PROJECT REPORT ON JET-ETIHAD DEAL (INTER DISCIPLINRY PROJECT) SUBMITTED BY: SHREY AGGARWAL SIDDARTH YADAV 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 unfavourable 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 Proposal to allow foreign carriers to make strategic investments (up to 49% stake) in Indian Carriers Proposal to allow airlines to directly import ATF Lifting the freeze on international expansions of private airlines 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 favourable demographics, rising disposable incomes and low air travel penetration could attract long-term strategic investments in the sector. However, in our opinion, there are two key challenges: Aviation economics is currently not favourable in India resulting in weak financial performance of airlines 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 a wide access to the 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. India is expected to become the fourth biggest market in terms of value for all new aircraft deliveries during the next 20 years, according to aircraft maker Airbus. Therefore, the aviation sector in India is becoming highly promising. Further, the liberalisation of the sector in the mid-nineties has resulted in a remarkable growth as a large number of private service airlines entered the sector. A massive boom in the tourism industry and increasing levels of disposable incomes have given an intense impetus to the Indian Aviation industry; the major contributor being civil aviation. Strong government support and private participation, coupled with the availability of skilled manpower, and favourable business environment have positioned India as an attractive investment destination on the world map. Meanwhile, India has released its first ever detailed Aviation Carbon Footprint Report for 2011, which states that CO2 emissions from Indian scheduled airline operations as well as from foreign airlines to international destinations represent less than 1 per cent of the country's total CO2 emissions, which is significantly lower than the global average contribution of airlines. Delhi's Indira Gandhi International (IGI) Airport has been ranked the second-best airport in the world for 2011 by the Airports Council International. The airport scored this distinction in the category of airports with 25-40 million passengers per annum. Last year, it had been ranked fourth in the same category. India is the ninth largest aviation market in the world, according to RNCOS research report, titled "Indian Aerospace Industry Analysis". It is anticipated that the civil aviation market will register more than 16 per cent compound annual growth rate (CAGR) during 2010-2013 on back of strong market fundamentals. The rapidly expanding aviation sector in India handles about 2.5 billion passengers across the world in a year; moves 45 million tonnes (MT) of cargo through 920 airlines, using 4,200 airports and deploying 27,000 aircraft. Currently, 87 foreign airlines fly to and from India and five Indian carriers fly to and fro from 40 countries. India is expected to be amongst the top five nations in the world in the next 10 years. An efficient civil aviation sector is important for India as it is inter-linked with other sectors in the economy and generates income and employment through global commerce and tourism, as per a National Council of Applied Economic Research (NCAER) study titled 'Emirates in India - Assessment of Economic Impact and Regional Benefits'. Airport infrastructure in India is witnessing improvisation and expansion on a massive scale, with the Government avidly supporting private participants. The need for airport infrastructure in India has increased considerably. In order to ramp up airport infrastructure, the Government has unveiled reforms to facilitate investment in this segment. The investment in Indian airport infrastructure market, especially in the Greenfield projects is expected to increase. INDUSTRY EVOLUTION Market Size The domestic airlines carried 43.84 million passengers during January -September 2012 (first three quarters of calendar year), according to data released by the Directorate General Civil Aviation (DGCA). The air transport (including air freight) in India has attracted foreign direct investment (FDI) worth US$ 446 million from April 2000 to September 2012, as per data released by Department of Industrial Policy and Promotion (DIPP). Aerospace on a High India and New Zealand have signed the "Arrangement for Cooperation on Civil Aviation". Under the arrangement, the two countries will promote and support the development of training and technical cooperation in the field of civil aviation GVK Power and Infrastructure Ltd has signed an operations and management contract with the Airports Authority of Indonesia (Angkasa Pura Airports). The scope of the contract includes managing non-aeronautical commercial operations at both the existing terminals and the new international terminal of Indonesia's second busiest Bali (Denpasar) international airport Maldivian Airlines has expanded its flight network by connecting Chennai, Mumbai and Dhaka with Male, the capital city of Maldives. "India is our focus market, as it has a great potential," said Mr Sandhu Ibrahim Salem, Chairman, Maldivian Airlines India will be the fourth biggest market in terms of value for all new aircraft deliveries after China, the US and the UAE during the next 20 years, according to aircraft maker Airbus Spice Jet Ltd has announced the launch of two new international flights from Kochi, Kerala to Male and Dubai. The airline has deployed the Bombardier Q400 aircraft, with a capacity of 78 passengers, in the Kochi-Male route IBS Software has entered into a contract with Lufthansa Cargo AG for the implementation of its air cargo solution - iCargo. The deal worth Rs 700 crore (US$ 127.50 million) has three segments and IBS Software has major share of the contract Road Ahead The Indian aviation industry is exploring opportunities to improve connectivity and is also looking at enhancing the number of Indian carriers to various countries. Rise in per capita income is making