Dinodia Capital Advisors September 2012 Will FDI Take-off in Aviation?
May 22, 2015
Dinodia Capital Advisors September 2012
Will FDI Take-off in Aviation?
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Executive Summary
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While the present situation of the Indian Aviation Industry is already in blues, the Government has allowed 49% Foreign Direct Investment (FDI) to fund the dwindling aviation industry. The hopes are high, the industry, market and lobbies at the international level have given thumbs up and cheers. But for the past few years, the industry is loosing its sheen, with last financial year showing a loss of Rs.12,000 crores across the industry. Let us unveil the true opportunity that exists and analyze the challenges one has to face in entering the Indian Aviation Industry.
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The industry currently has a cash crunch, low credibility / ratings and most players already
have an overleveraged balance sheet, which discourages banks from giving any further
funding to the private carriers Air India and Indian Airlines – the 2 state owned carriers have been able to sustain
themselves only due into generous bail-out packages offered by the Government at
regular levels The newly implemented policies however have opened the doors for the much needed
equity infusions / relaxation of norms
Where are we today?
In the past two decades, the Indian Aviation
Industry has seen several ups and downs, but has
recently started seeing some private players do
well Most Airlines are still struggling due to heavy
statutory requirements, huge airport tariffs, binding
approval requirements & ever rising fuel prices. Along with other reforms that the Government Of
India recently announced, 49% FDI in the aviation
sector (Scheduled & Non-Scheduled Airlines) has
also been permitted
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The Aviation industry is one of the major
economic drivers for prosperity, development and
employment in a country. It handles ~2.5bn
passengers across the world in a year and
moves 45mm tones (MT) of cargo through 920
airlines, using 4,200 airports and deploying
27,000 aircraft
India is the 9th largest civil aviation market in the
world. Today, 87 foreign airlines fly to and from
India and 5 Indian carriers fly to and from 40
countries
Where are we today?Continued…
“India is an exciting market for us. We expect India’s contribution to our global (cargo)
revenues to increase from 3.5% to 5% this fiscal and 10% in the next three to four years,”
as per Nick Rhodes, Director Cargo of Cathay Pacific
India will be the 4th biggest market in terms of value for all new aircraft deliveries during the
next 20 years, according to aircraft maker Airbus
“The fleet of the Indian Commercial Airlines is expected to touch ~ 1,000 aircrafts by 2020” - Mr. Ajit Singh, Union Minister for Civil
Aviation, Government of India
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Evolution of the Industry…….
Nine Airlines existed including Indian Airlines & Air India
>1953
1953Nationalization of all private airlines through Air Corporations Act
1995
Jet, Sahara, Modiluft, Damania, East West granted scheduled carrier status
1997
4 out of 6 operators shut down; Jet & Sahara continue
2005
Kingfisher, Spice Jet, Indigo, Go Air, Paramount start operations
2007Industry consolidates; Jet acquired Sahara; Kingfisher acquired Air Deccan
2012
Government allows direct ATF imports, FDI proposal for allowing foreign carriers to pick up to 49% stake under consideration
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Earlier Now
The following have been revised now :Permission to invest (by FII & FDI together)
49% in equity of:
- Scheduled and
- Non-scheduled air transport services Will have to comply with relevant
- SEBI* regulations,
- FIPB**
- and other regulatory clearances A scheduled operator’s permit can be
granted only to a company with:
- The chairman and at least two-third
of its directors have to be Indian
citizens
- Substantial ownership and effective
control is vested with Indian nationals
- Registration and principle place of
business is in India
No Foreign Airlines were allowed to invest
in the equity of an aviation company in
India They were only allowed to invest in the
equity of Cargo airlines, helicopter and
seaplane services The following was allowed:
- 46% FDI (100% for NRIs) in
Scheduled Air Transport Services
through the automatic route
- 74% FDI (100% for NRIs) in Non-
Scheduled Air Transport Services
through the automatic route (up to
49%) and government route
(beyond 49% and up to 74%)
- 100% in Helicopter Services
requiring DGCA approval through
automatic route
*SEBI – Securities & Exchange Board of India**FIPB – Foreign Investment Promotion Board
What’s new to it???Government Policies
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S No. Name of the Airlines Market Capitalization
Enterprise Value
Turnover Net Profit
1 Air China Ltd. $12.2 $23.6 $6.7 $1.10
2 Singapore Airlines 10.2 7.1 2.8 0.10
3 Ryan Air 8.1 8.8 1.1 0.00
4 Delta Airlines 7.9 18.0 8.4 0.40
5 China Southern Airlines 7.0 14.7 6.3 0.60
6 China Eastern Airlines 6.3 15.2 6.1 0.50
7 Korean Airlines 3.6 14.6 10.7 (0.3)
8 Jet Airways 0.6 3.1 3.2 (0.0)
9 Kingfisher Airlines 0.2 1.7 1.4 (0.2)
10 Spice Jet 0.2 0.2 0.6 0.00
* Bloomberg and DCA Research
Who dominates the skies today?($ in Billion)
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Market Share Analysis of Domestic Players
IndiGo Airlines, the leading low cost airlines operates in all major cities of India although now at par with peers. It was awarded the “Best Domestic low Cost Carrier” in the year 2008. The company’s market share stood at 27.6% in 2012
Jet Airways, the second largest airlines based on its market share (25.2%), is most likely be the first local carrier to receive foreign investment after the announcement of the changes in the FDI policy
Spice Jet, India's second-biggest budget airline is the least leveraged airlines amongst its competitors which may attract the foreign investors to invest in it. Currently, the airlines holds the market share of 18.5%
Air India, the national carrier of India is slightly below spice jet by market size (18.2%) and is exempted from Foreign Direct Investment
Kingfisher Airlines, once a pride & joy of the nation, is the smallest in terms of market share (3.2%) today. The company is saddled with a high debt burden of $1.4bn. Its worsening credit status has disabled the company from securing further funds
Go-Air, another profitable airlines which is capable of attracting foreign players to invest in it has about 7.4% of the market share
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SWOT Analysis
THREATS
STRENGTHS
WEAKNESSES
FDI move will infuse funds in the industry India has world class airports Trend of enhanced quality of in-flight
service Indian carriers now also include a range
of Boeing 747s and Airbus 340s
Excess capacity of carriers as compared to demand
Negatively impacting current tax regime in place
High fuel costs Profitability issue unaddressed High price competition acting as a
downward spiral
Scope of increasing connectivity Government is committed to revive the
Industry Reforms to relax complicated
compliances
Globally the industry is considered to be a laggard and unprofitable
Current carriers require heavy recapitalization
New government might not support current changes in 2014
OPPORTUNITIES
"How do you become a millionaire?" asked Warren Buffett, who then answered his own question: "Make a billion dollars and then buy an airline."
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Pull of the Future
AirlineNo. of aircrafts
expected by 2017Estimated value
(Rs. Crores)
Air India 40 18,000
Go Air 22 8,100
Jet Airways 79 32,000
Jet Lite 20 7,600
Kingfisher 78 29,700
Spice Jet 68 26,100
Indigo 69 26,100
Total 376 147,600
Source: Report of Working Group on Civil Aviation for formulation of Twelfth Five Year Plan (2012-17)
“ India is light years ahead in terms of the market potential and the potential for the company (Boeing) to come together as an enterprise and grow
Q R ThomasPresidentBoeing India
“
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Will foreign airlines be convinced…..
The aviation industry all over the world is facing the music
The ones who are successful are the ones who are state run
A ‘wait and watch’ policy is being followed, deals are being discussed behind the veils
Except for Abu-Dhabi based Etihad Airways, many foreign airlines are shying away from
openly announcing anything
Center for Asia Pacific Aviation (CAPA) has given a mixed review but have called these
policy change to be positive in the long term
The Aviation Industry’s current problem is
profitability and not investment
The Government is now committed towards
reviving the sector and reviewing the present
Tax Structure, but will that address the inherent
challenges that the industry faces?
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Opportunities !!!
India is a land of 1.2 billion people, a growing middle class with high disposable income
and a desire to travel the world
The rail and road connectivity in India is decent, but the condition of the Indian railways
and the safety concerns of the roads provides a huge opportunity for the airlines industry
Indigo airlines which has the semblance of the very profitable US based Southwest Airlines,
is paving the way for other carriers to learn from the best and implement some of the key
strategies around low pricing, on-time arrival, high quality food which can be bought at
reasonable prices (keeps base fares low), all economy seating, good connectivity /
frequency, quick turn-around time (~20mins) and word-of-mouth advertising
If we look at the passenger traffic of the country, it has grown at a compounded annual
growth rate (CAGR) of 16% over a period of 10 years
There is a huge opportunity for foreign carriers to tap into this growing market and bring
their best practices and global expertise in running a successful airline business in India
Given India’s importance on the business map of the world and its location, it can serve as
a hub for connectivity between the US/Europe and Asian Countries as well
India is too large a market and too important an economy for the global giants to ignore,
the key question is who will land here first and take advantage of being the first mover
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Dinodia Capital Advisors
Dinodia Capital Advisors Corporate Profile
Dinodia Capital Advisors is a Financial Consulting firm based in New Delhi, India. It assists clients across all industries grow, both organically and inorganically. The firm helps clients Raise Capital. Execute Merger & Acquisition opportunities. Restructure, Transform and Turnaround businesses. Resolve challenging problems. Take advantage of financial and strategic opportunities. Balance investor expectations. DELIVER VALUE
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Dinodia Capital Advisors Service Offerings
Dinodia Capital Advisors Advice Clients on :
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