Will FDI Take-off in Aviation? Dinodia Capital Advisors September 2012
Executive Summary 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. 2 1
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 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 3
Where are we today?Continued… 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 “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 4 Aviation, Government of India
Evolution of the Industry……. Government allows direct ATF imports, FDI proposal for allowing foreign carriers to pick up to 49% stake 2012 under consideration 4 out of 6 operators 2007 shut down; Jet & Industry consolidates; Sahara continue Jet acquired Sahara; Jet, Sahara, Modiluft, Kingfisher acquired Air 1997 2005 Deccan Damania, East West granted scheduled carrier status Kingfisher, Spice Jet, 1995 Indigo, Go Air, Paramount start operations 1953 Nationalization of all private airlines through Air Corporations Act>1953 Nine Airlines existed including 5 Indian Airlines & Air India
What’s new to it???Government Policies Earlier Now No Foreign Airlines were allowed to invest The following have been revised now : in the equity of an aviation company in Permission to invest (by FII & FDI together) India 49% in equity of: They were only allowed to invest in the - Scheduled and equity of Cargo airlines, helicopter and - Non-scheduled air transport services seaplane services Will have to comply with relevant The following was allowed: - SEBI* regulations, - 46% FDI (100% for NRIs) in - FIPB** Scheduled Air Transport Services - and other regulatory clearances through the automatic route A scheduled operator’s permit can be - 74% FDI (100% for NRIs) in Non- granted only to a company with: Scheduled Air Transport Services - The chairman and at least two-third through the automatic route (up to of its directors have to be Indian 49%) and government route citizens (beyond 49% and up to 74%) - Substantial ownership and effective - 100% in Helicopter Services control is vested with Indian nationals requiring DGCA approval through - Registration and principle place of automatic route business is in India 6*SEBI – Securities & Exchange Board of India**FIPB – Foreign Investment Promotion Board
Who dominates the skies today?($ in Billion)S No. Name of the Airlines Market Enterprise Turnover Net Capitalization Value Profit1 Air China Ltd. $12.2 $23.6 $6.7 $1.102 Singapore Airlines 10.2 7.1 2.8 0.103 Ryan Air 8.1 8.8 1.1 0.004 Delta Airlines 7.9 18.0 8.4 0.405 China Southern Airlines 7.0 14.7 6.3 0.606 China Eastern Airlines 6.3 15.2 6.1 0.507 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 7* Bloomberg and DCA Research
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, Indias 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 Go-Air, another profitable airlines which is capable of attracting foreign players to invest in it has about 7.4% of the market share 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 8
SWOT AnalysisS W TRENGTHS EAKNESSES FDI move will infuse funds in the industry Excess capacity of carriers as compared India has world class airports to demand Trend of enhanced quality of in-flight Negatively impacting current tax regime service in place Indian carriers now also include a range High fuel costs of Boeing 747s and Airbus 340s Profitability issue unaddressed High price competition acting as a downward spiralO T HREATS PPORTUNITIES Scope of increasing connectivity Globally the industry is considered to Government is committed to revive the be a laggard and unprofitable Industry Current carriers require heavy Reforms to relax complicated recapitalization compliances New government might not support current changes in 2014 "How do you become a millionaire?" asked Warren Buffett, who then 9answered his own question: "Make a billion dollars and then buy an airline."
Pull of the Future No. of aircrafts Estimated valueAirline expected by 2017 (Rs. Crores)Air IndiaGo Air 40 22 18,000 8,100 “ India is light years ahead in terms of the market potential and the potentialJet Airways 79 32,000 for the company (Boeing) to come “Jet Lite 20 7,600 together as an enterprise andKingfisher 78 29,700 grow Q R ThomasSpice Jet 68 26,100 President Boeing IndiaIndigo 69 26,100Total 376 147,600 10Source: Report of Working Group on Civil Aviation for formulation of Twelfth Five Year Plan (2012-17)
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? 11
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 12
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