Indian Aviation Industry - 15th March

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ICRA LIMITED

Fver

Summary

The Indian Aviation Industry has been going through a turbulent phase over the past several years facing multiple headwinds – high oil prices and

limited pricing power contributed by industry wide over capacity and periods of subdued demand growth. Over the near term the challenges facing

the airline operators are related to high debt burden and liquidity constraints - most operators need significant equity infusion to effect a meaningful

improvement in balance sheet. Improved financial profile would also allow these players to focus on steps to improve long term viability and brand

building through differentiated customer service. Over the long term the operators need to focus on improving cost structure, through rationalization

at all levels including mix of fleet and routes, aimed at cost efficiency. At the industry level, long term viability also requires return of pricing power

through better alignment of capacity to the underlying demand growth.

While in the beginning of 2008-09, the sector was impacted by sharp rise in crude oil prices, it was the decline in passenger traffic growth which led to

severe underperformance during H2, 2008-09 to H1 2009-10. The operating environment improved for a brief period in 2010-11 on back of recovery

in passenger traffic, industry-wide capacity discipline and relatively stable fuel prices. However, elevated fuel prices over the last three quarters

coupled with intense competition and unfavorable foreign exchange environment has again deteriorated the financial performance of airlines. During

this period, while the passenger traffic growth has been steady (averaging 14% in 9m 2011-12), intense competition has impacted yields and forced

airlines back into losses in an inflated cost base scenario. To address the concerns surrounding the operating viability of Indian carriers, the

Government on its part has recently initiated a series of measures including (a) proposal to allow foreign carriers to make strategic investments (up to

49% stake) in Indian Carriers (b) proposal to allow airlines to directly import ATF (c) lifting the freeze on international expansions of private airlines and

(d) financial assistance to the national carrier. However, these steps alone may not be adequate to address the fundamental problems affecting the

industry.

While the domestic airlines have not been able to attract foreign investors (up to 49% FDI is allowed, though foreign airlines are currently not allowed

any stake), foreign airlines may be interested in taking strategic stakes due to their deeper business understanding, longer investment horizons and

overall longer term commitment towards the global aviation industry. Healthy passenger traffic growth on account of favorable demographics, risingdisposable incomes and low air travel penetration could attract long-term strategic investments in the sector. However, in our opinion, there are two

key challenges: i) aviation economics is currently not favorable in India resulting in weak financial performance of airlines and ii) Internationally, too

airlines are going through period of stress which could possibly dissuade their investment plans in newer markets. Besides, foreign carriers already

enjoy significant market share of profitable international routes and have wide access to Indian market through code-sharing arrangements with

domestic players. Given these considerations, we believe, foreign airlines are likely to be more cautious in their investment decisions and strategies

are likely to be long drawn rather than focused on short-term valuations. On the proposal to allow import of ATF, we feel that the duty differential

between sales tax (averaging around 22-26% for domestic fuel uplifts) being currently paid by airlines on domestic routes and import duty (8.5%-

10.0%) is an attractive proposition for airlines. However the challenges in importing, storing and transporting jet fuel will be a considerable roadblock

for airlines due to OMCs monopoly on infrastructure at most Indian airports. From the working capital standpoint too, airlines will need to deploy

significant amount of resources in sourcing fuel which may not be easy given the stretched balance sheets and tight liquidity profile of most airlines.

INDIAN AVIATION INDUSTRY

Through turbulent times, FDI relaxation alone not a game changer MARCH 2012ICRA RATING FEATURE

Contacts

Anjan Ghosh

+ 91 22 3047 0006

[email protected]

Analysts

Subrata Ray

+ 91 22 3047 0027

[email protected]

Shamsher Dewan

+ 91 124 4545 328

[email protected]

Siddharth Shah

+ 91 22 3047 0018

[email protected]

mailto:[email protected]













ICRA LIMITED

Indian Aviation Industry – Evolution & Recent Updates [1/2]

Historically, the Indian aviation sector has been a laggard relative to its growth potential due to

excessive regulations and taxations, government ownership of airlines and resulting high cost of air

travel. However, this has changed rapidly over the last decade with the sector showing explosive

growth supported by structural reforms, airport modernizations, entry of private airlines, adoption of

low fare - no frills models and improvement in service standards. Like elsewhere in the world, airtravel is been transformed into a mode of mass transportation and is gradually shedding its elitist

image.

Strong passenger traffic growth aided by buoyant economy, favorable demographics,

rising disposable incomes and low penetration levels

India aviation industry promises huge growth potential due to large and growing middle class

population, favorable demographics, rapid economic growth, higher disposable incomes, rising

aspirations of the middle class, and overall low penetration levels (less than 3%). The industry has

grown at a 16% CAGR in passenger traffic terms over the past decade. With advent of LCCs and

resultant decline in yields, passenger traffic growth which averaged 13% in the first half hasincreased substantially to 19% CAGR during 2006-2011. Despite strong growth, air travel penetration

in India remains among the lowest in the world. In fact, air travel penetration in India is less than half

of that in China where people take 0.2 trips per person per year; indicating strong long term growth

potential. A comparative statistic in United States, the world’s largest domestic aviation market

stands at 2 trips per person per year. We expect passenger demand to remain stable and grow

between 12-15% in the medium term, assuming a no major weakness in GDP growth going forward.

However domestic airlines operate under high cost environment; intense

competition has constrained yields; aggressive fleet expansions have impacted

profitability and capital structures

Despite reforms, the domestic aviation sector continues to operate under high cost environment due

to high taxes on Aviation Turbine Fuel (ATF), high airport charges, significant congestion at major

airports, dearth of experienced commercial pilots, inflexible labor laws and overall higher cost of

capital. While most of these factors are not under direct control of airline operators, the problems

have compounded due to industry-wide capacity additions, much in excess of actual demand.

Intense competitive pressure from Low cost carriers (focusing on maximizing load factors) and

national carrier (looking to regain lost market share) have constrained yields from rising in-sync with

the elevated cost base. Besides, aggressive fleet expansions (LCCs have added aircrafts mainly on

long-term operating leases; FSC’s have purchased aircrafts – debt financed, most often backed by

guarantees from the US EXIM Bank or Europe’s ECA) to leverage upon the anticipated robust growth

and to support international operations have significantly impacted the capital structure and

weakened the credit profile of most domestic airlines.

Exhibit 1: Industry Evolution

Year Major Milestones

< 1953 Nine Airlines existed including Indian Airlines & Air India

1953 Nationalization of all private airlines through Air Corporations Act;

1986 Private players permitted to operate as air taxi operators

1994 Air Corporation act repealed; Private players can operate schedule services

1995 Jet, Sahara, Modiluft, Damania, East West granted scheduled carrier status

1997 4 out of 6 operators shut down; Jet & Sahara continue

2001 Aviation Turbine Fuel (ATF) prices decontrolled

2003 Air Deccan starts operations as India’s first LCC

2005 Kingfisher, SpiceJet, Indigo, Go Air, Paramount start operations

2007 Industry consolidates; Jet acquired Sahara; Kingfisher acquired Air Deccan

2010 SpiceJet starts international operations

2011 Indigo starts international operations, Kingfisher exits LCC segment

2012 Government allows direct ATF imports, FDI proposal for allowing foreign carriers

to pick up to 49% stake under consideration

Source: ICRA Research

Exhibit 2: FDI Regulations

FDI

LimitsApprovals

Airports

- Greenfield Projects 100% Automatic

- Existing projects100% Automatic – up to 74%

FIPB - beyond 74%

Air Transport Services

- Scheduled Air Transport Services*49%

(NRIs 100%) Automatic

- Non-scheduled Air Transport Service 74%Automatic – up to 49%

FIPB – 49% to 74%- Helicopter Services / Seaplane services

requiring DGCA approval100% Automatic

Other Services

Ground Handling Services subject to

sectoral regulations and security

clearance

74%

(NRIs 100%)

Automatic – up to 49%

FIPB – 49% to 74%

Automatic

Maintenance and Repair organizations;

flying and technical training institutions100% Automatic

* Note: Foreign airlines are currently not allowed to participate directly or indirectly

in the equity of an Air Transport Undertakings engaged in operating Scheduled,

Non-Scheduled and Chartered airlines.

Source: Department of Industrial Policy and Promotion (DIPP), ICRA Research



ICRA LIMITED

Indian Aviation Industry – Evolution & Recent Updates [2/2]

Low-cost model now dominating the skies; viability remains to be seen

Internationally the LCC model came into existence when the US Congress passed the Airline

Deregulation Act in 1978 easing the entry of new companies into the business and giving them

freedom to set their own fares and choose routes (Prior to this routes and fares were fixed by aGovernment Agency). This was followed by entry of carriers like Southwest, which pioneered the LCC

concept. Majority (~60-65%) of an airline cost are dependent on external factors, which can’t be

managed by an LCC. This includes the fuel cost (~40%), maintenance cost (~12%) and ownership cost

(~12-15%). LCCs try to achieve a cost advantage in other ways by avoiding the in-flight services,

operating from secondary airports, selling tickets through the internet, higher number of seats in the

aircraft, inventory reduction through use of similar aircraft and lower employees per aircraft.

The Indian aviation sector was exposed to intense competition with the advent of a low-cost airline -

Air Deccan back in 2003. The success of Air Deccan spurred the entry of other LCCs like SpiceJet,

Indigo, Go Air and subsequently low fare offerings from Jet airways and Kingfisher airlines. As a

result, the sector which was completely dominated by full-service airlines till a decade ago is nowdominated by low-cost airlines. However, longer term viability of LCCs models in India remains to be

seen (Kingfisher exited the segment recently) as airport charges are same for FSCs and LCCs in India.

Besides, the fuel costs forms a larger proportion of overall costs as compared to international

standards due to higher central and state government levies (viability of direct ATF imports remains

to be seen due to lack of supporting infrastructure) and high congestion at major airports (half an

hour hovering at major airport could increase fuel costs by Rs.60,000 to Rs. 115,000 depending on

aircraft, besides impacting aircraft utilizations). These constraint can be resolved only if there

significant improvement in infrastructure such that LCCs could operate on secondary airports.

Exhibit 7: LCC Strategies

Categories Remarks

Single model of aircraft Reduces maintenance and inventory cost.

Operate on secondary airport Lower charges, lower turnaround time due to less congestion.

Point to Point Model Improves aircraft utilization by reducing waiting time at airports.

Single class configuration More seats per flight so spread costs over a larger base.

No In-flight services Helps to keep the costs and hence the fares low.

Fewer employees per aircraft Reduces employee cost and leads to higher employee productivity.

E-Ticketing

The traditional method of ticketing costs around US$ 4.5 per

passenger whereas the cost of an e-ticket comes to US$ 1 which

helps reduce selling expenses.

Ancillary RevenuesPrimarily on-board sales. Provides alternate source of revenues –

helps to reduce break-even PLF.

Source: Company Filings, ICRA Research

Exhibit 3: Growing LCC Market Share

Exhibit 4: ATF Price Trends (Mumbai, Rs/KLitre)

Exhibit 5: Rupee Depreciation (INR/USD)

Exhibit 6: ATF Tax Structure in India

Particulars Tax Rates

Excise Duty 8%

Average Sales Tax Levies by states ~23-24%

Margins of Oil Marketing Companies ~15-18%

Source: Company Filings, Bloomberg, ICRA Research

99% 95%71% 66%

54% 52%37% 31%

1% 5%29% 34%

46% 48%63% 69%

0%

20%

40%60%

80%

100%

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

FSC (%) LCC (%)

20,000

30,000

40,000

50,000

60,000

70,000

80,000

J a n - 0 9

A p r - 0 9

J u l - 0 9

O c t - 0 9

J a n - 1 0

A p r - 1 0

J u l - 1 0

O c t - 1 0

J a n - 1 1

A p r - 1 1

J u l - 1 1

O c t - 1 1

J a n - 1 2

42

44

46

4850

52

54

J a n - 1 0

F e b - 1 0

M a r - 1 0

A p r - 1 0

M a y - 1 0

J u n - 1 0

J u l - 1 0

A u g - 1 0

S e p - 1 0

O c t - 1 0

N o v - 1 0

D e c - 1 0

J a n - 1 1

F e b - 1 1

M a r - 1 1

A p r - 1 1

M a y - 1 1

J u n - 1 1

J u l - 1 1

A u g - 1 1

S e p - 1 1

O c t - 1 1

N o v - 1 1

D e c - 1 1

J a n - 1 2



ICRA LIMITED

Indian Aviation Industry – Operating Performance [1/2]

Exhibit 8: Domestic Airlines - Operating Matrix

Revenues

Domestic Revenues

International Revenues

Other Operating Income

Sub-Lease of Aircrafts

Cargo, Auxiliary Revenues etc.

Non-Operating Income

Aircraft Sale & Lease back

Cost Structure

Fuel Cost

Employee Cost

Aircraft Maintenance Expenses

Landing, Navigation & Airport Charges

Other Expenses

Selling & Distribution Expenses

General & Administrative Expenses

EBITDAR

Aircraft Lease Rental

Depreciation

Interest Expense

PBT


Domestic revenues are largely INR denominated; Robust pax traffic growth, but yields out of sync with cost structures due to

intense competition, government support to national carrier and customer preference for LCC models

Airlines with international operations generate part of revenues in foreign currency; foreign carriers dominate in the longer

haulage and premium service offerings

Earnings from aircraft sub-leases (dry or wet) are mostly in $ terms, helps rationalize capacities

Low contributions from cargo and auxiliary revenue due to their modest adoption level

ATF costs contributes 30-45% of overall operating costs for Full Service Carrier’s (FSC’s) & 40-55% for Low cost carriers (LCCs)

Domestic ATF prices are linked to fluctuation in crude oil prices and movement in INR vs. $

High central and state levies translates into a 60-70% higher ATF prices in India over the global average

Significant congestion at major domestic airports increases fuel costs considerably

Given the fact that Indian airlines have been in aggressive expansion phase, dearth of experienced pilots require airlines to

employee foreign pilots which command higher salaries and are often paid in foreign currency

Most airlines follow an operating lease model for large part of their capacity; Lease rentals are also denominated in foreign

currency thereby exposed to fluctuation in forex movement; Depreciation costs mainly for owned aircrafts (Financial Lease)

Significant rise in interest expenses due to deterioration in the capital structure, cash losses and increased working capital

requirements besides overall rise in interest rates

With capacity constraints at global aircraft manufacturers & rising commodity prices, market value of successful aircraft models

often exceed book values making sale and lease back (conversion of Financial Lease to Operating Lease) an attractive option to

book non-operating incomes, generate free cash flows and deleverage the balance sheet



ICRA LIMITED


ATF Import: [Heading]


The domestic airlines industry is facing significant operating (slowing growth, rising fuel costs) and

non-operating (interest costs, rupee depreciation) challenges as evident in the quarterly

performance trends of listed airline companies.

Sales Growth: After a strong rebound in 2010, the pax growth has been moderating over the last few

quarters due to moderating economic growth and weak industrial activity. Besides, severe

competitive pressure from domestic LCC players (rapidly gaining market share) and Air India (trying

to maintain market share) have resulted in price wars (at times below cost pricing), lowered yields

and moderated sales growth for the airlines. Even on international routes, the yields have remained

weak due to weaker economic conditions and severe competition from global airlines.

Rising ATF Prices & Steep Rupee Depreciation: The airlines industry had been severely impacted by

the significant increase in ATF prices (up 57% in last 18 months) as Indian Carriers do not hedge fuel

prices and have exhibited limited ability to charge fuel surcharges due to irrational and undisciplined

pricing dictated by competition rather than costs / demand. Besides, the steep rupee depreciation

(~18.7% depreciation in CY11, although partly reversed through 7.3% YTD appreciation in CY12) actsdouble whammy as apart from fuel costs, substantial portion of other operating costs like lease

rentals, maintenance, expat salaries and a portion of sales commissions are USD-linked or USD-

denominated.

Profit Margins: With combined impact of 1) moderating pax growth 2) lower yields due to excessive

competitive 3) rising ATF prices 4) steep rupee depreciation and 5) rising debt levels and interest

costs, the profitability margins of the airlines industry have been severely impacted. As per Centre

for Asia Pacific Aviation (CAPA), Indian carriers could be posting staggering losses of $2.5 billion (~Rs

12,500 crore) in 2011-12, worse than the losses of 2008-09 when traffic was declining and crude oil

prices spiked to $150 per barrel.

Overall, the industry has been marred by cost inefficiencies and is bearing the brunt of aggressive

price cuts, rising costs, expensive jet fuel, a weaker rupee, high interest payments and hence

mounting losses. The government support required to bailout the loss making Air India has increased

substantially; while the leading private players like Kingfisher Airlines, Jet Airways and SpiceJet are

making significant losses. With Banks unwilling to enhance their exposure to the industry, recast

their loans or pick up equity stakes without viable business plans, industry needs to come out with

strong equity infusion plans. Hence, the government is mulling allowing foreign carriers to pick

strategic stakes in domestic airlines to help them stay afloat in these difficult times, besides bringing

global expertise and best industry practices over the medium term.

Exhibit 9: Domestic Airlines - Gross Sales Growth (%, YoY)

Exhibit 10: Domestic Airlines – Fuel Costs (% of Gross Sales)

Exhibit 11: Domestic Airlines – Reported PAT (% of Gross Sales)

Note: Aggregate Data for Listed Airlines

Source: Capitaline, ICRA Research

3%

-17%-25%

-3%

19%

31% 34%

21% 20% 20%13%

9%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

M a r - 0 9

J u n - 0 9

S e p - 0 9

D e c - 0 9

M a r - 1 0

J u n - 1 0

S e p - 1 0

D e c - 1 0

M a r - 1 1

J u n - 1 1

S e p - 1 1

D e c - 1 1

29% 32%

40%33% 35% 36% 36% 34%

44%47%

52% 50%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

M a r - 0 9

J u n - 0 9

S e p - 0 9

D e c - 0 9

M a r - 1 0

J u n - 1 0

S e p - 1 0

D e c - 1 0

M a r - 1 1

J u n - 1 1

S e p - 1 1

D e c - 1 1

-14%-11%

-26%

-4%

-11%

-3%-4%

-1%

-10%-7%

-26%

-9%

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

M a r - 0 9

J u n - 0 9

S e p - 0 9

D e c - 0 9

M a r - 1 0

J u n - 1 0

S e p - 1 0

D e c - 1 0

M a r - 1 1

J u n - 1 1

S e p - 1 1

D e c - 1 1



ICRA LIMITED

Indian Aviation Industry: Proposed FDI Relaxations [1/2]

\

FDI in Aviation: Feasibility and Impact Analysis for various stakeholders

FDI Proposal: The Civil Aviation Ministry is expected to soon circulate a proposal before the union

cabinet to consider allowing up to 49% equity investment by foreign carriers in domestic airlines. In

case of listed airlines, if the proposal does not get a waiver from SEBI’s Takeover Code, foreigncarriers may have to first make an open offer of 26% stake to public shareholders and later acquire

up to 23% stake (from promoters or fresh equity), such that their stake remains within the 49 % cap.

Indian Carriers: The FDI proposal, if approved, would certainly be an important milestone in the

aviation sector and may provide much-needed relief to the domestic aviation industry reeling under

the pressure of mounting losses and rising debt burden. Besides, the move will help bring global

expertise and best industry practices over the medium term.

Foreign Carriers: It will not just provide entry into one of the fastest growing aviation market globally

but also an opportunity to establish India as their hub for connections between US/Europe and

South-East Asian countries. While full-service airlines could help them further consolidate theirmarket position on international routes (and improve connectivity within India), acquisition of low-

cost airlines could help them compete in a market where travelers are highly price sensitive.

Consumers: New players could enter the market as they could now have a strategic foreign player

with deep pockets to support the airline in difficult times. Besides, it would provide more flexibility in

international travels when one travels through the same airline domestically as well as

internationally. Overall, this could increase competition, offer more alternatives, reduce tariffs and

improve customer service standards over the medium term.

However, the Global Airline industry is itself currently going through a tough phase (Bloomberg

World Airline index down 22%, Asia-Pacific Airline index down 25% in last one year), due to below

trend economic growth across advanced economies and high crude oil prices ($100-125/Barrel).

Besides, aviation economics currently remain unfavorable in India due to intense competition,

mandatory route dispersal guidelines, higher taxes on ATF, airport related charges and inadequate

airport infrastructure. For example, airlines like Air Asia (citing high infrastructure costs) & American

Airlines (parent facing financial stress) have recently withdrawn from India. Lastly, foreign carriers

already enjoy significant market share of profitable international routes and have wide domestic

access through code sharing agreements. Given these considerations, we believe, attracting

investments from foreign airlines may not be easy.

Exhibit 12: Factors that support investments in Indian Aviation Sector…

Strong growth prospects

Passenger traffic growth has grown at a CAGR of 16% in India over the past 10 years

Relative underpenetrated market

Penetration of air travel at <3% is significantly below benchmarks in other markets

An opportunity to create India as an hub

An opportunity for foreign airlines to create India as their hub for international

traffic between Europe and South East Asia; Additionally offer better connectivity

within India with international destinations

An opportunity to create India as an MRO centre

Foreign airlines could also look at leveraging on In dia’s low-cost arbitrage by setting

up MRO facilities in India

Low Valuations

Market valuation of listed airlines in India has suffered due to poor performance

Exhibit 13: Factors that are not in favor of investments…

Aviation economics are not favorable in India

Higher taxes on ATF and airport charges continue to be key headwinds for the

sector; besides higher cost base, airlines in India are also mandatorily required to fly

on certain unviable routes

Inadequate Infrastructure

Development of airport infrastructure has not kept pace with demand, thereby

resulting in delays and higher costs for airlines

Poor financial health of most airlines

Intense competition, sharp fluctuation in ATF prices and high debt burden continue

to weigh on the financial performance of Indian airlines; foreign exchange

fluctuation and lack of adequate hedging mechanism (for fuel) have added to the

woes

Highly competitive & Price Sensitive traveler base




ICRA LIMITED

Indian Aviation Industry: Proposed FDI Relaxations [2/2]

Foreign carriers already enjoy significant share of international traffic; domestic

access through code sharing agreements

As per DGCA data, foreign carriers already enjoy ~65% market share in international traffic and hence

~27% of total passenger traffic (Domestic + International). For Jet Airways, due to longer haulage (~4.6 hrs

avg block hours in international routes as compared to ~1.6 hrs avg block hours in domestic routes),

revenue per passenger carried on international route has been 2.5x to 3.0x revenue per passenger carried

on do mestic route. We expect this ratio to be higher on an industry wide basis as foreign carriers

dominate longer haulage routes, full service offerings and business traffic as compared to shorter haulage,

low fare offerings & VFR (visiting friends and relatives) traffic prominence of Indian carriers. A s a result, we

estimate that the foreign carriers have already garnered 42-48% of total airline revenues (inbound,

outbound & within India). Besides, the stark difference between Jet A irways’ domestic and International

EBITDAR margins indicates that the foreign airlines could be already enjoying majority of the industry

profits, with the domestic carriers left with price conscious no-frills pax traffic, less viable routes and hence

saddled with high operating losses. Besides, due to number of code sharing agreements, foreign carriers

can offer enhanced connectivity into Indian cities without acquiring stakes in Indian carriers.

Dilutions at Current market capitalizations unlikely to solve issues of staggering debt

levels and mounting losses

Besides, since the airlines stocks have corrected significantly over the last two years, fresh equity infusions

are current market capitalizations (although 50-100% higher YTD) could lead to considerable stake dilution

for the existing promoters who have built these businesses over the years. Besides, the amount of fresh

equity that could be raised at current market prices would not be a game-changer considering the

staggering debt levels and quarterly losses posted by the airline industry (auditors have already raised

concerns over the rapid depletion of networth for all listed airline companies).

Exhibit 17: Promoter Stake dilution incase in fresh equity infusion

Jet Airways Kingfisher SpiceJet Total

Total Debt Outstanding – FY11 (Rs Cr) 15,210 7,057 86 22,353

Current Market Capitalization (Rs Cr) 2,767 1,150 1,066 4,982

Current Promoter holding (%) 80% 59% 39%

Fresh Equity infusion for 49% stake* 2,658 1,104 1,024 4,787

Mcap Post Equity infusion 5,425 2,254 2,090 9769

Promoter holding post infusion 41% 30% 20%

*Assuming Equity infusion @ current share price that has already run-up considerably in anticipation (Jet

up 87% YTD, SpiceJet up 43% YTD)


Exhibit 14: Significant Erosion in Market Capitalizations (Rs Crore)

Exhibit 15: Foreign Carrier’s Pax market shares in International Routes (FY10 Data)

Exhibit 16: Jet Airways – Domestic vs. International Operations

Source: DGCA, Company filings, ICRA Research

-

2,000

4,000

6,000

8,000

J a n - 1 0

F e b - 1 0

M a r - 1 0

A p r - 1 0

M a y - 1 0

J u n - 1 0

J u l - 1 0

A u g - 1 0

S e p - 1 0

O c t - 1 0

N o v - 1 0

D e c - 1 0

J a n - 1 1

F e b - 1 1

M a r - 1 1

A p r - 1 1

M a y - 1 1

J u n - 1 1

J u l - 1 1

A u g - 1 1

S e p - 1 1

O c t - 1 1

N o v - 1 1

D e c - 1 1

J a n - 1 2

F e b - 1 2

Jet Airways Kingfisher Airlines SpiceJet

21.4%

12.5%

10.8%

4.3%

4.1%3.6%

3.3%

3.1%3.0%

- 2,000,000 4,000,000 6,000,000 8,000,000

Air India

Jet Airways

Cathay Pacific

Thai Airways

British Airways

26%

19% 13%

23%

3%7%

-9%2%

23%22% 26% 26%

16%11%

14%8%

-

0.50

1.00

1.50

2.002.50

3.00

-10.00%

0.00%

10.00%

20.00%

30.00%

Q4

FY10

Q1

FY11

Q2

FY11

Q3

FY11

Q4

FY11

Q1

FY12

Q2

FY12

Q3

FY12

Jet Airways : EBITDAR Margins - Domestic (%, LHS)Jet Airways : EBITDAR Margin - International (%, LHS)Jet Airways : Rev per pax (International/Domestic)



ICRA LIMITED

Direct ATF Imports: Benefits and near term feasibility remain misty

In addition to the proposal on FDI, the empowered group of Minister has also recently approved the proposal for airlines to import Aviation Turbine Fuel (ATF) directly, a demand that the

airlines have been lobbying for quite some time now. While the cabinet approval is yet come by, in our opinion, the impact of this development is likely to be a mixed bag. Although the

taxation differential (between currently applicable sales tax rates and likely import duty) certainly suggest a large potential saving for airlines, the availability of infrastructure is likely to be

a considerable roadblock. Given the monopoly of OMCs at major airports, airlines would have to resort to a fee-based structure for utilizing their infrastructure for fueling, storing and

transporting ATF. At the same time, airlines will also have to engage a fair bit of working capital in sourcing imported ATF as against credit period available from OMCs. Given the currentliquidity constraints, managing additional credit lines from banks is also likely to be a challenge for airlines and overall would reduce the potential savings being envisaged.

At present, airlines buy ATF from OMCs which is priced on an import parity formula and is also subject to sales tax varying from 4%-30% depending upon states. Given the higher tax rates

at major airports, airlines pay on an average 22-26% sales tax on ATF for domestic operations. With the option to import directly, the effective taxes on ATF would prima facie reduce as

airlines will pay import duties and will be exempted from paying sales tax thus resulting in large savings for airlines. While the savings appear to be significant, there are various practical

issues that airlines will have to sort out before they could start importing ATF directly. At most airports (barring the private ones), state-run OMCs own and operate the infrastructure for

sourcing, fueling and storing aviation fuel. For sourcing fuel directly, airlines will have no other option but to utilize the existing infrastructure possibly on a fee-based structure with OMCs.

In addition, airlines will also lose out on volume discounts (ranging between 4-5%) and credit period offered by OMCs and would need to pay in cash for direct imports, implying

incremental funding requirement. There is also an additional worry that the states may implement an entry tax (as applicable on crude oil in some states) to offset the revenue loss from

sales tax. Given these hurdles, the effective savings could be much lower than what is reflected from tax differential. In absolute terms, the impact will be higher on airlines with higher

share of domestic operations like Indigo or SpiceJet.

International Routes: Freeze on international permissions to private carrier removed

In another major boost to private airlines (especially IndiGo and SpiceJet), the Civil Aviation Ministry has lifted the freeze on their overseas expansions. The government had imposed the

freeze in Mar-2011 with the objective of protecting the financially strained Air India from more competition on foreign routes. However, lower utilizations of maximum permissible limits

under the bilateral Air Service Agreements (ASAs) have prompted the move to allow eligible domestic airlines (with more than 5 years experience) expand their international operations.

The move will benefit the private carriers (although may increase competition and losses for the national carrier) as international flights provide better margins owing to the availability of

fuel at international rates, higher auxiliary revenue through in-flight sales and higher fleet utilization, as international operations could happen during the otherwise idle night hours.

Financial guarantees to the debt-ridden national carrier in securing funding at competitive rates

As per media reports, Group of ministers (GoM), headed by finance minister cleared the financial restructuring plan for Air India under which the national carrier will be allowed to raise Rs

7,400 crore through government- guaranteed bonds bearing a coupon rate of 8.5-9%. According to official data, Air India has outstanding loans and dues worth Rs 67,520 crore. Of this, Rs

21,200 crore represents working capital loans, Rs 22,000 crore long -term loans taken for fleet acquisition, Rs 4,600 crore dues to vendors and it carries an accumulated loss of Rs 20,320

crore. The ministerial group also decided to restructure the carrier’s Rs 21,200 crore working capital loans - Rs 7,400 crore shall be come from the bond issue, Rs 9,800 crore will be

converted into long-term debt of 10 to 15 years and the balance Rs 4,000 crore will remain outside the restructuring exercise. While the financial guarantees may help it overcome near

term headwinds, operation turnaround at ailing national carrier remains critical for overall health of the industry.



ICRA LIMITED

Annexure 1: Key operating indicators and valuations for the Global Airline Industry

Company Name M cap EV SalesNet

ProfitsEBITDAR RoE ASKMs RPKMs PLF Yield FC/ ASKM

P/E

Ratio

EV

/EBITDA

P

/BV

P

/CF

CY/FY CY/FY CY/FY CY/FY CY/FY CY/FY CY/FY CY/FY CY/FY CY/FY CY/FY CY/FY CY/FY CY/FY CY/FY

Current Current 2011 2011 2011 2011 2011 2011 2011 2011 2011 2012e 2013e 2012e 2013e 2012e 2012e

($ Bn) ($ Bn) ($ Bn) ($ Bn) (%) (%) In Bn In Bn (%) $ $ x x x x x X

FSC Carriers

Delta Airlines 7.9 18.0 8.4 0.4 18.8 -- 235 193 82.1 16 3.7 4.2 3.5 3.9 3.9 7.4 2.4

Deutsche Lufthansa 6.3 -- -- -- -- -- 236 187 79.3 -- -- 20.8 9.1 2.8 2.4 0.6 2.2

Air France-KLM 1.7 -- -- -- -- -- 251 202 80.7 -- -- -- -- 8.1 5.1 0.3 1.5

Air China Ltd 12.2 23.6 6.7 1.1 40.3 37 132 106 80.0 10 2.8 6.8 7.7 7.5 7.2 1.1 3.4

Singapore Airlines 10.2 7.1 2.8 0.1 31.6 8 108 85 78.5 9 3.1 27.2 19.5 4.2 3.8 1.0 6.9

All Nippon Airways 7.7 15.8 8.2 0.1 22.5 5 87 58 67.5 0 3.6 30.4 17.2 5.9 5.3 1.2 4.4

Cathay Pacific Airways 7.7 -- -- -- -- -- 116 97 83.4 -- -- 14.5 10.6 7.1 5.9 1.0 5.6

China Southern Airlines 7.0 14.7 6.3 0.6 32.2 31 140 111 79.2 10 2.6 5.8 6.9 6.4 6.1 0.9 2.1

China Eastern Airlines 6.3 15.2 6.1 0.5 31.4 60 119 93 78.0 10 2.7 5.3 6.1 7.4 6.8 1.2 1.9

Qantas Airways 4.1 7.6 6.7 0.0 19.8 4 133 107 80.1 11 3.0 13.1 8.6 3.9 3.2 0.6 2.4

Korean Airlines 3.6 14.6 10.7 (0.3) -- -11 -- -- -- -- -- 8.8 8.4 8.3 7.4 1.2 2.2

Malaysian Airline 1.5 3.0 -- -- -- -- 51 39 75.4 -- -- -- 85.0 16.2 7.2 2.4 17.2

Thai Airways 1.8 5.8 -- -- -- -- -- -- -- -- -- 14.4 10.6 5.9 5.3 0.8 2.1

Garuda Indonesia 1.5 1.9 2.2 0.1 21.8 15 26 18 71.7 8 2.7 14.8 8.6 7.9 6.0 1.8 --

Asiana Airlines 1.3 -- 4.8 0.0 -- -- 37 28 76.4 -- -- 6.9 5.5 6.7 5.7 1.2 2.9

Air New Zealand 0.8 1.3 1.5 (0.0) 12.8 5 32 27 83.4 11 2.8 15.0 8.0 3.4 2.8 0.6 2.6

Jet Airways 0.6 3.1 3.2 (0.0) 27.0 -5 40 31 78.6 9 2.9 -- -- 88.2 10.2 4.0 --

Kingfisher Airlines 0.2 1.7 1.4 (0.2) 13.0 -- 16 13 81.0 9 3.1 -- -- -- - - -- --

LCC Carriers

Ryan Air 8.1 8.8 1.1 0.0 41.4 17 63 53 84.1 6 2.7 13.1 12.8 7.3 7.1 1.9 7.1

Southwest Airlines 6.3 6.9 4.1 0.2 17.6 3 121 98 80.9 15 4.8 11.4 8.3 3.7 3.3 0.9 5.0

Air Asia 3.3 5.1 -- -- -- -- 26 21 80.0 -- -- 11.1 9.2 8.2 7.2 1.9 6.2

Cebu Air 0.9 1.1 -- -- -- -- 10 9 85.0 -- -- 9.6 8.0 6.2 5.0 1.7 5.3

Tiger Airways 0.5 0.8 0.5 0.0 30.3 23 10 8 85.8 6 1.8 -- 78.0 -- 16.3 2.4 --

SpiceJet 0.2 0.2 0.6 0.0 18.5 -- 10 9 82.5 7 2.6 -- -- -- - - -- --

Source: Bloomberg, ICRA Research; projected estimates – Bloomberg Consensus estimates



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Indian Aviation Industry - 15th March