Indian aviation industry

INDIAN AVIATION INDUSTRY

as service sector

Presented by:

Ashish AsthanaAnkit GuptaAbhimanyu chandel

Liberalization and history

Industry characteristics Capacity PESTEL STP 7p Opportunity Challenges Summation/

conclusion/recommendation

Flow of presentation

1953: Nationalization of Aircraft Industry

Consequently, assets of 9 existing companies transferred to two entities in the aviation sector controlled by the Government in

a) Indian Airlines, primarily serving domestic sectors

b) Air India, primarily serving the international sectors

Implication

Aviation became a preferred mode of transport for elite class

Restricted Growth of Aviation Industry

High Cost structure

Underdevelopment of infrastructure

1986: Private Sector Players permitted as Air

taxi operators

Players including Jet, Air Sahara, NEPC,

East West, Modiluft,etc started service

1994: Private Carriers permitted to operate

scheduled services

Six operators granted license however

only Jet and Air Sahara able to service

2003: Entry of low cost carriers

Air Deccan, Spice Jet, Go Air, Indigo

Implication

Aviation has become affordable with check fares and discount schemes

Various Operators with different business model

Huge growth foreseen in the Aviation Industry

Indian Aviation liberalization

HUGE POTENTIAL

Under penetrated Market

- Total Passenger Traffic only 50 mn as on 31st Dec 2005

amounting to only 0.05 trips per annum as compared to

developed Nations like United States have 2.02 trips per annum

- High Level of potential demand with growth in Indian economy

Untapped Air Cargo Market

- Air Cargo has not yet been fully taped in the Indian markets and

is expected that in the coming years

large no of players would have dedicated fleets

What this means…

- Build up of capacity by existing players and entry of new players

CONSTRAINTS

Infrastructure Constraints

-Shortage of airport facilities, parking

bays,air traffic control facilities and

takeoff and landing slots

- Continued growth might be hampered

Relatively Limited Reach

-Only 454 airports with less than 100

airports having more than one daily

service

Industry characteristics

Competitive landscape

Huge Growth- Huge Plans

Fleet Acquisition

New Fleet Orders -More than 500

Fund Requirement- USD 50-55 bn approx

Order Book – New Players

Indigo 100

Air India 68

Air Deccan 60

Kingfisher 50

Indian Airlines 43

Jet airways 40

Go Air 36

Spice Jet 20

Expected to grow to 125 from 7 by 2025

Capacity expansion and competitors

Competitive Pressure

Full

Serv

ice

Price

Low cost Carriers changing the game Indigo

With a growth rate of 18 per cent per annum, the Indian aviation industry is one of the fastest growing aviation industries in the world.

Today, private airlines account for around 75 per cent share of the domestic aviation market.

India has jumped to 9th position in world's aviation market from 12th in 2006

Sector structure/Market size

Many policies supporting the infrastructure

are now in place. 100 per cent FDI under automatic

route is permissible for

greenfield airports.For existing

airports, FDI up to 74 per cent is

permitted through

automatic approvals and up to 100 per cent through special

permission (from FIPB). Private developers

allowed setting up of captive airstrips

and general airports 150 km away from an

existing airport.

100 per cent tax exemption for

airport projects for a period of 10

years.

49 per cent FDI is permissible in domestic airlines under the automatic route, but not by foreign airline companies.

100 per cent equity ownership by Non-Resident Indians (NRIs) is permitted.

74 per cent FDI is permissible in cargo and non-

scheduled airlines.

Aviation policy

DEMAND DRIVERSGDP Growth has been more than

7% in the last 4 yearsThe rising middle class of more

than 300 mn is fuelling the growth

The Increase in Consumerism and Affordability of Air travel

Government Liberal Policy to allow private carriers and entry of Low Cost Carriers has lead to a increase in demand in passenger traffic

Domestic Tourism and International Business Travel and Tourism has also greatly fuelled the rise of Indian aviation sector

Demand drivers

Political – Govt.is not stable

Economy – Disposable income is increasing .

GDP grow is more than 9%.

Social -- Status conscious

-- Awareness is increasing

-- Increase in Entrepreneurship

Technology – Indigenous technology is coming for aircrafts & airports.

Legal -- Flexibility in entry .

The five year stringent law towards flying abroad .

Environment – Stiff competition for hiring pilots (poaching)

Easy FDI(49%) through secondary market

PESTEL

SEGMENTATION - HNI People .& others

TARGET -VPs,CEOs -Bollywood Stars -Politicians -Foreign Tourists -industrialists

-regular -Oil exploring companies POSITIONING Chartered air service – Statement -

STP

Services/product – Hell Skiing, Leisure channels flights, Charter flight for pilgrimage,

Hiring Jet/Chopper film shooting ,Air ambulance. On shore service

Price -- Epic jet (7seater) - Rs 167,000/hr Cessane luxury jet(7seater) - Rs 217,000/hr Robinson chopper(5seater) - Rs 35,000/hr Honda Chopper(Medical) - Rs 50.000/ hr

Promotion – Strategy - Advertising in all leading corporate/travelling magazines

Tie-up with corporate/Travel Agencies

Physical evidence - Aircrafts Helicopters

People - Pilots Engineers

Productivity /process - Giving convenience in travelling

Place – Metros & capitals

Declining yields

Building on cost efficiencies

High input costs

Gaps in infrastructure

Challenges

LCCs and other new entrants together

now command a market share of around

46%

Legacy carriers forced to match low LCC

fares, during a time of escalating costs

Increasing growth prospects have

attracted & likely to attract more players

More players – more competition – lower

fares – a continuous cycle

The bottom-line – lower yields for all

operators

Declining yields

Low yield regime to continue

Airlines have to build on their cost efficiencies & drive down costs

below the yield that their product will fetch, to return to profits

For an industry that is estimating losses of US$ 500-550 million by

end of current fiscal, this is a daunting challenge

Yet, airlines have no control on external input costs

Building on cost efficiencies

High input costs ATF prices in India continue to be far higher than global rates, making ATF account

for 35-40% of operating cost, as against global average of 20-25% High basic rates aggravated by high taxes imposed by State Govt.’s ATF cost / kilolitre :

◦ US$ 755 in Delhi ◦ US$ 780 in Mumbai◦ US$ 455 in Singapore◦ US$ 497 in Dubai

High input costs Witholding tax on interest repayments on foreign currency loans for aircraft

acquisition Witholding tax proposed on aircraft lease rentals for leases concluded after 1st

April’07. Increasing manpower costs due to shortage of technical personnel

Contd..

Airport and ATC infrastructure inadequate to support growth

Airlines paying for these strategic gaps in many ways

◦ Higher fuel consumption - long holding times, on ground and in the air

◦ Lower utilisation of aircraft - slot constraints and air traffic congestion

◦ Sub-optimal route network strategies, due to lack of night parking stands

at major airports and navigational aids at many of the smaller airports

◦ Increased passenger facilitation costs

While a start has been made to upgrade infrastructure, the

results will be visible only after 2 – 3 years

Gaps in Infrastructure

A large & growing potential market

Developing alternative revenue streams

◦ Air cargo operations

◦ Airframe, engine & component overhaul

◦ Ground handling

◦ Training

◦ Leveraging the internet

Access to new markets

Opportunities

Freight carriage in India currently around 4200 tons per day

CAGR of 15% over the past 2 years

Fuelled by a fast growing economy, supported by a strong

industrial base

Forecast to grow at 11.4% p.a. till 2011-12

Air Cargo

Ground handling business in India estimated at Rs. 1074 crores

Expected to grow at 15% CAGR till 2011-12

Opportunity lies in 3rd party handling as well as entering into service

contracts with private airports / AAI to offer comprehensive ground

handling solutions, e.g. AI – CIAL at Cochin

Ground Handling

◦ Airlines in India will need training for pilots,

engineers, cabin crew, load & trim, etc.

Projected requirement for 3600 additional pilots in the short to

medium term

Cabin crew, engineers, technicians will also be required to

support aircraft being inducted

◦ Opportunity for simulator training establishments

◦ IA already has a Central Training Establishment at

Hyderabad, with facilities for most categories / types

of trainings on A320

Training

◦ Increasing numbers are booking directly from the airlines’ websites

Traditional sales channels with paper tickets cost airlines ~10% of ticket

price

Comparatively, e-ticket sales from own website cost an airline only ~3%

of ticket price

For every direct booking from their website, airlines save an estimated

US$ 4 plus 5% agency commission

◦ Airlines can also turn their websites into one stop shops for all travel

related services, generating additional revenue

Leveraging the internet

As airlines complete 5 years of domestic operations, those with 20+ aircraft

will get international access

◦ Access to new revenue streams

◦ Help even out the seasonality factor of domestic operations

◦ Spread the risk of downturn in a single market

The opportunity for some will be a challenge for the existing international

players

The risk – cycle of increased competition, low yields, and growth transferred

to the international arena

Access to new markets

The Indian aviation industry Is one of the fastest growing aviation industries in the % share

of the world.

India has 454 airports and airstrips; of these,16 are designated international airports.

With the liberalization of the Indian aviation sector, aviation industry in India has undergone

a rapid transforamtion.priavate airline account for around 75% share of the domestic

aviation market

Being primarily a govt-ownwed industry ,the Indian aviation industry is now dominanated by

privately owned full service airlines and low cost carriers.

Current scenario of Indian aviation industry

Domestic and international traffic is up 45% and 15.1

%,respectively.

Over 135 aircraft have been added in the past two year alone.

Center for Asia pacific aviation (CAPA) estimates domestic

traffic to grow 25-30 % annually and international traffic

15%untill 2010.

Market size

Indian Aviation has seen high growth on account of sustained Indian socio economic growth and

liberalized Government initiatives

Airport Infrastructure needs to improve significantly to meet the current and future demand of

the Indian Aviation Sector

Authorities have initiated various steps to implement modernization, reconstruction and

development of airport infrastructure to implement infrastructure development plan

Provides a huge opportunity for private players operating in Aerospace and allied industries

Significant opportunity for foreign companies as Indian companies not technologically equipped

to cater to requirements

Summation

Despite a growing market, airlines in India are fighting for survival in a highly competitive environment

A host of initiatives are required to be taken by all concerned, to tide over the current situation◦ Control Costs◦ Improve quality of service◦ Develop a large pool of skilled / technical manpower◦ Attract more professionals to manage the aviation industry◦ Develop infrastructure to match growth plans◦ Liberalise rules & regulations governing civil aviation, without

compromising on safety & security◦ Reduction in ATF prices and taxation on ATF and lease rentals

In sum……

THANK YOU