IMPACT OF THE ECONOMIC CRISIS ON THE INDIAN AVIATION INDUSTRY
A peep into its early history………… <ul><li>In 2003 the whole world celebrated the centenary of powered flight. But we Indians have to wait till 2010 to observe the centenary of flight in India. </li></ul><ul><li>After the flight of the Wright Flyer, it took just seven years, for the first aircraft to get airborne at Allahabad in UP. </li></ul><ul><li>There was hectic activity to bring planes to India and show them off in December 1910. </li></ul>
From then to now ………. <ul><li>1953: NATIONALISATION OF AIRCRAFT INDUSTRY </li></ul><ul><li>Assets of 9 existing companies transferred to two entities in the aviation sector controlled by the Government in </li></ul><ul><li>Indian Airlines, primarily serving domestic sectors </li></ul><ul><li>Air India, primarily serving the international sectors </li></ul><ul><li>IMPLICATIONS </li></ul><ul><li>Aviation became a preferred mode of transport for elite class </li></ul><ul><li>Restricted Growth of Aviation Industry </li></ul><ul><li>High Cost structure </li></ul><ul><li>Underdevelopment of infrastructure </li></ul><ul><li>1986: Private Sector Players permitted as Air taxi operators. Jet, Air Sahara, NEPC, East West, Modiluft, etc started service. </li></ul><ul><li>1994: Private Carriers permitted to operate scheduled services. Six operators granted license, however only Jet and Air Sahara able to service. </li></ul><ul><li>2003: Entry of low cost carriers. Air Deccan, Spice Jet, Go Air, Indigo. </li></ul><ul><li>IMPLICATIONS </li></ul><ul><li>Aviation is now affordable with check fares and discount schemes. </li></ul><ul><li>Various Operators with different business model. </li></ul><ul><li>Huge growth foreseen in Aviation </li></ul>
THE INDIAN AVIATION MARKET ……. <ul><ul><li>Strong economic growth </li></ul></ul><ul><ul><li>Liberalization of access to foreign airlines under bilaterals </li></ul></ul><ul><ul><li>Policy to encourage multiple Indian carriers to operate international services </li></ul></ul>Indian aviation market had been booming – domestic at 46%, and international at 17%, over the past 2 – 3 years <ul><ul><li>Strong capacity growth in the domestic market, mainly in the LCC segment </li></ul></ul><ul><ul><li>6 new airlines, almost all operating on the LCC model </li></ul></ul>
The growth opportunity in Indian Aviation….. . <ul><li>India’s airports handled 71 </li></ul><ul><li>million domestic passengers </li></ul><ul><li>In 2006/07, posting growth of </li></ul><ul><li>almost 40% year-on-year, and </li></ul><ul><li>over 25 million international </li></ul><ul><li>passengers, up approx 15%. </li></ul><ul><li>Growth is underpinned by </li></ul><ul><li>economic expansion, increased </li></ul><ul><li>capacity and price stimulation </li></ul><ul><li>resulting from increased </li></ul><ul><li>competition. </li></ul>“ Centre for Asia Pacific Aviation projects domestic traffic in India will grow 25-30% p.a., and international by 15% p.a. until 2010”
INDIAN AVIATION: BEARING THE BRUNT OF RECESSION
RISING FUEL PRICES… The relentless rise in global crude prices is threatening to take the sting out of aviation industry’s tail. Losses of industry is in the range of Rs.4000 crore and it is expected to double by the end of next year. The operating cost for airlines across the country during the past six months has gone up from 30 percent to a whopping 47 percent now Airlines across the country are finding it difficult to pay the increased fuel bill and in some cases the wages, industry experts say.
HIGH FUEL PRICES ONLY PART OF THE PROBLEM… RISING AIRCRAFT LEASE RENTALS A BIGGER ISSUE… Recent near collapse of AIG (American Insurance Group), which was bailed out by Federal Reserve through a $85 billion package at the last minute. International Lease Finance Corporation (ILFC), a subsidiary of AIG is the largest aircraft leasing company in the world. Its Indian customers are Air India, Jet Airways, Kingfisher Airlines and Spice Jet. A little over one-third of the 370 commercial aircraft registered in the country are new, many of which are leased structured in an ingenious way rather than bought outright. Lease rate fixed as per LIBOR…Rise in LIBOR due to international credit and liquidity crisis…Higher lease rentals passed on to customers as higher fares…
OTHER ISSUES… Kingfisher, which has catapulted to the top-spot among private airlines, recently shed 300 employees. Following “rationalisation,” it “returned surplus aircraft ” back to the lessors. “Airlines have cut capacity by about 17% in the first half of this fiscal. Expected to return atleast 20 more aircraft. Domestic air traffic plummeted to an 18% negative growth this September. In the fourth quarter of current fiscal, air traffic expected to fall by upto 15% due to fall in domestic incomes. The domestic carriers carried about 2.6 million passengers during Sep, 08 as against 3.3 million passengers in the corresponding period last year.
MEASURES TAKEN BY THE SECTOR. Excessive salary cuts – Reduction in the salaries of pilots by 20% in Jet airways. Cutting down on excessive frills in business class – Air India switching over from expensive menu items to comparatively cheaper options. Sale and Lease back policy - Air India trying to raise USD $165 million. Dilution of stake – Kingfisher planning to dilute 25% of their stake. Jet Airways planning to dilute 10% of its stake to Temasek. On October 13, Kingfisher and Jet Air announced an alliance that included code-sharing, rationalization, and some undisclosed arrangements for cutting costs. Cutting down on uneconomical flights - Industry wide capacity reduced from 1630 flights daily to around 1450. Air India cancels some flights for a certain specific duration.
MEASURES TAKEN BY THE SECTOR. Other options for sourcing ATF – Kingfisher talking to Reliance industries for direct import. Increase in fares – Airlines have been forced to increase fares and fuel surcharges in order to meet higher lease rentals and fuel price rise. Elimination of unwarranted travel by staff.
EXPECTATIONS OF THE INDUSTRY FROM GOVERNMENT… Lower taxes on aviation turbine fuel (ATF) which is 35% of the operating cost of airlines. They have been dropped from Rs 73.67 per litre to Rs 40.69 in the past four months. But still further reductions required . The industry’s wish list includes : Extending exemption of withdrawal tax on lease rentals of aircraft The Indian aviation sector’s double-digit growth has been the fastest in the world. But the airlines have not made much out of the profitless growth, with most players stepped deep in red. Reduction in landing charges – In India low cost carriers (LCC) pay the same as full service airlines. As per international standards, it is lower for LCCs.
EXPECTATIONS OF THE INDUSTRY FROM GOVERNMENT… Interest-free loans with repayments that kick in after three years Relaxation of route dispersal guidelines under which they have also to service non-profitable routes. Withdrawal of duty on spare parts and a sharp cut in landing, route and navigation charges for at least two years. Relaxing fringe benefit tax (FBT) Removing service taxes on first and business-class travellers.
OUTLOOK INDIA 2020…… <ul><li>The growth of India’s aviation sector has the potential to absorb up to US$120 billion of investment by 2020. </li></ul><ul><li>However, we must close the gap between the demand for aviation </li></ul><ul><li>services and the ability of our aviation system to meet that demand. </li></ul><ul><li>India must prepare a blueprint for the expansion of system capacity whilst maintaining safety, security and the environment. </li></ul><ul><li>India must develop a roadmap for infrastructure development beyond 2010. </li></ul>
OUTLOOK INDIA 2020…… <ul><li>Air Traffic - CAPA research projects that domestic passenger traffic will reach 150-180 million by 2020, with international traffic in excess of 50 million. </li></ul><ul><li>Scheduled Aircraft - The total aircraft fleet is likely to reach 1000, including replacement of the current fleet of 312 aircraft, with an estimated value of US$80bn + </li></ul><ul><li>General Aviation - Market for 500 Plus aircraft in the Non-Scheduled Category by 2020 and 300 aircraft in the private category use. Estimated Investment of Usd 4 billion. </li></ul><ul><li>Airports – US d 30 billion plus investment requirement by 2020(Included 9 billion already committed). </li></ul>