Aviation Industry
Prepared by Madhulika Appasani

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. At the industry level, long term viability also requires return of pricing power through better alignment of capacity to the underlying demand growth.

Aviation Industry
Indian hospitality sector contributes 8-9 percent of the country’s GDP. The sector encompasses travel and tourism and major segments that fall under this category include accommodation and catering (hotels, restaurants), transportation (cruise, railway, rentals, airline companies), travel agencies and tour operators. The tourism and hospitality sector together contributed US $32.7bn in 2011, and registered a CAGR of 13 percent. Currently, India has 114,000 hotel rooms, which stands 150,000 rooms short in meeting the current requirement. Thus, the growth opportunity for this sector is immense, but is tangled with challenges across parallel sectors and the overall economy. According to estimates provided by World Travel & Tourism Council (WTTC), contribution of travel and tourism to nation’s GDP will grow consistently in the next decade though this growth opportunity will be closely linked to the growth of India’s hotel and restaurant business. Structure of Indian Aviation Industry:

ECO 561 – IMT Hyderabad

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Aviation Industry
Indian aviation sector has witnessed a phenomenal growth chart in the last decade. Today, India is the 9th largest civil aviation market in the world and ranks fourth in domestic passenger volumes with a market worth of US $12bn. As per AAI, passenger handling capacity has risen two-fold from 72 million (FY 06) to 143 million (FY 11), and freight traffic has risen from 1.5 million MT (FY ‘06) to 2.3 million MT (FY ‘11). The Airport Authority of India (AAI) was the only major player involved in developing and upgrading airports in India for a long time, but private sector participation has increased post liberalisation. Major private sector players in aviation are GMR Infrastructure, GVK, Siemens, Larsen & Toubro Ltd., Maytas Infra Ltd., and Unique Aviation Services Pvt. Ltd. Year < 1953 1953 1986 1994 1995 1997 2001 2003 2005 2007 2010 2011 2012 Major Milestones Nine Airlines existed including Indian Airlines & Air India Nationalization of all private airlines through Air Corporations Act; Private players permitted to operate as air taxi operators Air Corporation act repealed; Private players can operate schedule services Jet, Sahara, Modiluft, Damania, East West granted scheduled carrier status 4 out of 6 operators shut down; Jet & Sahara continue Aviation Turbine Fuel (ATF) prices decontrolled Air Deccan starts operations as India’s first LCC Kingfisher, SpiceJet, Indigo, Go Air, Paramount start operations Industry consolidates; Jet acquired Sahara; Kingfisher acquired Air Deccan SpiceJet starts international operations Indigo starts international operations, Kingfisher exits LCC segment Government allows direct ATF imports, FDI proposal for allowing foreign carriers to pick up to 49% stake under consideration
Industry Evolution – Aviation Industry (Source: ICRA Research)

Pricing: The next big change in the industry came in late 2003 with the emergence of India’s first no-frill airlines, Air Deccan. It revolutionized the industry, offering fares as low as INR 500 (USD 10 roughly), compared with Full Service fares offered by the incumbents, averaging about INR 3000 or more. Since then, Spice Jet (restructured Royal Airways and Modiluft), Go Airways and Kingfisher Air have also entered the industry. Paramount Airways is another player, though it is positioned on the other end of the spectrum, as an ‘all business class’ airline. With the further advent of online ticket sales through companies such as makemytrip.com, prices have crashed and tickets are available for as little as INR 0.99. In fact, now many airline tickets can be bought for a price comparable to an upper class railway ticket for the same route.
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Aviation Industry
Challenges:
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Hotel industry is prone to hurdles like poor infrastructure, high cost of land procurement and multiple licences as well as levies. High inflation, high interest rates and absence of policies being issued by the government is hampering growth prospects. Slow economic growth in developed countries like US and Euro zone will greatly impact the travel and tourism sector, and consequently, also the hospitality sector. Talent management is a major challenge for this sector. Inadequate supply of talent coupled to increased competition within the sector for available resources has made attrition a cause of concern.
Factors that are not in favour of investments Aviation economics are not favourable in India Higher taxes on ATF and airport charges continue to be key headwinds for the sector; 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. Highly competitive traveller base & Price Sensitive

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