Indian Carrier Revenue and Net Income in FY12 and FY13

FY12

Revenue

FY12

Net Income

FY13

Revenue

FY13

Net Income

Air India USD2.6 bn (USD1.4 bn) USD3.0 bn (USD950 mn)

GoAir USD278 mn (USD24 mn) USD375‐400 mn (USD14‐16 mn)

IndiGo USD1.0 bn USD23 mn USD1.5‐1.6 bn USD100‐110 mn

Jet Airways USD2.7 bn (USD226 mn) USD3.0bn (USD87 mn)

Jet Konnect USD340 mn (USD33 mn) USD387 mn (USD53 mn)

Kingfisher USD1.0 bn (USD423 mn) USD91 mn (USD500‐520+ mn)

SpiceJet USD720 mn (USD109 mn) USD1.0 bn) (USD34 mn)

Source: CAPA Research and company filings. *Data for unlisted carriers Air India, GoAir and IndiGo

are CAPA estimates. Final results for these carriers may vary due to one‐off accounting adjustments.

FY13 losses may impact investor valuations but CAPA expects two further transactions

in FY14

These continued losses and the further erosion of net worth may widen the gap between

promoter and investor expectations when it comes to valuations. Combined with the

prospect of new entrants into the market, this might impact capital raising plans for

incumbent carriers. Neverthless we believe that there is sufficient confidence in the long

term fundamentals of the market to maintain investor interest and we expect a further

two Indian carriers to complete transactions with strategic or financial partners in FY14.

Q4 re‐wrote the results for all carriers, especially Jet and SpiceJet

The sector generated losses of approximately USD700 million in the last quarter (close to

USD500 million excluding Kingfisher). Jet Airways, which had reported a marginal profit of

USD2 million over the first 9 months, ended the year with a USD87 million loss due to one‐

off costs and increased maintenance expenses. While SpiceJet’s loss of under USD 1

million for the first three quarters finished up as a US34 million full‐year loss due to

maintenance costs being more than USD30 million higher than last year, coupled with a

significant increase in interest expense. IndiGo was earlier on‐track to achieve a higher

full‐year profit but it too was impacted by lower than expected yields in Q4. Air India’s

losses were intensified as a result of the weak fares environment and the grounding of its

787 fleet during a crucial period.

Industry debt increased 8‐9% in FY13 to USD14.5 billion

India’s airlines have an estimated combined debt of approximately USD14.5 billion (with

additional vendor‐related liabilities of around USD2 billion), compared with an average


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cash position of just USD500‐550 million. Air India holds just over 60% of that debt, with

full service carriers combined accounting for close to 90%, although the Jet Airways Group

reduced its debt position from USD2.62 bn to USD2.25 bn during FY13.

A key contributor to the overall debt has been the industry’s accumulated losses since

2007 which were approaching USD9.5 billion as at 31 March 2013. This has resulted in

continued erosion of the net worth of India’s carriers which are estimated as follows:

Air India (FY12): (USD3 billion)

GoAir (FY12): (USD107 million)

IndiGo (FY12): USD69 million

Jet Airways: (USD62 million)

Jet Konnect: (USD311 million)

SpiceJet: (USD41 million)

Source: CAPA Research and company filings. *Data for unlisted carriers Air India, GoAir and IndiGo

are CAPA estimates.

International accounts for 80% of Air India’s losses, while the Jet Airways Group is

hurting on domestic where it lost USD210 million in FY13

Air India faces key structural viability issues on its international routes due to poor

alignment between its fleet structure and route network, and weak commercial capability,

particularly in offshore markets. As a result international operations account for 80% of its

losses. The resumption of 787 services will help to improve the situation but huge losses

are expected to continue.

Jet Airways and JetKonnect combined reported losses of approximately USD210 million on

domestic routes in FY13, whereas the international business was profitable to the tune of

approximately USD70 million. The carrier has struggled on the domestic front as a result of

its confused strategy with at one stage three separate brands operating without a clear

market proposition for each. With the recent consolidation down to two brands and the

greater strategic clarity afforded by the partnership with Etihad a more focused approach

can be expected.

That said, both Jet Airways and Air India remain vulnerable on domestic routes, especially

as they continue to operate with a full service cost structure in a market that has shifted

predominantly to low cost. Until both of these full service carriers have developed a

competitive domestic cost structure the sector will remain unviable as it is otherwise

impossible for them to sustain fares close to the levels charged by LCCs. They have been

unable to extract a premium for the full service product and the fare difference between

full service and low cost carriers is negligible.

Domestic Outlook FY14: Passenger numbers expected to cross 60 million once again

Domestic traffic is expected to expand by 4‐6% in FY14, with most of the growth to occur

in the second half of the year. Starting from Q3 the traditional festival and holiday traffic is

expected to be supplemented by increased passenger movements driven by state

elections in November, and then by general elections some time prior to May 2014.

AirAsia’s possible entry in the second half of this financial year could also provide some

further growth although the airline will still be relatively small even by the end of the

forecast period. These factors could push growth above 6% subject to market conditions

from Q3 onwards. We expect that by the end of FY14 domestic traffic will have matched

or slightly exceeded the previous high water mark of just over 60 million annual domestic

passengers reported in FY12.


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International Outlook FY14: Buoyant traffic could grow at 10‐12%, twice the pace of

domestic

International traffic growth is expected to be more buoyant than domestic and could grow

by 10‐12% as Indian carriers expand and as more bilateral entitlements are expected to be

granted to foreign carriers. As is the case for domestic traffic, the second half of the year is

expected to account for the majority of the growth. Capacity expansion during the year

ahead is likely to be around 10%, largely driven by LCCs.

Jet is already profitable on international operations and is expected to further strengthen

its performance in the coming year as a result of its increasing cooperation with Etihad.

IndiGo and SpiceJet are both nearing break‐even on overseas routes. However Air India

continues to incur huge losses on international services due. The 787s will help but the

structural issues run deep and this will impact the carrier’s overall turnaround prospects.

Profitability Outlook FY14: Private airlines expected to report USD250‐300+ million

profits, but Air India projected to lose USD750‐800 million

CAPA estimates that India’s private airlines could post combined profits of USD250‐300

million or more in FY14 with a projected breakdown as follows, based on CAPA Research

estimates:

GoAir: USD8‐10 million profit;

IndiGo: USD100‐120 million profit;

Jet Airways: USD125+ million profit;

SpiceJet: USD25‐30 million profit.

Jet’s return to profitability is largely being driven by a significant reduction in interest costs

as a result of a USD600 million reduction in high interest Rupee debt and access to lower

interest rates through offshore financing options that have become available in light of the

Etihad investment. In addition the carrier is expected to see an increase in net earnings

from further strengthening of its international operations although the real benefits will

be seen from FY15 SpiceJet’s and GoAir’s profitability is subject to them being able to

control their losses during the weaker second and fourth quarters which have let them

down in the past. In the case of SpiceJet, now that it is a relatively large airline these

swings between strong and weak quarters can have a major impact on financials.

However, the overall industry result is expected remain in the red, dragged down by a

projected USD750‐800 million loss at Air India.

These projections have been developed on the expectation:

that oil prices will remain stubbornly high with average Brent Crude rates for the

year assumed to be USD100‐110/barrel;

the Rupee is not expected to provide any cushion with rates projected to remain

in the range of INR54‐55 to the US Dollar;

and that pricing discipline will be maintained – if we were to experience an

extended period of discounting similar to that seen in Q4 FY13, profitability

would deteriorate well below the projected levels.

Key challenges will remain, but there are some positive developments on the horizon

The viability of domestic operations will continue to face several fundamental challenges.

Fare levels are expected to be softer than in FY13 and there is no significant easing around

the corner in terms of costs.


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Fuel, the largest input cost, is expected to remain high. This is leading airlines to consider

direct import of aviation turbine fuel which is exempt from sales taxation. Permission to

do so was granted last year but due to the associated logistical and infrastructure

challenges no carrier has yet taken advantage of the option. The matter was also held up

due to inter‐ministerial issues.

SpiceJet is expected to commence importing some of its requirements from Q2, although

given that this is a complex and untested undertaking it is difficult to assess how

successful it will be. It is likely to start on a small scale and then grow subject to whether

genuine savings are realised. This will take some time to assess so we do not expect that

direct import of fuel will have a material impact on profitability in FY14 and we have not

included it in our projections.

However, if successful it could be an important trigger towards creating a more

sustainable long term cost base for domestic operations. Ideally it would result in a direct

reduction in sales taxation allowing carriers to benefit from lower prices through the front

door rather than having to develop a bypass solution.

If Jet Airways proceeds down the direct import path it may be able to leverage its

relationship with Etihad to secure favourable commercial terms and reduce the advance

cash commitments required by fuel suppliers in Abu Dhabi. One of the stumbling blocks to

date has been that carriers do not have available cash balances to be able to place the

bulk orders that are required for wholesale import purposes.

Ancillaries expected to be grasped with greater vigour as regulator gives green light

The recent green light given by the regulator for unbundling of fares (although technically

there was no formal restriction earlier) should see airlines pursue ancillary opportunities

more aggressively. CAPA estimates that there is the potential for carriers to generate an

additional USD500 million per annum through this channel to be developed over the next

two years. Only a fraction of this is expected to be tapped in the coming year as it will take

some time to implement new initiatives, however more significant benefits can be

expected to accrue from FY15 onwards. Low hanging fruit such as charging for premium

seats and priority check‐in could generate an additional USD10‐12 million relatively

quickly in the current financial year.

Small but important steps towards achieving a viable operating environment

The successful direct import of fuel or a possible reduction in taxation, combined with

increasing ancillary revenue will help to bridge the cost‐revenue gap.

The introduction of GAGAN, India’s satellite‐based navigation system in 2014, together

with the flexible use of airspace between civil and military purposes which has recently

been approved, are two further initiatives which will be very important in reducing airline

operating costs through reduced fuel consumption as a result of more direct flight

routings.

And from 2016 onwards as these developments become more established and the market

sees the introduction of re‐engined A320neos and 737 MAX aircraft, we can expect to see

a meaningful change in the landscape.


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2 Policy & Regulatory Outlook Immense change ahead in domestic and international

markets but a policy vacuum persists

Absence of a structured policy framework is damaging to industry viability

A massive upheaval is occurring in Indian aviation. Yet, despite this, there has been no change in the nation’s approach to policy and regulation. Successive administrations have studiedly ignored the desperate need to create a structured framework and long‐term vision for the sector. The result is a disconnected and ultimately costly jumble of adjustments.

Repeated flowery commitments to comprehensive overhaul of the policy have led to nothing; a proposed new civil aviation policy has remained in draft format for some 20 years. In this vacuum jolting changes occur in an ad hoc manner. Sometime they are positive ‐ such as the decision to allow foreign airlines to invest in Indian carriers – but there has been no thought given to the far reaching implications that will have for the aviation market structure.

India’s flag carrier for example continues to languish, with no prospect of recovery other than the regular band‐aid bailout – convenient for politicians, but costly for the nation. And makeshift decisions taken out of context, like the foreign ownership revision, as a result have offsetting negatives that almost invalidate the positives.

Other examples:

Just a few months ago the government wanted to encourage the development of hub airports in India, but statements in the light of the Jet Airways‐Etihad deal suggest this is no longer considered a priority;

Airlines were advised at the beginning of the year that foreign carriers would not be granted increased access until Indian carriers had exhausted entitlements, but instead dramatic opening up is taking place on selected markets;

The Aircraft Acquisition Committee disappeared as quickly as it arrived;

And while charging for preferential seats was not permitted, priority check‐in and other ancillaries posed no problem.

These stuttering inconsistencies in regulations and policy reversals, in 2013 alone, entrench instability and damage viability across the sector.

Until firm directions are introduced, few will be brave enough to invest in the sector in future. India desperately needs a long‐term policy and regulatory framework which spells out the government’s stance on critical issues.

Without this strategic clarity any major decisions will only create more structural challenges – and make investment ever more risk‐filled.

India cannot expect billions of dollars of investment without a national civil aviation policy framework

Supporting modernisation and growth of India’s aviation industry requires billions of dollars of investment in aircraft, airport infrastructure and ancillary services, the majority of which is expected to come from the private sector. Yet in the more than 20 years since the domestic aviation sector was first opened up India remains without a Cabinet‐approved national aviation policy. Despite numerous well‐intentioned attempts, especially since 1997‐98, they have not progressed beyond the draft stage. There does not appear to be a genuine interest in creating a long term policy framework.


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The absence of a transparent policy has prevented the corporatisation of the sector and has kept many serious investors away from the market. This unpredictability has hurt Indian airlines and airports. Private operators have invested billions of dollars in preparing Delhi and Mumbai for hub operations only to find that the bilateral policy has been changed overnight to one that encourages these airports to be bypassed. And India’s airlines had been operating on the assumption that no new bilaterals would be granted until the home carriers had developed greater scale.

CAPA India continuously engages with global investors and tracks their interest in the market. It is apparent that the frequent shifting of the goalposts means that many potential investors are reluctant to commit capital despite their confidence in the underlying growth potential of the market.

CAPA urges the government to introduce a well‐thought long term aviation policy within the next 6 months based on extensive industry consultation. This should be the key priority of the administration as the absence of policy predictability is one of the greatest barriers to serious investment.

Bilateral policy is expected to be a key factor in the battle of Middle East hubs

India does not have a stated bilateral policy outlining the mission, purpose and objective for which seat entitlements will be allocated. Prior to 2004 the government had an extremely conservative stance, reluctant to grant further access to foreign carriers given that Air India, which was then the only Indian carrier permitted to operate overseas, was in no position to expand. Air India at the time had not inducted a single aircraft into its fleet for over a decade. The capacity limitation was strangling international business and tourism, with passengers needing to book months in advance to secure seats during peak season.

From 2004, as a part of the overall opening up of the sector bilaterals with key markets were opened up dramatically. Although liberalisation was welcome, it took place without consultation with the industry and no roadmap on the future direction of bilateral policy was presented.

From 2008, as the operating environment became more challenging bilateral policy returned to a conservative setting in an effort to protect Air India, as well as in response to controversies surrounding the increase in access that had been granted to Middle East carriers, especially Emirates, over the preceding years. The protection of Air India also impacted private Indian carriers which struggled to obtain route rights even where seat entitlements were available under the bilateral. The government stated that the rights were reserved for Air India even thought it did not have the aircraft nor any interest to operate most of the routes which private carriers wanted to launch.

A hazy “official” position that is at odds with reality

The official position remains that Air India has first right of refusal, however since 2012 there has been some relaxation and almost 80,000 seat entitlements have been granted to Indian carriers in recent months.

It was also stated by the Ministry that until Indian carriers exhaust entitlements available under existing bilaterals no new air services agreements would be negotiated with foreign countries, especially from the Middle East. And yet in late April 2013, India and Abu Dhabi reached agreement on a new bilateral that will see an almost four‐fold increase in seat entitlements, which paved the way for the Jet Airways‐Etihad deal to go through less than 24 hours later.

The about‐turn in policy was as a result of the support of pivotal senior figures in government. CAPA expects that European and Asian airlines will protest the liberal opening up for Middle East carriers, especially since Lufthansa and Singapore Airlines have not been able to secure approval to even up‐gauge the largest permitted aircraft from a 747‐800 to an A380.


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According to CAPA Research estimates, foreign airlines are seeking an additional 150,000‐175,000 seats per week (excluding the recently expanded India‐Abu Dhabi bilateral) over the period through to the Winter schedule 2015/16. Most of the demand is from Middle East carriers and Turkish Airlines.

Emirates for example is understood to be seeking an additional 50,000 weekly seats of which 26,000 they want to utilise immediately. Talks between the respective governments are already underway on this request. Qatar Airways is reportedly seeking an additional 50,000 seats and Air Arabia around 20,000 additional seats over the next 2‐3 years. A further 20,000‐30,000 seats are understood to have been requested by other Middle East carriers.

Meanwhile Turkish Airlines has been aggressively seeking to increase its entitlements for more than a year from 14 to 56 weekly frequencies to enable it to offer double daily services to Delhi and Mumbai and daily services to Bangalore, Chennai, Hyderabad and Kolkata.

Following the recently concluded India‐Abu Dhabi bilateral agreement, UAE carriers now have entitlements to operate 120,000 weekly seats to India, let alone the increases they are seeking. Against this backdrop Singapore is unlikely to have been pleased with the modest 10% increase to just under 29,000 seats that was agreed last month.

Change in Weekly Seat Entitlements in Indian Bilateral Negotiations with Abu Dhabi and Singapore in Apr‐13

Source: CAPA, Press Information Bureau

A new direction in policy which will integrate wider economic and political objectives

CAPA expects that the Indian government will increasingly link bilateral air services negotiations with larger economic and geo‐political considerations such as foreign direct investment, trade and access to oil and gas supplies. The structure and competitiveness of the Indian aviation industry appears to be a lower priority in the broader agenda of the government. The investment by Etihad in Jet Airways is linked to larger direct investment from Abu Dhabi. Similarly Qatar is likely to link bilateral air services access to gas supplies and inbound investment. Aviation has become a trade issue.

CAPA welcomes the opening of the market but the process needs to be well thought and to follow a clear plan. Bilateral entitlements are a national asset and not an individual carrier’s, and CAPA urges the government to develop a transparent and structured policy for their allocation. If right are to be linked to broader trade and investment issues – and this may well be in the larger national interest, although it is unlikely that careful analysis

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10,000

20,000

30,000

40,000

50,000

60,000

India‐Singapore India‐Abu Dhabi

Weekly seat entitlem

ents

Earlier bilateral New bilateral


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has been conducted to arrive at this conclusion – this should be stated, thereby allowing operators and investors to plan accordingly.

Over the last few years India has signed several Free Trade Agreements with key partners but has since found that several were rushed and poorly thought out. In a bid to seek foreign investment to correct the current account deficit the government should take care to ensure that it does not damage an industry that is strategically important to the economy.

Liberalisation of bilaterals will certainly support the growth of traffic flows but it is also likely to shift key elements of the aviation value chain and employment offshore. A couple of landmark foreign investment transactions involving Indian carriers could permanently change the dynamics of the international market and transform domestic aviation. However, these seismic developments are taking place in a policy vacuum.

Urgent clarity is required from the government on the criteria for issuing new licences

AirAsia’s plan to form an Indian JV in which it will hold a 49% share is seen as a strong vote of confidence in the potential of the market. CAPA expects further interest from other Southeast Asian and Gulf LCCs to set up greenfield operations.

However, market entry is yet another grey area in India’s policy framework. There is no clearly stated position from the Ministry of Civil Aviation on the criteria with respect to the issue of new airline licences, especially for pan‐India operations. Several start‐ups are planning to launch new national carriers but are unaware of the government’s intentions.

Until recently, prospective entrants such as Captain Gopinath and others were advised that they would initially only be able to apply for a regional airline licence ‐ and after an undefined period of time they might have the ability to upgrade to a national licence. However, with the AirAsia application for a national licence likely to be cleared the Ministry appears to have changed its stance.

If approved it will be difficult for the government to reject other applications from start‐up airlines seeking to operate nationwide. This would be positive if so – but instead it is simply another unknown. And again, if bilaterals are being opened up on the basis that increased capacity and competition is good for consumers then the same should apply for new airline licences.

The government is keen to encourage regional connectivity, but viability remains a key challenge. The proposed subsidy scheme is impractical to implement.

The government of India is keen to encourage air connectivity to move beyond the large metropolitan cities to Tier 2 and Tier 3 towns across the country. At present 36% of domestic capacity is deployed on connecting just the six largest cities to each other.

India’s Route Dispersal Guideline (RDG) system has been in place for many years. This requires airlines to deploy capacity to connect remote regions equivalent to 10% of the ASKs they operate on the most lucrative trunk routes as defined by the regulator. But this framework restricts commercial freedom by forcing airlines to fly routes which are unviable for them. There was a provision allowing airlines to sell excess seats on RDG routes to other carriers but it did not function well and was subsequently abolished.

In 2007 a new regional airline licence category was announced. Operators of regional aircraft seating less than 80 passengers are exempt from landing charges and sales taxation on fuel (although Delhi Airport has recently obtained an exemption from the regulator to be able to apply landing charges to small aircraft and may be followed by other airports).

Despite this India has no successful, standalone regional airline; this should be a cause for concern. Earlier attempts such as Paramount and MDLR have failed and most recently Mantra has also suspended operations. Intra‐state air taxi operators such as Ventura in Madhya Pradesh are struggling while Captain Gopinath’s Deccan Shuttles in Gujarat closed within months of starting. There is clearly a fundamental issue with the viability of


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regional operations due to the cost structure, airport infrastructure limitations and the overall policy environment.

Share of Weekly Seat Capacity on Metro and Non‐Metro Routes, 6‐May‐13

Source: CAPA, OAG

The Ministry is evaluating a seat credit system to replace the RDG, along the lines of an emissions trading system. This would be partly funded through subsidies paid from an Essential Services Fund of USD50‐60 million for which a fee will be levied on all domestic passengers.

A key weakness in this approach is that there is no clear definition of regional operations. The category spans a wide range, from 20 seater air taxis to 50‐80 seat turboprops and regional jets and these have very different business models and requirements. It is only after defining the objective that the efficacy of a policy measure can be assessed. The proposed subsidy pool will be insufficient to support operators in the 50‐80 seat category while the 20 seater air taxi model has some inherent weaknesses. There are no modern aircraft available in this segment and by their very nature the per seat mile cost on small aircraft is relatively high.

Offering high fares on old, small aircraft is not going to stimulate the market. And if subsidies are going to be used to bring down fares, who is going to monitor these small operators to ensure that public funds are being used correctly? An oversight committee will be required to manage the process adding yet another layer of bureaucracy and costs. In addition the limited seat capacity on air taxis is such that the number of aircraft required to meet RDG targets is likely to outstrip their availability.

Although the proposed system is more structured than the RDG, CAPA is of the opinion that there are challenges to its practical implementation. The government first needs to focus on identifying why the current business model is unviable and why ventures such as Deccan Shuttles and Mantra have failed.

Aircraft Acquisition Committee, now you see it, now you don’t

In Mar‐13 the government abolished the Aircraft Acquisition Committee (AAC), a bureaucratic construct established less than five months earlier to vet and approve the fleet induction plans of all scheduled and non‐scheduled operators. CAPA welcomes the decision as we have always advocated that the Committee was not required and was an intrusion in the commercial decisions of operators.

However it is puzzling that within months of the Ministry arguing in parliament for the establishment of the AAC it is now no longer considered necessary. Such sudden changes

0%

10%

20%

30%

40%

50%

60%

70%

Metro‐Metro Metro‐Non Metro Non Metro‐Non Metro

Share of weekly seat capacity


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in key regulatory and policy matters send the wrong signal to investors and other stakeholders.

The regulator must recognise that ancillaries are now an integral part of the airline business model. AirAsia is likely to deliver a wake‐up call.

Two years ago IndiGo introduced an option for passengers to pay a premium to reserve exit row seats, a common practice around the world. Regulatory advice was communicated via email to all airlines at the time stating that charging for premium seats was discriminatory and should be discontinued. However there was no officially documented restriction on ancillary revenues in the Civil Aviation Regulations nor in policy documents.

As a result the announcement by the Ministry in Apr‐13 declaring that airlines will now be permitted to unbundle fares and apply charges for preferred seating, checked baggage, oversized items, lounge access and onboard catering is not the major reform that it is being pitched as. Aside from preferred seating, several Indian airlines have in one way or another already been charging for many of these features.

The DGCA has stated that it will review the impact of unbundling on consumers in six months time. One of the key challenges is that the regulator does not have a good understanding of the evolution of airline business models globally and the increasing complexity and variety of ancillary features. The government has granted permission for carriers to charge for a list of specified features. But what happens if an airline wants to offer zero free baggage allowance or charge passengers for services that do not appear on the approved list e.g. charges for unaccompanied minors, in‐flight entertainment, wireless internet, blankets and pillows, or to check‐in at the airport? Within days of permitting airlines to charge for preferred seating the DGCA stepped in to say that it will limit the number of seats for which a fee can be levied to 10‐15% of the total.

With the planned entry by AirAsia in the Indian domestic market later this year we can expect to see a much more aggressive approach to ancillaries. For a travelling public that has become accustomed to certain basic inclusions there will be sensitivities around unbundling and airlines will need to ensure that they communicate changes clearly to passengers. But the market has already evolved, only 10 years ago a complimentary hot meal was standard in economy class on Indian domestic sectors whereas today it is common to pay for onboard catering.

Ancillaries are now an integral part of the airline business model and should be recognised as such by the regulator. Rather than a piecemeal approach consisting of a time‐bound permission to charge for specific, defined ancillaries the industry requires the certainty and flexibility to innovate and to apply charges as is commercially appropriate for the airline. CAPA estimates that Indian airlines could generate an additional USD500 million per annum in revenue through ancillary initiatives.

The regulator continues to be seriously stretched and the pressures are likely to increase as growth resumes

India’s aviation regulator the Directorate General of Civil Aviation (DGCA) remains stressed due to a serious shortage of resources, with several key departments remaining well below sanctioned staffing levels. And there is insufficient investment in training the existing staff. This situation is only set to become more acute with market growth expected to resume this year.

In addition a further change may occur at the top shortly due to the end of the Director‐General’s secondment from West Bengal. This would bring in the third Director‐General in two years. This lack of stability at the top is further compounded by the fact that senior ranks below the Director‐General level are not well‐equipped to handle the challenges faced by the regulator.

A proposal to establish a Civil Aviation Authority (CAA) to replace the DGCA is expected to be approved by the Cabinet and parliament before the end of the year. As a result the


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government has taken its eye off the task of institutionally strengthening the DGCA thereby increasing risks during the interim period until the CAA is established. There appears to be a misplaced assumption that the establishment of the CAA will by itself solve many of the current issues, but the reality is that it will inherit whatever weaknesses exist today.

Civil Aviation Authority (CAA) could be delayed until 2014. CAPA calls for independence of CAA and need to appoint domain specialists to key roles.

The Civil Aviation Authority is expected to be functional by Nov/Dec‐13 however it is possible that this could be postponed until after the Central government elections which are due within 12 months. This will be an important milestone – if greatly overdue ‐ for Indian aviation but it is critical that it be much deeper than a simple re‐badging exercise. The objective must be to establish a professional and independent regulatory agency, and not just to change the name of the DGCA. It is intended to operate along the lines of the UK CAA with responsibility for air safety; airspace; airline licensing; pilot, engineer and air traffic controller licensing and consumer protection.

The set‐up costs of the CAA will initially be funded by the Ministry of Finance with ongoing revenue generated by passenger levies. It is expected to have full financial autonomy but will operate under the supervision of the Ministry of Civil Aviation although the precise nature of this relationship is to be defined.

A career civil servant is expected to head the CAA, counter to ICAO’s recommendation that the key posts be held by experienced aviation safety professionals. Since the CAA will absorb the DGCA it will also inherit the shortage of staff and expertise which makes it imperative that the government continue to actively strengthen the regulator over the coming months.

CAPA maintains that the independence of the CAA from Ministry intervention, direct and indirect, is critical to its effective functioning. Domain specialists rather than bureaucrats should be appointed to the leadership positions. Otherwise there will be little change from the DGCA today.

Time to end the ban on the A380 in India

CAPA expected that the A380 would be operating in India before the end of 2012. That did not happen and we now expect the aircraft to make its debut in 2013. With the government exposing Indian carriers to significantly increased competition from foreign operators already it is difficult to continue to defend the argument that the incremental capacity of an A380 relative to a 747‐800 is going to destabilise the market.

The most likely operators in the short term are Emirates, Lufthansa and Singapore Airlines, and in due course possibly Etihad or Jet Airways. If the Jet Airways‐Etihad deal is good for the consumer then surely the A380 is too.


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3 Airline Outlook FY14 signals the start of a game‐changing period for

Indian airlines

Jet’s Indian summer in Paris, CAPA expects a very large order signaling new intent, will become the first Indian customer for the 737 MAX.

CAPA understands that Jet Airways has placed an order for around 50 Boeing 737 MAX aircraft together with 8‐10 777‐300ERs, which will be announced at the Paris Air Show.

We expect a further order for over 50 A320 neos which will be utilised by its low cost subsidiary, JetKonnect. Jet Airways was earlier in negotiations for over a year to acquire 100 A320 neos however it now looks likely that the order will be split across manufacturers. Jet is therefore expected to announce a total order for over 100 aircraft in Paris. The longer term order could be as high as 200, however we expect that it will be announced in phases.

Jet Airways Group aircraft in service and on order prior to latest expected order

Source: CAPA Fleet Database

This represents the emergence of a new Jet Airways in the aftermath of the investment from Etihad. Until recently the carrier was unable to order aircraft because export credit agencies were concerned about its leverage, as a result of which it had to lease A330s to expand capacity. We also expect to see Jet place a strong emphasis going forward on turning JetKonnect into a competitive LCC.

The current order for ten 787‐8s will switch to 787‐9s – to provide a common fleet with Etihad and airberlin ‐ while the order for 36 737‐800s will be converted to ‐900 series aircraft. We expect that Jet Airways could be the first Indian carrier to operate the A380, leased from Etihad.

SpiceJet’s fleet plans and forward strategy dependent upon new investor

CAPA expects that SpiceJet will secure a new investor, possibly a foreign airline, within the next 3‐ 6 months. This will lead to a complete change in the carrier’s strategic plans. Confirmation of an order for 30‐40 737 MAX aircraft has been held up pending the new investor coming on board, however continued delays may lead the carrier to miss out on

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timely delivery slots. We expect that the outstanding options for 15 Q400 regional aircraft will also be exercised after the strategic investor is confirmed.

GoAir also likely to attract a strategic investor in FY14

GoAir, India’s smallest scheduled airline is expected to launch international operations in FY14. Although it has been operating for six years now its fleet size is below the current minimum threshold of 20 aircraft for operating overseas. However, this regulation is expected to be relaxed shortly reducing the minimum fleet size to 10 aircraft. CAPA expects that GoAir could also induct a financial or strategic investor in FY14 and may even consider an IPO.

Kingfisher’s revival ruled out with banks now focusing on recovering loans

Despite continued efforts and statements by the promoter, Kingfisher’s revival now appears to be all but ruled out. A number of resumption plans submitted to the Ministry have been rejected as not being feasible as there was insufficient commitment to capital. The banks with outstanding loans to Kingfisher are now intent on recovery proceedings. So far they have succeeded in recovering INR10 billion (USD185 million) but a protracted legal battle can be expected for the remainder.

IndiGo remains well‐placed in the market but the competitive framework is set to change

India’s most profitable airline, IndiGo, has remained consistently focused on its business plan and is the market leader across financial and operational metrics.

However going forward it is likely to face a more challenging competitive landscape in FY14 with Jet placing much greater attention on its low cost subsidiary JetKonnect; SpiceJet and GoAir set to be strengthened by new investors; Air India introducing its low cost subsidiary on domestic routes; and the launch of AirAsia and possibly other greenfield carriers, all of which will create a new market dynamic.

With the changing market structure the carrier might review its funding plan over the next 12‐18 months and could explore also options from strategic and financial investors to an IPO.

The carrier may also seek opportunities in new territories by establishing cross‐border JVs in Africa and Southeast Asia.

Indian Domestic Market Share by Airline, Mar‐13

Source: CAPA, DGCA

IndiGo, 27.40%

Jet Airways Group, 23.80%SpiceJet,

20.40%

Air India, 20.20%

GoAir, 8.10%


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A decision on Air India’s privatisation is likely to be high on the agenda for the next administration in 2014 as a result of the changing market structure

Air India has delivered a significant improvement in its operational and financial performance in FY13, reducing losses by USD500 million. But despite these improvements deep structural issues remain, ranging from its massive debt burden of USD9 billion to sub‐optimal aircraft utilisation, poor labour productivity, fleet limitations, and a fundamentally weak business model, all compounded by government intervention and a rapidly changing external environment, with the Jet‐Etihad deal being the latest challenge hurled at the airline. Indian Carrier Debt Levels FY12/13

Source: CAPA Research, Company Reports. Data for IndiGo and GoAir is as at 31 March 2012; Kingfisher and SpiceJet as at 30 September 2012; Air India (estimate) and Jet Airways as at 31 December 2012.

The likelihood is that despite the best intentions of Air India’s management and recent improvements in performance, the carrier has an almost insurmountable challenge. In this scenario the government will be faced with having to drip feed billions of dollars over the next few years to finance deficits with no meaningful improvement in the carrier’s situation. Meanwhile Air India itself will be politically hamstrung with regard to taking the difficult restructuring decisions required to develop a competitive cost base.

As a result Air India has no future under continued government control which should bring privatisation back on to the agenda, with a possible decision on the divestment schedule in 2014 triggered by the impact of foreign airline investment transactions. In the meantime the carrier requires a new turnaround plan and financial restructuring programme that takes into account the changes in the market since the last plan was prepared two years ago. A viable and long‐term solution for Air India is imperative not only for the airline itself but for the industry at large because as long as it struggles under government ownership it will continue to drive distortions in policy.

5 Year/20 Aircraft threshold for start‐ups operating overseas is likely to be abolished, changing market dynamics

Indian regulations require that a start‐up domestic airline must complete five years of operations and reach a fleet size of 20 aircraft before it will be permitted to operate international services. The rationale provided was that for the protection of passengers carriers need to demonstrate their credentials in the domestic market before being considered capable of handling the additional complexity of international operations.

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But this restriction discriminated against Indian carriers since it did not apply to foreign airlines. So while Air Arabia, Etihad and Tiger Airways were granted permission to fly to India despite having been in operation for less than five years, Indian airlines such as Kingfisher, IndiGo and SpiceJet could not fly out.

It was an unnecessary restriction which only benefited Jet Airways. And indirectly it may have been one of the contributory causes to Kingfisher’s demise. Its decision to acquire Air Deccan was driven in part by the fact that Deccan was approaching five years of operations and would allow Kingfisher to launch international services. The challenges of integrating Air Deccan ultimately proved to be very costly.

CAPA has long called for this regulation to be abolished and we expect changes to take place very soon. As a first step the restriction may be reduced to five years and 10 aircraft which is currently under consideration, however it may be removed entirely in the next 12‐18 months. This would completely change market dynamics and would for example allow carriers such as AirAsia and other prospective start‐ups to grow new markets which could include the development of a long haul LCC.

Despite the challenges AirAsia sees only opportunity and plans to make India a focus market

AirAsia India could launch operations by late October 2013 and CAPA believes that the airline is planning a much larger play in the market than has been indicated so far. Aside from domestic operations if the 5 year/20 aircraft rule is abolished in the near term we could see the launch of regional international services sooner than expected. Similarly there is likely to be much greater integration with other carriers in the AirAsia group in Thailand and Indonesia and the re‐launch of AirAsiaX services from Kuala Lumpur to Delhi and Mumbai.

Indeed international plans could include the launch of medium and long haul routes from India using A330s. India could be an ideal market for a long haul LCC and given its geographic location it could even support hub operations connecting Asia to Europe and the Middle East. It would be somewhat ironic if a foreign airline ends up being the first to recognise and leverage the Indian market’s hub potential.

Foreign airline investment will transform the dynamics of the sector

As CAPA forecast in our India Aviation Outlook 2012/13, the Indian Cabinet finally approved foreign airline investment in Indian carriers in Sep‐12, finally bringing to an end a regulatory anomaly that had existed for 16 years. India already permitted 49% foreign direct investment in the airline sector, but since 1996 the regulations ‐ unique in the world – specifically excluded the one class of investor that has the greatest strategic interest and can add value to the sector, namely foreign airlines.

CAPA had declared this to be a game‐changing policy decision and it has rapidly proved to be exactly that. In Sep‐12 we had anticipated that the deal flow would commence within 6‐9 months with the most likely interest to come from the Gulf. Our report had also projected the possibility of AirAsia’s entry.

The results are showing. Etihad will acquire a 24% stake in Jet Airways, while AirAsia plans to hold 49% in a proposed start‐up carrier. With the Jet Airways‐Etihad deal now concluded we expect serious interest to follow from others. Qatar Airways’ preferred market strategy for the market is likely to consist of seeking an increase of 50,000 weekly seat entitlements and entering into a codeshare agreement with IndiGo, however we do not rule out the prospect of them investing.

Other potential suitors include All Nippon Airways, Lion Air, Tiger Airways and even Singapore Airlines. Leading international LCCs which have established JV operations in multiple markets are likely to favour greenfield investments, along the lines of AirAsia, to avoid legacy issues and ensure that they can establish low costs of operation. Emirates has remained conspicuously quiet, although bilateral discussions are underway between the governments of India and Dubai to increase weekly seats by 26,000 with immediate effect.


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The carrier does not look like a prospective investor at this stage as the model goes against its broader strategy.

As already noted, the Jet Airways‐Etihad deal was reportedly linked to other foreign direct investment flows from Abu Dhabi. The timing of the reform was perfect for Jet Airways – a carrier which until 2012 had argued that there was no need to allow foreign airlines to invest in India. However, the simultaneous decision to open up the India‐Abu Dhabi bilateral agreement by almost four‐fold was key to Jet Airways achieving the valuation that it did.

CAPA expects that foreign airlines could invest in both SpiceJet and GoAir in the next 3‐6 months. With a precedent now having been set, future transactions are likely to be seen by Middle East carriers in particular as a means to leveraging market access. This should have a positive impact on valuations for Indian carriers. However, with such investment the role of Indian carriers is likely to consist of supporting the business plans of Middle East airlines and hubs.

CAPA welcomed foreign airline investment as a game‐changing decision. However, we also cautioned that the policy and regulatory framework – and its ability to understand competition and consumer issues – was not sufficiently robust to absorb the potential impact of foreign airline transactions, alliances and codeshares on the industry structure. This horse has now bolted, but that does not remove the need for a transparent and coherent policy and regulatory regime.


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4 Airports, MRO & GA Outlook

Airports Authority of India’s plan to offer Chennai and Kolkata Airports on management contracts may face political hurdles

The AAI is moving into a critical phase in 2013/14 across airport operations, airport development and air navigation services. This is a landmark year as upgrade projects at the two jewels in AAI’s crown, Chennai and Kolkata, have finally been completed after some delays with new terminals opening in early 2013. This marks the completion of the modernisation programme across all six metro airports which between them account for around 68% of the total traffic handled by the approximately 80 Indian airports with scheduled air services.

Share of Total Indian Airport Traffic Handled by Six Metro Airports, 11 months to Feb‐13

Source: CAPA, AAI

The new terminals at Chennai and Kolkata are of a high quality and have been well‐received by passengers. Their construction has employed value engineering methods that have helped to contain programme costs which will be welcomed by the industry as an important contribution to moderating increases in charges.

The authority is considering inviting international airport operators to bid for management contracts for these two airports. This is a good idea in theory however local political considerations may present some hurdles as could human resource issues since a new operator may seek to reduce employee numbers, a measure which is always fraught with sensitivity. As a result this is unlikely to happen in FY14.

Although the Chennai and Kolkata projects are now complete the AAI continues to lead an aggressive modernisation programme at tens of non‐metro airports across the country. Meanwhile demands from state governments for new airport infrastructure continue to increase placing further pressure on the AAI.

There is a need to clarify whether the AAI should be responsible for such new airport projects or whether all greenfield ventures should be developed through public‐private partnership arrangements. If the AAI is expected to play an active role in airport development then the government must ensure that it is appropriately funded.

The government is keen to encourage the development of low cost airports to enhance connectivity to smaller centres. This is a necessary goal but before this can proceed a

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viable model must be found for regional airline operations otherwise there will be limited investor interest in such projects. However, as some of these issues are resolved we would expect to see a further push in the airport modernisation programme from 2014 onwards.

Modernisation of air navigation services continues

The AAI is not only an airport operator but is also the Indian air navigation services provider. Huge investment in technology and training is required in order to upgrade airspace management to enhance the efficiency of current aircraft movements and to support the projected growth of the Indian aviation sector. This requires a fresh and focused approach to funding and governance for the air navigation services division independent from the AAI’s airport operations.

The hiving‐off and corporatisation of air navigation services has been on the agenda for some time however this could finally become a reality in FY14. However, the financial impact of this decision on the airports division needs to be considered. We would further recommend that the airport operations be split into two divisions and corporatised themselves, each with independent financials, with one responsible for airport construction and the other for airport management requiring as they do quite different skills sets and funding structures.

India’s satellite‐based augmentation system, GAGAN, is expected to launch in 2014 however capacity building and training of controllers will be a key issue during implementation. GAGAN will however make a major contribution to the efficiency of airspace management. Furthermore the recent agreement to allow flexible use of civilian and military airspace is an important milestone and will allow for more direct routings at certain times of the day. However now that it has been approved speedy implementation is vital. Satellite‐based navigation and flexible use of airspace are two initiatives which will be very important in reducing airline operating costs and carbon emissions through lower fuel consumption.

Airport capacity constraints at Mumbai continue to be one of the greatest concerns for Indian aviation

The outlook for airport capacity in Mumbai remains a concern. Continued delays with land acquisition for the second airport at Navi Mumbai suggest that the first phase of the project is now unlikely to open before 2018/19, a couple of years after the existing Chhatrapati Shivaji International Airport (CSIA) is expected to saturate.

Scheduled Hourly Aircraft Movements at Mumbai Airport 10‐May‐13

Source: CAPA, Innovata

The airport currently operates at close to its maximum runway capacity of around 35 hourly movements for 19 hours a day, between 5am and midnight. The operator has


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engaged NATS from the UK to develop a plan to improve the airside efficiency of the airport to increase hourly movements to at least 46 and ideally 50, although the latter is likely to be a stretch.

A plan has also been proposed to relieve some pressure at CSIA by shifting general aviation and small regional aircraft to Juhu Airport, which is currently used for helicopter operations. However this is an ambitious undertaking which would require extending the runway into the sea and moving a main road underground. The project faces numerous logistical, political and environmental challenges and CAPA does not expect that it will proceed. In fact CAPA’s most recent research indicates that there is a possibility that the government will close Juhu Airport down in due course to monetise its valuable real estate.

India’s hub ambitions are becoming increasingly elusive

India’s geographic location between Europe, the Middle East, Africa and Asia, combined with its huge domestic market provide it with some of the key building blocks to support the development of aviation hubs. What it has lacked are strong airlines with extensive global networks and efficient and attractive airports. As a result of the airport modernisation programme over the last few years the latter is being addressed and Indian airports have successfully climbed the ranks of global airport quality surveys. But the emergence of a powerful home carrier with global ambitions has proved more challenging.

Air India continues to struggle, Kingfisher has suspended operations and now Jet Airways, the one carrier that had the potential to become a major sixth freedom airline, has entered into a partnership with Etihad that may see its role largely relegated to being that of a feeder to Abu Dhabi airport rather than an Indian one. With this and possibly other upcoming deals, the prospects for Delhi and Mumbai to emerge as the next major global hubs have taken a major step backwards.

Until recently the government, right up to the level of the Prime Minister’s Office, had taken an active interest in the development of airport hubs in India, particularly at Delhi in the North and Chennai in the South. But following the Jet Airways‐Etihad deal the statements from the Ministry have shifted to stating that there is no reason for passengers from across India to hub over Delhi if they can do so via Abu Dhabi. This suggests a change of policy that has not been earlier communicated.

If a clear policy roadmap has been established, which was known to all operators and investors, it might have been possible to modernise the airport more cost‐effectively, resulting in lower charges for airlines and lower fares for passengers.

Uncertainty remains on ground handling policy, but CAPA expects a solution soon

The outlook for the ground handling sector, a key element of airport operations, has been uncertain for the last few years as the introduction of the government’s new ground handling policy has remained stuck in the Supreme Court since 2009.

Under the policy proposed by the government, airlines would not be permitted to self‐handle at metro airports and would instead have to outsource ground handling to one of up to three authorised handlers. The key driver of the policy was purportedly to enhance security by reducing the number of companies operating at the airport, particularly those providing outsourced manpower.

Airlines protested that this would increase their costs and the outsourcing of terminal handling would diminish their ability to control the service quality of critical customer‐facing roles, and the matter went to the courts where it remains. The latest date for a


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decision is Jul‐13. If security was indeed the major concern then this has clearly been compromised for the last four years.

What is emerging is that a compromise agreement may be reached under which airlines are expected to be permitted to self‐handle and could also form JVs to offer 3rd party services, subject to a revenue sharing arrangement with the airport operator. Further clarity is required with respect to whether a revenue share would be applicable for an airline JV providing services to the parent airline.

However, providers of outsourced manpower will no longer be permitted at airports and staff would need to be absorbed either by the airlines or the ground handling companies. The introduction of the policy is likely to result in a 20% increase in ground handling costs for Indian carriers. We would expect Indian LCCs to outsource all of their airport operations to 3rd party handlers. However Jet Airways could possibly tie‐up with Dnata and bring ground handling for Jet, Etihad and Emirates under one roof.

MRO continues to be unviable even after recent fiscal concessions

With its labour cost advantage and large pool of engineering talent, India should be a competitive location for MROs. However, the multiplicity of taxes, high hangarage costs and royalty fees at airports, poor training facilities and tight regulations make viability a major challenge, especially up against competitive facilities in the region in Sri Lanka and the UAE. The recent decision to exempt 3rd party MROs from customs duty on imported spare parts is highly welcome but this alone will not change the viability scenario.

General Aviation, the Cinderella sector of Indian aviation, feeling the squeeze

India’s estimated active general aviation (GA) fleet of 709 aircraft is around 65% larger than the scheduled airline fleet yet the sector remains extremely neglected. It is underdeveloped in terms of airports, airspace, maintenance and training. And while the scheduled sector is seeing improvements on the ground, things are moving much more slowly for GA. At a policy and regulatory level the industry has largely been ignored. There has been limited consideration given to the specific requirements for GA in air traffic management planning, or in the development of dedicated infrastructure.

For 709 aircraft there are just 10 dedicated hangars (of which five are likely to be dismantled shortly) and 40 dedicated parking bays. And in Mumbai, the market with the greatest business and general aviation potential, airport constraints are gradually squeezing the sector out of the city as scheduled operators take priority.

There was a spurt in growth between 2005 and 2010 during which time the business jet fleet increased almost five‐fold to 125 aircraft, and helicopter numbers doubled. However in the last couple of years as a result of the structural challenges and the slowdown in the economy much of that enthusiasm has evaporated.

If the underlying issues can be addressed there is great potential for GA in India, however limited progress is expected in FY14.

CAPA India Aviation Outlook Report 2013/14 This analysis is an extract from the keenly anticipated 2013/14 edition of the annual CAPA India Aviation Outlook Report to be released on 6 June 2013.

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