PPreparedby

CAPAIndia
AviationOutlook
FY14Highlights
PreparedbyCAPAIndia
May2013

www.capaindia.com
INDIA

HighlightsofCAPAIndiaAviationOutlook2013/14 Page1
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May2013CentreforAsiaPacificAviationIndia

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Disclaimer
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contained in this report. The Centre does not accept any legal responsibility for consequences that
mayarisefromerrors,omissionsoranyopinionsgiven.

Thisdocumentcontainsforwardlookingstatements.Forwardlookingstatementsmayincludethe
words may, will, plans, estimates, anticipates, believes, expects, intends and
similar expressions. These statements are made on the basis of current information available and
simplisticassumptions.Theseforwardlookingstatementsaresubjecttonumerousfactors,risksand
uncertainties that could cause actual outcomes and results to be materially different from those
projectedorassumedintheforwardlookingstatements.

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Contents
Disclaimer................................................................................................................................................1
1FinancialandTrafficOutlook...............................................................................................................3
2Policy&RegulatoryOutlook................................................................................................................9
3AirlineOutlook...................................................................................................................................16
4Airports,MRO&GAOutlook.............................................................................................................21

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1FinancialandTrafficOutlook
IndiancarrierslostUSD1.65bnonrevenueofUSD9.5
bninFY13,40%ofannuallosswasgeneratedinQ4
This analysis is an extract from the keenly anticipated 2013/14 edition of the annual
CAPA India Aviation Outlook Report to be released on 6 June 2013. For more
information and to order the full 250+ page report contact Binit Somaia on
bs@centreforaviation.comorusetheorderformattheendofthisdocument.
CAPA estimates that Indias airlines posted a combined loss of USD1.65 billion in FY13
(USD1.15 billion if Kingfisher is excluded), down from approximately USD2.28 billion the
previous year. More than 40% of the loss was incurred in the last quarter alone,
squanderingtheimprovedperformancepostedduringthefirstninemonthsoftheyear.
Kingfishers exit from the Indian aviation sector was one of the most significant
developments for the market in FY13. It highlighted the fragility of the sector when an
airlinethatwasthelargestinthecountrylessthantwoyearsearlierandwithanexcellent
reputationamongstpassengers,couldfallfromgracesoswiftly.
But with it came a silver lining for the remaining carriers. As a result of the removal of
Kingfishers seats, combined with modest capacity induction by other carriers the
demand/supply dynamics in the market started to favour airlines for the first time since
2004.Thiswasreflectedpositivelyintheaveragefareswhichincreasedby1520%yoy.
Indias airlines were showing signs of a recovery in financial performance during the first
three quarters of FY13, however the 4th quarter spoilt the party. Aggressive discounting
during the traditionally weak period JanuaryMarch period resulted in losses of USD700
millionduringthisquarteralone(closetoUSD500millionifKingfisherisexcluded).
The cost environment remained hostile throughout the year with the weakness of the
Indian Rupee and continued high oil prices being the key challenges. Even though Brent
Crude levels softened towards the end oftheyear, thedepreciation of the Rupee meant
thatcarriersdidnotseeanybenefitfromthis.
Over the 12 months to 31 March 2013, with carriers moving to fill the space vacated by
Kingfisher, all airlines except Jet Konnect saw an increase in their domestic market share
over the previous year, but none more so than IndiGo which saw a 7 percentage points
improvement.
IndiandomesticairlinemarketshareFY13v.FY12

Source:CAPA,DGCA
0%
5%
10%
15%
20%
25%
30%
D
o
m
e
s
t
i
c

M
a
r
k
e
t

S
h
a
r
e

FY12 FY13

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However, despite the moderation in capacity in the market, the steep increase in fares
curtaileddemandandmeantthatalmostallcarriersreportedaslightdecreaseinaverage
passenger load factors during the year. The sole exception to this was Air India which
achievedacreditable5pptsimprovementto69%,althoughitremainedthelowestofall
thecarriersthatarecurrentlyoperating.However,itsloadfactorsinEconomyclasswere
much higher (as is the case for Jet Airways) with the average being depressed by the
relatively poor performanceof businessclass on domestic routes. IndiGo was once again
the standout performer achieving sustained load factors of above 80% throughout the
year.
AveragepassengerloadfactorsondomesticroutesFY13v.FY12

Source:CAPA,DGCA
EmiratesemergesasIndiasleadinginternationalairlineinFY13
OntheinternationalfrontanimportantdevelopmentwasthefactthatinFY13forthefirst
timeaforeigncarrier,Emirates,claimedthehighestmarketsharefortrafficto/fromIndia.
Air India, historically the market leader on international routes was impacted by the
grounding of its 787s for most of the last quarter. While Indias second largest
internationalcarrier,JetAirways,sawonlyamarginalincreaseintrafficasitconsolidated
its network and dropped services to points such as New York JFK, Milan, Johannesburg
andKualaLumpur.
AirlineMarketShareonInternationalRoutesto/fromIndiaFY13

Source:CAPA,DGCA
50%
55%
60%
65%
70%
75%
80%
85%
P
a
s
s
e
n
g
e
r

L
o
a
d

F
a
c
t
o
r
FY12 FY13
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%
Lufthansa
SriLankan
ThaiAirways
SingaporeAirlines
AirArabia
QatarAirways
AIExpress
JetAirways
AirIndia
Emirates
Internationalmarketshare%

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IndustrylostanestimatedUSD1.65bnonrevenueofUSD9.5bn,butIndiGowas
exceptionalwithanestimatedUSD100110mnprofitonrevenueofUSD1.51.6bn
Indias airlines lost USD1.65 billion on total revenue of approximately USD9.5 billion.
Despite the magnitude of the loss there were yearonyear improvements almost across
theboard.
ReportedandEstimatedIndianCarrierRevenueandNetIncomeinFY12andFY13
FY12
Revenue
FY12
NetIncome
FY13
Revenue
FY13
NetIncome
AirIndia USD2.6bn (USD1.4bn) USD3.0bn (USD950mn)
GoAir USD278mn (USD24mn) USD375400mn (USD1416mn)
IndiGo USD1.0bn USD23mn USD1.51.6bn USD100110mn
JetAirways USD2.7bn (USD226mn) USD3.0bn (USD87mn)
JetKonnect USD340mn (USD33mn) USD387mn (USD53mn)
Kingfisher USD1.0bn (USD423mn) USD91mn (USD500520+mn)
SpiceJet USD720mn (USD109mn) USD1.0bn) (USD34mn)
Source:CAPAResearchandcompanyfilings.*DataforunlistedcarriersAirIndia,GoAirandIndiGo
areCAPAestimates.Finalresultsforthesecarriersmayvaryduetooneoffaccountingadjustments.
FY13lossesmayimpactinvestorvaluationsbutCAPAexpectstwofurthertransactions
inFY14
Thesecontinuedlossesandthefurthererosionofnetworthmaywidenthegapbetween
promoter and investor expectations when it comes to valuations. Combined with the
prospect of new entrants into the market, this might impact capital raising plans for
incumbentcarriers. Neverthless we believe that there is sufficient confidence in the long
term fundamentals of the market to maintain investor interest and we expect a further
twoIndiancarrierstocompletetransactionswithstrategicorfinancialpartnersinFY14.
Q4rewrotetheresultsforallcarriers,especiallyJetandSpiceJet
ThesectorgeneratedlossesofapproximatelyUSD700millioninthelastquarter(closeto
USD500millionexcludingKingfisher).JetAirways,whichhadreportedamarginalprofitof
USD2millionoverthefirst9months,endedtheyearwithaUSD87millionlossduetoone
off costs and increased maintenance expenses. While SpiceJets loss of under USD 1
million for the first three quarters finished up as a US34 million fullyear loss due to
maintenance costs being more than USD30 million higher than last year, coupled with a
significant increase in interest expense. IndiGo was earlier ontrack to achieve a higher
fullyear profit but it too was impacted by lower than expected yields in Q4. Air Indias
losseswereintensifiedasaresultoftheweakfaresenvironmentandthegroundingofits
787fleetduringacrucialperiod.
Industrydebtincreased89%inFY13toUSD14.5billion
Indias airlines have an estimated combined debt of approximately USD14.5 billion (with
additional vendorrelated liabilities of around USD2 billion), compared with an average

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cashpositionof just USD500550 million.Air Indiaholds just over60% of that debt,with
fullservicecarrierscombinedaccountingforcloseto90%,althoughtheJetAirwaysGroup
reduceditsdebtpositionfromUSD2.62bntoUSD2.25bnduringFY13.
A key contributor to the overall debt has been the industrys accumulated losses since
2007 which were approaching USD9.5 billion as at 31 March 2013. This has resulted in
continuederosionofthenetworthofIndiascarrierswhichareestimatedasfollows:
AirIndia(FY12): (USD3billion)
GoAir(FY12): (USD107million)
IndiGo(FY12): USD69million
JetAirways: (USD62million)
JetKonnect: (USD311million)
SpiceJet: (USD41million)
Source:CAPAResearchandcompanyfilings.*DataforunlistedcarriersAirIndia,GoAirandIndiGo
areCAPAestimates.
Internationalaccountsfor80%ofAirIndiaslosses,whiletheJetAirwaysGroupis
hurtingondomesticwhereitlostUSD210millioninFY13
Air India faces key structural viability issues on its international routes due to poor
alignmentbetweenitsfleetstructureandroutenetwork,andweakcommercialcapability,
particularlyinoffshoremarkets.Asaresultinternationaloperationsaccountfor80%ofits
losses. The resumption of 787 services will help to improve the situation buthuge losses
areexpectedtocontinue.
JetAirwaysandJetKonnectcombinedreportedlossesofapproximatelyUSD210millionon
domesticroutesinFY13,whereastheinternationalbusinesswasprofitabletothetuneof
approximatelyUSD70million.Thecarrierhasstruggledonthedomesticfrontasaresultof
its confused strategy with at one stage three separate brands operating without a clear
market proposition for each. With the recent consolidation down to two brands and the
greaterstrategicclarityaffordedbythepartnershipwithEtihadamorefocusedapproach
canbeexpected.
Thatsaid,bothJetAirwaysandAirIndiaremainvulnerableondomesticroutes,especially
astheycontinuetooperatewithafullservicecoststructureinamarketthathasshifted
predominantly to low cost. Until both of these full service carriers have developed a
competitive domestic cost structure the sector will remain unviable as it is otherwise
impossible for them to sustain fares close to the levels chargedby LCCs. Theyhave been
unabletoextractapremiumforthefullserviceproductandthefaredifferencebetween
fullserviceandlowcostcarriersisnegligible.
DomesticOutlookFY14:Passengernumbersexpectedtocross60milliononceagain
Domestictrafficisexpectedtoexpandby46%inFY14,withmostofthegrowthtooccur
inthesecondhalfoftheyear.StartingfromQ3thetraditionalfestivalandholidaytrafficis
expected to be supplemented by increased passenger movements driven by state
elections in November, and then by general elections some time prior to May 2014.
AirAsias possible entry in the second half of this financial year could also provide some
further growth although the airline will still be relatively small even by the end of the
forecast period. These factors could push growth above 6% subject to market conditions
fromQ3onwards.WeexpectthatbytheendofFY14domestictrafficwillhavematched
orslightlyexceededtheprevioushighwatermarkofjustover60millionannualdomestic
passengersreportedinFY12.

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InternationalOutlookFY14:Buoyanttrafficcouldgrowat1012%,twicethepaceof
domestic
Internationaltrafficgrowthisexpectedtobemorebuoyantthandomesticandcouldgrow
by1012%asIndiancarriersexpandandasmorebilateralentitlementsareexpectedtobe
grantedtoforeigncarriers.Asisthecasefordomestictraffic,thesecondhalfoftheyearis
expected to account for the majority of the growth. Capacity expansion during the year
aheadislikelytobearound10%,largelydrivenbyLCCs.
Jetisalreadyprofitableoninternationaloperationsandisexpectedtofurtherstrengthen
its performance in the coming year as a result of its increasing cooperation with Etihad.
IndiGo and SpiceJet are both nearing breakeven on overseas routes. However Air India
continues to incur huge losses on international services due. The 787s will help but the
structuralissuesrundeepandthiswillimpactthecarriersoverallturnaroundprospects.
ProfitabilityOutlookFY14:PrivateairlinesexpectedtoreportUSD250300+million
profits,butAirIndiaprojectedtoloseUSD750800million
CAPAestimatesthatIndiasprivateairlinescouldpostcombinedprofitsofUSD250300
millionormoreinFY14withaprojectedbreakdownasfollows,basedonCAPAResearch
estimates:
GoAir: USD810millionprofit;
IndiGo: USD100120millionprofit;
JetAirways: USD125+millionprofit;
SpiceJet: USD2530millionprofit.
Jetsreturntoprofitabilityislargelybeingdrivenbyasignificantreductionininterestcosts
asaresultofaUSD600millionreductioninhighinterestRupeedebtandaccesstolower
interestratesthroughoffshorefinancingoptionsthathavebecomeavailableinlightofthe
Etihad investment. In addition the carrier is expected to see an increase in net earnings
from further strengthening of its international operations although the real benefits will
be seen from FY15 SpiceJets and GoAirs profitability is subject to them being able to
control their losses during the weaker second and fourth quarters which have let them
down in the past. In the case of SpiceJet, now that it is a relatively large airline these
swingsbetweenstrongandweakquarterscanhaveamajorimpactonfinancials.
However, the overall industry result is expected remain in the red, dragged down by a
projectedUSD750800millionlossatAirIndia.
Theseprojectionshavebeendevelopedontheexpectation:
thatoilpriceswillremainstubbornlyhighwithaverageBrentCruderatesforthe
yearassumedtobeUSD100110/barrel;
theRupeeisnotexpectedtoprovideanycushionwithratesprojectedtoremain
intherangeofINR5455totheUSDollar;
and that pricing discipline will be maintained if we were to experience an
extended period of discounting similar to that seen in Q4 FY13, profitability
woulddeterioratewellbelowtheprojectedlevels.
Keychallengeswillremain,buttherearesomepositivedevelopmentsonthehorizon
Theviabilityofdomesticoperationswillcontinuetofaceseveralfundamentalchallenges.
FarelevelsareexpectedtobesofterthaninFY13andthereisnosignificanteasingaround
thecornerintermsofcosts.

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Fuel,thelargestinputcost,isexpectedtoremainhigh.Thisisleadingairlinestoconsider
direct import of aviation turbine fuel which is exempt from sales taxation. Permission to
do so was granted last year but due to the associated logistical and infrastructure
challengesnocarrierhasyettakenadvantageoftheoption.Thematterwasalsoheldup
duetointerministerialissues.
SpiceJetisexpectedtocommenceimportingsomeofitsrequirementsfromQ2,although
given that this is a complex and untested undertaking it is difficult to assess how
successfulitwillbe.Itislikelytostartonasmallscaleandthengrowsubjecttowhether
genuinesavingsarerealised.Thiswilltakesometimetoassesssowedonotexpectthat
directimportoffuelwillhaveamaterialimpactonprofitabilityinFY14andwehavenot
includeditinourprojections.
However, if successful it could be an important trigger towards creating a more
sustainablelongtermcostbasefordomesticoperations.Ideallyitwouldresultinadirect
reductioninsalestaxationallowingcarrierstobenefitfromlowerpricesthroughthefront
doorratherthanhavingtodevelopabypasssolution.
If Jet Airways proceeds down the direct import path it may be able to leverage its
relationship with Etihad to secure favourable commercial terms and reduce the advance
cashcommitmentsrequiredbyfuelsuppliersinAbuDhabi.Oneofthestumblingblocksto
date has been that carriers do not have available cash balances to be able to place the
bulkordersthatarerequiredforwholesaleimportpurposes.
Ancillariesexpectedtobegraspedwithgreatervigourasregulatorgivesgreenlight
Therecentgreenlightgivenbytheregulatorforunbundlingoffares(althoughtechnically
there was no formal restriction earlier) should see airlines pursue ancillary opportunities
more aggressively. CAPA estimates that there is the potential for carriers to generate an
additionalUSD500millionperannumthroughthischanneltobedevelopedoverthenext
twoyears.Onlyafractionofthisisexpectedtobetappedinthecomingyearasitwilltake
some time to implement new initiatives, however more significant benefits can be
expected to accrue from FY15 onwards. Low hanging fruit such as charging for premium
seats and priority checkin could generate an additional USD1012 million relatively
quicklyinthecurrentfinancialyear.
Smallbutimportantstepstowardsachievingaviableoperatingenvironment
The successful direct import of fuel or a possible reduction in taxation, combined with
increasingancillaryrevenuewillhelptobridgethecostrevenuegap.
The introduction of GAGAN, Indias satellitebased navigation system in 2014, together
with the flexible use of airspace between civil and military purposes which has recently
beenapproved,aretwofurtherinitiativeswhichwillbeveryimportantinreducingairline
operating costs through reduced fuel consumption as a result of more direct flight
routings.
Andfrom2016onwardsasthesedevelopmentsbecomemoreestablishedandthemarket
seestheintroductionofreenginedA320neosand737MAXaircraft,wecanexpecttosee
ameaningfulchangeinthelandscape.

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2Policy&RegulatoryOutlook
Immensechangeaheadindomesticandinternational
marketsbutapolicyvacuumpersists
Absenceofastructuredpolicyframeworkisdamagingtoindustryviability
A massive upheaval is occurring in Indian aviation. Yet, despite this, there has been no
changeinthenationsapproachtopolicyandregulation.Successiveadministrationshave
studiedly ignored the desperate need to create a structured framework and longterm
vision for the sector. The result is a disconnected and ultimately costly jumble of
adjustments.
Repeated flowery commitments to comprehensive overhaul of the policy have led to
nothing; a proposed new civil aviation policy has remained in draft format for some 20
years. In this vacuum jolting changes occur in an ad hoc manner. Sometime they are
positive such as the decision to allow foreign airlines to invest in Indian carriers but
there has been no thought given to the far reaching implications that will have for the
aviationmarketstructure.
Indias flag carrier for example continues to languish, with noprospectof recovery other
than the regular bandaid bailout convenient for politicians, but costly for the nation.
And makeshift decisions taken out of context, like the foreign ownership revision, as a
resulthaveoffsettingnegativesthatalmostinvalidatethepositives.
Otherexamples:
Justafewmonthsagothegovernmentwantedtoencouragethedevelopmentof
hub airports in India, but statements in the light of the Jet AirwaysEtihad deal
suggestthisisnolongerconsideredapriority;
Airlineswereadvisedatthebeginningoftheyearthatforeigncarrierswouldnot
begrantedincreasedaccessuntilIndiancarriershadexhaustedentitlements,but
insteaddramaticopeningupistakingplaceonselectedmarkets;
TheAircraftAcquisitionCommitteedisappearedasquicklyasitarrived;
Andwhilechargingforpreferentialseatswasnotpermitted,prioritycheckinand
otherancillariesposednoproblem.
These stuttering inconsistencies in regulations and policy reversals, in 2013 alone,
entrenchinstabilityanddamageviabilityacrossthesector.
Until firm directions are introduced, few will be brave enough to invest in the sector in
future.Indiadesperatelyneedsalongtermpolicyandregulatoryframeworkwhichspells
outthegovernmentsstanceoncriticalissues.
Without this strategic clarity any major decisions will only create more structural
challengesandmakeinvestmentevermoreriskfilled.
India cannot expect billions of dollars of investment without a national civil
aviationpolicyframework
Supporting modernisation and growth of Indias aviation industry requires billions of
dollarsofinvestmentinaircraft,airportinfrastructureandancillaryservices,themajority
ofwhichisexpectedtocomefromtheprivatesector.Yetinthemorethan20yearssince
the domestic aviation sector was first opened up India remains without a Cabinet
approvednationalaviationpolicy.Despitenumerouswellintentionedattempts,especially
since199798,theyhavenotprogressedbeyondthedraftstage.Theredoesnotappearto
beagenuineinterestincreatingalongtermpolicyframework.

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The absence of a transparent policy has prevented the corporatisation of the sector and
has kept many serious investors away from the market. This unpredictability has hurt
Indianairlinesandairports.Privateoperatorshaveinvestedbillionsofdollarsinpreparing
Delhi and Mumbai for hub operations only to find that the bilateral policy has been
changed overnight to one that encourages these airports to be bypassed. And Indias
airlines had been operating on the assumption that no new bilaterals would be granted
untilthehomecarriershaddevelopedgreaterscale.
CAPA India continuously engages with global investors and tracks their interest in the
market. It is apparent that the frequent shifting of the goalposts means that many
potential investors are reluctant to commit capital despite their confidence in the
underlyinggrowthpotentialofthemarket.
CAPA urges the government to introduce a wellthought long term aviation policy within
the next 6 months based on extensive industry consultation. This should be the key
priorityoftheadministrationastheabsenceofpolicypredictabilityisoneofthegreatest
barrierstoseriousinvestment.
BilateralpolicyisexpectedtobeakeyfactorinthebattleofMiddleEasthubs
India does not have a stated bilateral policy outliningthe mission, purpose andobjective
for which seat entitlements will be allocated. Prior to 2004 the government had an
extremely conservative stance, reluctant to grant further access to foreign carriers given
thatAirIndia,whichwasthentheonlyIndiancarrierpermittedtooperateoverseas,was
in no position to expand. Air India at the time had not inducted a single aircraft into its
fleet for over a decade. The capacity limitation was strangling international business and
tourism,withpassengersneedingtobookmonthsinadvancetosecureseatsduringpeak
season.
From 2004, as a part of the overall opening up of the sector bilaterals with key markets
wereopenedupdramatically.Althoughliberalisationwaswelcome,ittookplacewithout
consultation with the industry andno roadmap on the future directionof bilateral policy
waspresented.
From 2008, as the operating environment became more challenging bilateral policy
returnedtoaconservativesettinginanefforttoprotectAirIndia,aswellasinresponseto
controversies surrounding the increase in access that had been granted to Middle East
carriers, especially Emirates, over the preceding years. The protection of Air India also
impacted private Indian carriers which struggled to obtain route rights even where seat
entitlements were available under the bilateral. The government stated that the rights
were reserved for Air India even thought it did not have the aircraft nor any interest to
operatemostoftherouteswhichprivatecarrierswantedtolaunch.
Ahazyofficialpositionthatisatoddswithreality
The official position remains that Air India has first right of refusal, however since 2012
there has been some relaxation and almost 80,000 seat entitlements have been granted
toIndiancarriersinrecentmonths.
ItwasalsostatedbytheMinistrythatuntilIndiancarriersexhaustentitlementsavailable
underexistingbilateralsnonewairservicesagreementswouldbenegotiatedwithforeign
countries,especiallyfromtheMiddleEast.AndyetinlateApril2013,IndiaandAbuDhabi
reached agreement on a new bilateral that will see an almost fourfold increase in seat
entitlements,whichpavedthewayfortheJetAirwaysEtihaddealtogothroughlessthan
24hourslater.
The aboutturn in policy was as a result of the support of pivotal senior figures in
government. CAPA expects that European and Asian airlines will protest the liberal
openingupforMiddleEastcarriers,especiallysinceLufthansaandSingaporeAirlineshave
not been able to secure approval to even upgauge the largest permitted aircraft from a
747800toanA380.

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AccordingtoCAPAResearchestimates,foreignairlinesareseekinganadditional150,000
175,000 seatsper week (excluding the recently expanded IndiaAbuDhabi bilateral) over
theperiodthroughtotheWinterschedule2015/16.MostofthedemandisfromMiddle
EastcarriersandTurkishAirlines.
Emirates for example is understood to be seeking an additional 50,000 weekly seats of
which26,000theywanttoutiliseimmediately.Talksbetweentherespectivegovernments
are already underway on this request. Qatar Airways is reportedly seeking an additional
50,000 seats and Air Arabia around 20,000 additional seats over the next 23 years. A
further20,00030,000seatsareunderstoodtohavebeenrequestedbyotherMiddleEast
carriers.
Meanwhile Turkish Airlines has been aggressively seeking to increase its entitlements for
more than a year from 14 to 56 weekly frequencies to enable it to offer double daily
services to Delhi and Mumbai and daily services to Bangalore, Chennai, Hyderabad and
Kolkata.
Following the recently concluded IndiaAbu Dhabi bilateral agreement, UAE carriers now
have entitlements to operate 120,000 weekly seats to India, let alone the increases they
are seeking. Against this backdrop Singapore is unlikely to have been pleased with the
modest10%increasetojustunder29,000seatsthatwasagreedlastmonth.
ChangeinWeeklySeatEntitlementsinIndianBilateralNegotiationswithAbuDhabiand
SingaporeinApr13

Source:CAPA,PressInformationBureau
Anewdirectioninpolicywhichwillintegratewidereconomicandpoliticalobjectives
CAPA expects that the Indian government will increasingly link bilateral air services
negotiations with larger economic and geopolitical considerations such as foreign direct
investment,tradeandaccesstooilandgassupplies.Thestructureandcompetitivenessof
the Indian aviation industry appears to be a lower priority in the broader agenda of the
government.TheinvestmentbyEtihadinJetAirwaysislinkedtolargerdirectinvestment
fromAbuDhabi.SimilarlyQatarislikelytolinkbilateralairservicesaccesstogassupplies
andinboundinvestment.Aviationhasbecomeatradeissue.
CAPAwelcomestheopeningofthemarketbuttheprocessneedstobewellthoughtand
to follow a clear plan. Bilateral entitlements are a national asset and not an individual
carriers,andCAPAurgesthegovernmenttodevelopatransparentandstructuredpolicy
fortheirallocation.Ifrightaretobelinkedtobroadertradeandinvestmentissuesand
thismaywellbeinthelargernationalinterest,althoughitisunlikelythatcarefulanalysis

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hasbeenconductedtoarriveatthisconclusionthisshouldbestated,therebyallowing
operatorsandinvestorstoplanaccordingly.
OverthelastfewyearsIndiahassignedseveralFreeTradeAgreementswithkeypartners
but has since found that several were rushed and poorly thought out. In a bid to seek
foreigninvestmenttocorrectthecurrentaccountdeficitthegovernmentshouldtakecare
to ensure that it does not damage an industry that is strategically important to the
economy.
Liberalisation of bilaterals will certainly support the growth of traffic flows but it is also
likelytoshiftkeyelementsoftheaviationvaluechainandemploymentoffshore.Acouple
of landmark foreign investment transactions involving Indian carriers could permanently
change the dynamics of the international market and transform domestic aviation.
However,theseseismicdevelopmentsaretakingplaceinapolicyvacuum.
Urgentclarityisrequiredfromthegovernmentonthecriteriaforissuingnewlicences
AirAsiasplantoformanIndianJVinwhichitwillholda49%shareisseenasastrongvote
of confidence in the potential of the market. CAPA expects further interest from other
SoutheastAsianandGulfLCCstosetupgreenfieldoperations.
However, market entry is yet another grey area in Indias policy framework. There is no
clearlystatedpositionfromtheMinistryofCivilAviationonthecriteriawithrespecttothe
issue of new airline licences, especially for panIndia operations. Several startups are
planningtolaunchnewnationalcarriersbutareunawareofthegovernmentsintentions.
Until recently, prospective entrants such as Captain Gopinath and others were advised
that they would initially only be able to apply for a regional airline licence and after an
undefined period of time they might have the ability to upgrade to a national licence.
However, with the AirAsia application for a national licence likely to be cleared the
Ministryappearstohavechangeditsstance.
Ifapproveditwillbedifficultforthegovernmenttorejectotherapplicationsfromstartup
airlines seeking to operate nationwide. This would be positive if so but instead it is
simply another unknown. And again, if bilaterals are being opened up on the basis that
increasedcapacityandcompetitionisgoodforconsumersthenthesameshouldapplyfor
newairlinelicences.
The government is keento encourage regional connectivity, but viability remains a key
challenge.Theproposedsubsidyschemeisimpracticaltoimplement.
The government of India is keen to encourage airconnectivity to movebeyond the large
metropolitan cities to Tier 2 and Tier 3 towns across the country. At present 36% of
domesticcapacityisdeployedonconnectingjustthesixlargestcitiestoeachother.
Indias Route Dispersal Guideline (RDG) system has been in place for many years. This
requires airlines to deploy capacity to connect remote regions equivalent to 10% of the
ASKstheyoperateonthemostlucrativetrunkroutesasdefinedbytheregulator.Butthis
framework restricts commercial freedom by forcing airlines to fly routes which are
unviable for them. There was a provision allowing airlines to sell excess seats on RDG
routestoothercarriersbutitdidnotfunctionwellandwassubsequentlyabolished.
In 2007 a new regional airline licence category was announced. Operators of regional
aircraft seating less than 80 passengers are exempt from landing charges and sales
taxation on fuel (although Delhi Airport has recently obtained an exemption from the
regulator to be able to apply landing charges to small aircraft and may be followed by
otherairports).
DespitethisIndiahasnosuccessful,standaloneregionalairline;thisshouldbeacausefor
concern. Earlier attempts such as Paramount and MDLR have failed and most recently
Mantra has also suspended operations. Intrastate air taxi operators such as Ventura in
MadhyaPradesharestrugglingwhileCaptainGopinathsDeccanShuttlesinGujaratclosed
within months of starting. There is clearly a fundamental issue with the viability of

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regional operations due to the cost structure, airport infrastructure limitations and the
overallpolicyenvironment.
ShareofWeeklySeatCapacityonMetroandNonMetroRoutes,6May13

Source:CAPA,OAG
The Ministry is evaluating a seat credit system to replace the RDG, along the lines of an
emissions trading system. This would be partly funded through subsidies paid from an
EssentialServicesFundofUSD5060millionforwhichafeewillbeleviedonalldomestic
passengers.
Akeyweaknessinthisapproachisthatthereisnocleardefinitionofregionaloperations.
The category spans a wide range, from 20 seater air taxis to 5080 seat turboprops and
regional jets and these have very different business models and requirements. It is only
after defining the objective that the efficacy of a policy measure can be assessed. The
proposedsubsidypoolwillbeinsufficienttosupportoperatorsinthe5080seatcategory
while the 20 seater air taxi model has some inherent weaknesses. There are no modern
aircraftavailableinthissegmentandbytheirverynaturetheperseatmilecostonsmall
aircraftisrelativelyhigh.
Offering high fares on old, small aircraft is not going to stimulate the market. And if
subsidies are going to be used to bring down fares, who is going to monitor these small
operators to ensure that public funds are being used correctly? An oversight committee
willberequiredtomanagetheprocessaddingyetanotherlayerofbureaucracyandcosts.
In addition the limited seat capacity on air taxis is such that the number of aircraft
requiredtomeetRDGtargetsislikelytooutstriptheiravailability.
Although the proposed system is more structured than the RDG, CAPA is of the opinion
that there are challenges to its practical implementation. The government first needs to
focusonidentifyingwhythecurrentbusinessmodelisunviableandwhyventuressuchas
DeccanShuttlesandMantrahavefailed.
AircraftAcquisitionCommittee,nowyouseeit,nowyoudont
In Mar13 the government abolished the Aircraft Acquisition Committee (AAC), a
bureaucratic construct established less than five months earlier to vet and approve the
fleet induction plans of all scheduled and nonscheduled operators. CAPA welcomes the
decision as we have always advocated that the Committee was not required and was an
intrusioninthecommercialdecisionsofoperators.
However it is puzzling that within months of the Ministry arguing in parliament for the
establishmentoftheAACitisnownolongerconsiderednecessary.Suchsuddenchanges
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in key regulatory and policy matters send the wrong signal to investors and other
stakeholders.
The regulator must recognise that ancillaries are now an integral part of the airline
businessmodel.AirAsiaislikelytodeliverawakeupcall.
Two years ago IndiGo introduced an option for passengers to pay a premium to reserve
exit row seats, a common practice around the world. Regulatory advice was
communicatedviaemailtoallairlinesatthetimestatingthatchargingforpremiumseats
was discriminatory and should be discontinued. However there was no officially
documentedrestrictiononancillaryrevenuesintheCivilAviationRegulationsnorinpolicy
documents.
AsaresulttheannouncementbytheMinistryinApr13declaringthatairlineswillnowbe
permitted to unbundle fares and apply charges for preferred seating, checked baggage,
oversized items, lounge access and onboard catering is not the major reform that it is
beingpitchedas.Asidefrompreferredseating,severalIndianairlineshaveinonewayor
anotheralreadybeenchargingformanyofthesefeatures.
The DGCA has stated that it will review the impact of unbundling on consumers in six
months time. One of the key challenges is that the regulator does not have a good
understanding of the evolution of airline business models globally and the increasing
complexity and variety of ancillary features. The government has granted permission for
carriers to charge for a list of specified features. But what happens if an airline wants to
offerzerofreebaggageallowanceorchargepassengersforservicesthatdonotappearon
theapprovedliste.g.chargesforunaccompaniedminors,inflightentertainment,wireless
internet, blankets and pillows, or to checkin at the airport? Within days of permitting
airlines to charge for preferred seating the DGCA stepped in to say that it will limit the
numberofseatsforwhichafeecanbeleviedto1015%ofthetotal.
With the planned entry by AirAsia in the Indian domestic market later this year we can
expecttoseeamuchmoreaggressiveapproachtoancillaries.Foratravellingpublicthat
has become accustomed to certain basic inclusions there will be sensitivities around
unbundling and airlines will need to ensure that they communicate changes clearly to
passengers. But the market has already evolved, only 10 years ago a complimentary hot
meal was standard in economy class on Indian domestic sectors whereas today it is
commontopayforonboardcatering.
Ancillariesarenowanintegralpartoftheairlinebusinessmodelandshouldberecognised
as such by the regulator. Rather than a piecemeal approach consisting of a timebound
permission to charge for specific, defined ancillaries the industry requires the certainty
and flexibility to innovate and to apply charges as is commercially appropriate for the
airline. CAPA estimates that Indian airlines could generate an additional USD500 million
perannuminrevenuethroughancillaryinitiatives.
Theregulatorcontinuestobeseriouslystretchedandthepressuresarelikelytoincrease
asgrowthresumes
IndiasaviationregulatortheDirectorateGeneralofCivilAviation(DGCA)remainsstressed
due to a serious shortage of resources, with several key departments remaining well
below sanctioned staffing levels. And there is insufficient investment in training the
existing staff. This situation is only set to become more acute with market growth
expectedtoresumethisyear.
InadditionafurtherchangemayoccuratthetopshortlyduetotheendoftheDirector
GeneralssecondmentfromWestBengal.ThiswouldbringinthethirdDirectorGeneralin
two years. This lack of stability at the top is further compounded by the fact that senior
ranks below the DirectorGeneral level are not wellequipped to handle the challenges
facedbytheregulator.
AproposaltoestablishaCivilAviationAuthority(CAA)toreplacetheDGCAisexpectedto
be approved by the Cabinet and parliament before the end of the year. As a result the

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government has taken its eye off the task of institutionally strengthening the DGCA
thereby increasing risks during the interim period until the CAA is established. There
appears to be a misplaced assumption that the establishment of the CAA will by itself
solvemanyofthecurrentissues,buttherealityisthatitwillinheritwhateverweaknesses
existtoday.
CivilAviationAuthority(CAA)couldbedelayeduntil2014.CAPAcallsforindependence
ofCAAandneedtoappointdomainspecialiststokeyroles.
The Civil Aviation Authority is expected to be functional by Nov/Dec13 however it is
possible that this could be postponed until after the Central government elections which
are due within 12 months. This will be an important milestone if greatly overdue for
Indianaviationbutitiscriticalthatitbemuchdeeperthanasimplerebadgingexercise.
Theobjectivemustbetoestablishaprofessionalandindependentregulatoryagency,and
notjusttochangethenameoftheDGCA.Itisintendedtooperatealongthelinesofthe
UKCAAwithresponsibilityforairsafety;airspace;airlinelicensing;pilot,engineerandair
trafficcontrollerlicensingandconsumerprotection.
ThesetupcostsoftheCAAwillinitiallybefundedbytheMinistryofFinancewithongoing
revenuegeneratedbypassengerlevies.Itisexpectedtohavefullfinancialautonomybut
will operate under the supervision of the Ministry of Civil Aviation although the precise
natureofthisrelationshipistobedefined.
A career civil servant is expected to head the CAA, counter to ICAOs recommendation
thatthekeypostsbeheldbyexperiencedaviationsafetyprofessionals.SincetheCAAwill
absorb the DGCA it will also inherit the shortage of staff and expertise which makes it
imperative that the government continue to actively strengthen the regulator over the
comingmonths.
CAPAmaintainsthattheindependenceoftheCAAfromMinistryintervention,directand
indirect, is critical to its effective functioning. Domain specialists rather than bureaucrats
shouldbeappointedtotheleadershippositions.Otherwisetherewillbelittlechangefrom
theDGCAtoday.
TimetoendthebanontheA380inIndia
CAPAexpectedthattheA380wouldbeoperatinginIndiabeforetheendof2012.Thatdid
not happen and we now expect the aircraft to make its debut in 2013. With the
government exposing Indian carriers to significantly increased competition from foreign
operators already it is difficult to continue to defend the argument that the incremental
capacityofanA380relativetoa747800isgoingtodestabilisethemarket.
ThemostlikelyoperatorsintheshorttermareEmirates,LufthansaandSingaporeAirlines,
andinduecoursepossiblyEtihadorJetAirways.IftheJetAirwaysEtihaddealisgoodfor
theconsumerthensurelytheA380istoo.

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3AirlineOutlook
FY14signalsthestartofagamechangingperiodfor
Indianairlines
JetsIndiansummerinParis,CAPAexpectsaverylargeordersignalingnewintent,will
becomethefirstIndiancustomerforthe737MAX.
CAPA understands that Jet Airways has placed an order for around 50 Boeing 737 MAX
aircrafttogetherwith810777300ERs,whichwillbeannouncedattheParisAirShow.
We expect a further order for over 50 A320 neos which will be utilised by its low cost
subsidiary, JetKonnect. Jet Airways was earlier in negotiations for over a year to acquire
100 A320 neos however it now looks likely that the order will be split across
manufacturers.Jetisthereforeexpectedtoannounceatotalorderforover100aircraftin
Paris. The longer term order could be as high as 200, however we expect that it will be
announcedinphases.
JetAirwaysGroupaircraftinserviceandonorderpriortolatestexpectedorder

Source:CAPAFleetDatabase
This represents the emergence of a new Jet Airways in the aftermath of the investment
from Etihad. Until recently the carrier was unable to order aircraft because export credit
agencieswereconcernedaboutitsleverage,asaresultofwhichithadtoleaseA330sto
expand capacity. We also expect to see Jet place a strong emphasis going forward on
turningJetKonnectintoacompetitiveLCC.
The current order for ten 7878s will switch to 7879s to provide a common fleet with
Etihad and airberlin while the order for 36 737800s will be converted to 900 series
aircraft.WeexpectthatJetAirwayscouldbethefirstIndiancarriertooperatetheA380,
leasedfromEtihad.
SpiceJetsfleetplansandforwardstrategydependentuponnewinvestor
CAPAexpectsthatSpiceJetwillsecureanewinvestor,possiblyaforeignairline,withinthe
next 3 6 months. This will lead to a complete change in the carriers strategic plans.
Confirmation of an order for 3040 737 MAX aircraft has been held up pending the new
investorcomingonboard,howevercontinueddelaysmayleadthecarriertomissouton
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timelydeliveryslots.Weexpectthattheoutstandingoptionsfor15Q400regionalaircraft
willalsobeexercisedafterthestrategicinvestorisconfirmed.
GoAiralsolikelytoattractastrategicinvestorinFY14
GoAir, Indiassmallest scheduled airline isexpected to launch international operations in
FY14. Although it has been operating for six years now its fleet size is below the current
minimum threshold of 20 aircraft for operating overseas. However, this regulation is
expected to be relaxed shortly reducing the minimum fleet size to 10 aircraft. CAPA
expectsthatGoAircouldalsoinductafinancialorstrategicinvestorinFY14andmayeven
consideranIPO.
Kingfishersrevivalruledoutwithbanksnowfocusingonrecoveringloans
Despite continued efforts and statements by the promoter, Kingfishers revival now
appearstobeallbutruledout.AnumberofresumptionplanssubmittedtotheMinistry
havebeenrejectedasnotbeingfeasibleastherewasinsufficientcommitmenttocapital.
The banks with outstanding loans to Kingfisher are now intent on recovery proceedings.
SofartheyhavesucceededinrecoveringINR10billion(USD185million)butaprotracted
legalbattlecanbeexpectedfortheremainder.
IndiGo remains wellplaced in the market but the competitive framework is set to
change
Indias most profitable airline, IndiGo, has remained consistently focused on its business
planandisthemarketleaderacrossfinancialandoperationalmetrics.
However going forward it is likely to face a more challenging competitive landscape in
FY14 with Jet placing much greater attention on its low cost subsidiary JetKonnect;
SpiceJetand GoAir set to bestrengthenedby new investors; Air India introducing itslow
costsubsidiaryondomesticroutes;andthelaunchofAirAsiaandpossiblyothergreenfield
carriers,allofwhichwillcreateanewmarketdynamic.
Withthechangingmarketstructurethecarriermightreviewitsfundingplanoverthenext
1218 monthsandcould explore also options from strategic and financial investors to an
IPO.
ThecarriermayalsoseekopportunitiesinnewterritoriesbyestablishingcrossborderJVs
inAfricaandSoutheastAsia.
IndianDomesticMarketSharebyAirline,Mar13

Source:CAPA,DGCA
IndiGo,27.40%
JetAirways
Group,23.80%
SpiceJet,
20.40%
AirIndia,
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GoAir,
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A decision on Air Indias privatisation is likely to be high on the agenda for the next
administrationin2014asaresultofthechangingmarketstructure
Air India has delivered a significant improvement in its operational and financial
performanceinFY13,reducinglossesbyUSD500million.Butdespitetheseimprovements
deep structural issues remain, ranging from its massive debt burden of USD9 billion to
suboptimal aircraft utilisation, poor labour productivity, fleet limitations, and a
fundamentally weak business model, all compounded by government intervention and a
rapidlychangingexternalenvironment,withtheJetEtihaddealbeingthelatestchallenge
hurledattheairline.

IndianCarrierDebtLevelsFY12/13

Source: CAPA Research, Company Reports. Data for IndiGo and GoAir is as at 31 March 2012;
Kingfisher and SpiceJet as at 30 September 2012; Air India (estimate) and Jet Airways as at 31
December2012.

The likelihood is that despite the best intentions of Air Indias management and recent
improvementsinperformance,thecarrierhasanalmostinsurmountablechallenge.Inthis
scenariothegovernmentwillbefacedwithhavingtodripfeedbillionsofdollarsoverthe
next few years to finance deficits with no meaningful improvement in the carriers
situation.MeanwhileAirIndiaitselfwillbepoliticallyhamstrungwithregardtotakingthe
difficultrestructuringdecisionsrequiredtodevelopacompetitivecostbase.
AsaresultAirIndiahasnofutureundercontinuedgovernmentcontrolwhichshouldbring
privatisationbackontotheagenda,withapossibledecisiononthedivestmentschedule
in 2014 triggered by the impact of foreign airline investment transactions. In the
meantime the carrier requires a new turnaround plan and financial restructuring
programme that takes into account the changes in the market since the last plan was
prepared two years ago. A viable and longterm solution for Air India is imperative not
onlyfortheairlineitselfbutfortheindustryatlargebecauseaslongasitstrugglesunder
governmentownershipitwillcontinuetodrivedistortionsinpolicy.
5 Year/20 Aircraft threshold for startups operating overseas is likely to be abolished,
changingmarketdynamics
Indian regulations require that a startup domestic airline must complete five years of
operations and reach a fleet size of 20 aircraft before it will be permitted to operate
international services. The rationale provided was that for the protection of passengers
carriers need to demonstrate their credentials in the domestic market before being
consideredcapableofhandlingtheadditionalcomplexityofinternationaloperations.

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But this restriction discriminated against Indian carriers since it did not apply to foreign
airlines. So while Air Arabia, Etihad and Tiger Airways were granted permission to fly to
India despite having been in operation for less than five years, Indian airlines such as
Kingfisher,IndiGoandSpiceJetcouldnotflyout.
It was an unnecessary restriction which only benefited Jet Airways. And indirectly it may
havebeenoneofthecontributorycausestoKingfishersdemise.ItsdecisiontoacquireAir
Deccan was driven in part by the fact that Deccan was approaching five years of
operationsandwouldallow Kingfisher tolaunchinternationalservices. Thechallengesof
integratingAirDeccanultimatelyprovedtobeverycostly.
CAPA has long called for this regulation to be abolished and we expect changes to take
placeverysoon.Asafirststeptherestrictionmaybereducedtofiveyearsand10aircraft
which is currently under consideration, however it may be removed entirely in the next
1218 months. This would completely change market dynamics and would for example
allowcarrierssuchasAirAsiaandotherprospectivestartupstogrownewmarketswhich
couldincludethedevelopmentofalonghaulLCC.
DespitethechallengesAirAsiaseesonlyopportunityandplanstomakeIndiaafocus
market
AirAsia India could launch operations by late October 2013 and CAPA believes that the
airlineisplanningamuchlargerplayinthemarketthanhasbeenindicatedsofar.Aside
from domestic operations if the 5 year/20 aircraft rule is abolished in the near term we
could see the launch of regional international services sooner than expected. Similarly
there is likely to be much greater integration with other carriers in the AirAsia group in
ThailandandIndonesiaandtherelaunchofAirAsiaXservicesfromKualaLumpurtoDelhi
andMumbai.
Indeedinternationalplanscouldincludethelaunchofmediumandlonghaulroutesfrom
India using A330s. India could be an ideal market for a long haul LCC and given its
geographic location it could even support hub operations connecting Asia to Europe and
theMiddleEast.Itwouldbesomewhatironicifaforeignairlineendsupbeingthefirstto
recogniseandleveragetheIndianmarketshubpotential.
Foreignairlineinvestmentwilltransformthedynamicsofthesector
As CAPA forecast in our India Aviation Outlook 2012/13, the Indian Cabinet finally
approvedforeignairlineinvestmentinIndiancarriersinSep12,finallybringingtoanend
a regulatory anomaly that had existed for 16 years. India already permitted 49% foreign
directinvestmentintheairlinesector,butsince1996theregulationsuniqueintheworld
specificallyexcludedtheoneclassofinvestorthathasthegreateststrategicinterestand
canaddvaluetothesector,namelyforeignairlines.
CAPAhaddeclaredthistobeagamechangingpolicydecisionandithasrapidlyprovedto
beexactlythat.InSep12wehadanticipatedthatthedealflowwouldcommencewithin
69 months with the most likely interest to come from the Gulf. Our report had also
projectedthepossibilityofAirAsiasentry.
Theresultsareshowing.Etihadwillacquirea24%stakeinJetAirways,whileAirAsiaplans
to hold 49% in a proposed startup carrier. With the Jet AirwaysEtihad deal now
concluded we expect serious interest to follow from others. Qatar Airways preferred
marketstrategyforthemarketislikelytoconsistofseekinganincreaseof50,000weekly
seat entitlements and entering into a codeshare agreement with IndiGo, however we do
notruleouttheprospectoftheminvesting.
Other potential suitors include All Nippon Airways, Lion Air, Tiger Airways and even
Singapore Airlines. Leading international LCCs which have established JV operations in
multiplemarketsarelikelytofavourgreenfieldinvestments,alongthelinesofAirAsia,to
avoidlegacyissuesandensurethattheycanestablishlowcostsofoperation.Emirateshas
remained conspicuously quiet, although bilateral discussions are underway between the
governmentsofIndiaandDubaitoincreaseweeklyseatsby26,000withimmediateeffect.

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The carrier does not look like a prospective investor at this stage as the model goes
againstitsbroaderstrategy.
Asalreadynoted,theJetAirwaysEtihaddealwasreportedlylinkedtootherforeigndirect
investmentflowsfromAbuDhabi.ThetimingofthereformwasperfectforJetAirwaysa
carrier which until 2012 had argued that there was no need to allow foreign airlines to
invest in India. However, the simultaneous decision to open up the IndiaAbu Dhabi
bilateral agreement by almost fourfold was key to Jet Airways achieving the valuation
thatitdid.
CAPAexpectsthatforeignairlinescouldinvestinbothSpiceJetandGoAirinthenext36
months.Withaprecedentnowhavingbeenset,futuretransactionsarelikelytobeseen
by Middle East carriers in particular as a means to leveraging market access. This should
have a positive impact on valuations for Indian carriers. However, with such investment
the role of Indian carriers is likely to consist of supporting the business plans of Middle
Eastairlinesandhubs.
CAPAwelcomedforeignairlineinvestmentasagamechangingdecision.However,wealso
cautioned that the policy and regulatory framework and its ability to understand
competition and consumer issues was not sufficiently robust to absorb the potential
impactofforeignairlinetransactions,alliancesandcodesharesontheindustrystructure.
This horse has now bolted, but that does not remove the need for a transparent and
coherentpolicyandregulatoryregime.

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4Airports,MRO&GAOutlook

AirportsAuthorityofIndiasplantoofferChennaiandKolkataAirportsonmanagement
contractsmayfacepoliticalhurdles
The AAI is moving into a critical phase in 2013/14 across airport operations, airport
development and air navigation services. This is a landmark year as upgrade projects at
the two jewels in AAIs crown, Chennai and Kolkata, have finally been completed after
somedelayswithnewterminalsopeninginearly2013.Thismarksthecompletionofthe
modernisation programme across all six metro airportswhichbetween them account for
around 68% of the total traffic handled by the approximately 80 Indian airports with
scheduledairservices.
ShareofTotalIndianAirportTrafficHandledbySixMetroAirports,11monthstoFeb13

Source:CAPA,AAI
The new terminals at Chennai and Kolkata are of a high quality and have been well
receivedbypassengers.Theirconstructionhasemployedvalueengineeringmethodsthat
have helped to contain programme costs which will be welcomed by the industry as an
importantcontributiontomoderatingincreasesincharges.
Theauthorityisconsideringinvitinginternationalairportoperatorstobidformanagement
contracts for these two airports. This is a good idea in theory however local political
considerations may present some hurdles as could human resource issues since a new
operatormayseektoreduceemployeenumbers,ameasurewhichisalwaysfraughtwith
sensitivity.AsaresultthisisunlikelytohappeninFY14.
AlthoughtheChennaiandKolkataprojectsarenowcompletetheAAIcontinuestoleadan
aggressive modernisation programme at tens of nonmetro airports across the country.
Meanwhile demands from state governments for new airport infrastructure continue to
increaseplacingfurtherpressureontheAAI.
There is a need to clarify whether the AAI should be responsible for such new airport
projects or whether all greenfield ventures should be developed through publicprivate
partnership arrangements. If the AAI is expected to play an active role in airport
developmentthenthegovernmentmustensurethatitisappropriatelyfunded.
The government is keen to encourage the development of low cost airports to enhance
connectivity to smaller centres. This is a necessary goal but before this can proceed a
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viablemodelmustbefoundforregionalairlineoperationsotherwisetherewillbelimited
investorinterestinsuchprojects.However,assomeoftheseissuesareresolvedwewould
expecttoseeafurtherpushintheairportmodernisationprogrammefrom2014onwards.
Modernisationofairnavigationservicescontinues
The AAI is not only an airport operator but is also the Indian air navigation services
provider. Huge investment in technology and training is required in order to upgrade
airspace management to enhance the efficiency of current aircraft movements and to
support the projected growth of the Indian aviation sector. This requires a fresh and
focused approach to funding and governance for the air navigation services division
independentfromtheAAIsairportoperations.
The hivingoff and corporatisation of air navigation services has been on the agenda for
some time however this could finally become a reality in FY14. However, the financial
impactofthisdecisionontheairportsdivisionneedstobeconsidered.Wewouldfurther
recommend that the airport operations be split into two divisions and corporatised
themselves, each with independent financials, with one responsible for airport
construction and the other for airport management requiring as they do quite different
skillssetsandfundingstructures.
Indias satellitebased augmentation system, GAGAN, is expected to launch in 2014
however capacity building and training of controllers will be a key issue during
implementation. GAGAN will however make a major contribution to the efficiency of
airspacemanagement.Furthermoretherecentagreementtoallowflexibleuseofcivilian
andmilitaryairspaceisanimportantmilestoneandwillallowformoredirectroutingsat
certaintimesoftheday.Howevernowthatithasbeenapprovedspeedyimplementation
isvital.Satellitebasednavigationandflexibleuseofairspacearetwoinitiativeswhichwill
beveryimportantinreducingairlineoperatingcostsandcarbonemissionsthroughlower
fuelconsumption.
AirportcapacityconstraintsatMumbaicontinuetobeoneofthegreatestconcernsfor
Indianaviation
TheoutlookforairportcapacityinMumbairemainsaconcern.Continueddelayswithland
acquisition for the second airport at Navi Mumbai suggest that the first phase of the
project is now unlikely to open before 2018/19, a couple of years after the existing
ChhatrapatiShivajiInternationalAirport(CSIA)isexpectedtosaturate.
ScheduledHourlyAircraftMovementsatMumbaiAirport10May13

Source:CAPA,Innovata
The airport currently operates at close to its maximum runway capacity of around 35
hourly movements for 19 hours a day, between 5am and midnight. The operator has

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engaged NATS from the UK to develop a plan to improve the airside efficiency of the
airport to increase hourly movements to at least 46andideally 50, although the latter is
likelytobeastretch.
A plan has also been proposed to relieve some pressure at CSIA by shifting general
aviationandsmallregionalaircrafttoJuhuAirport,whichiscurrentlyusedforhelicopter
operations.Howeverthisisanambitiousundertakingwhichwouldrequireextendingthe
runway into the sea and moving a main road underground. The project faces numerous
logistical, political and environmental challenges and CAPA does not expect that it will
proceed. In fact CAPAs most recent research indicatesthat there is apossibility thatthe
government will close Juhu Airport down in due course to monetise its valuable real
estate.
Indiashubambitionsarebecomingincreasinglyelusive
Indias geographic location between Europe, the Middle East, Africa and Asia, combined
withitshugedomesticmarketprovideitwithsomeofthekeybuildingblockstosupport
the development of aviation hubs. What it has lacked are strong airlines with extensive
global networks and efficient and attractive airports. As a result of the airport
modernisationprogrammeoverthelastfewyearsthelatterisbeingaddressedandIndian
airports have successfully climbed the ranks of global airport quality surveys. But the
emergence of a powerful home carrier with global ambitions has proved more
challenging.
AirIndiacontinuestostruggle,KingfisherhassuspendedoperationsandnowJetAirways,
the one carrier that had the potential to become a major sixth freedom airline, has
enteredintoapartnershipwithEtihadthatmayseeitsrolelargelyrelegatedtobeingthat
of a feeder to Abu Dhabi airport rather than an Indian one. With this and possibly other
upcomingdeals,theprospectsforDelhiandMumbaitoemergeasthenextmajorglobal
hubshavetakenamajorstepbackwards.
Until recently the government, right up to the level of the Prime Ministers Office, had
takenanactiveinterestinthedevelopmentofairporthubsinIndia,particularlyatDelhiin
the North and Chennai in the South. But following the Jet AirwaysEtihad deal the
statements from the Ministry have shifted to stating that there is no reason for
passengers from across India to hub over Delhi if they can do so via Abu Dhabi. This
suggestsachangeofpolicythathasnotbeenearliercommunicated.
If a clear policy roadmap has been established, which was known to all operators and
investors, it might have been possible to modernise the airport more costeffectively,
resultinginlowerchargesforairlinesandlowerfaresforpassengers.
Uncertaintyremainsongroundhandlingpolicy,butCAPAexpectsasolutionsoon
Theoutlookforthegroundhandlingsector,akeyelementofairportoperations,hasbeen
uncertain for the last few years as the introduction of the governments new ground
handlingpolicyhasremainedstuckintheSupremeCourtsince2009.
Under the policy proposed by the government, airlines would not be permitted to self
handleatmetroairportsandwouldinsteadhavetooutsourcegroundhandlingtooneof
uptothreeauthorisedhandlers.Thekeydriverofthepolicywaspurportedlytoenhance
securitybyreducingthenumberofcompaniesoperatingattheairport,particularlythose
providingoutsourcedmanpower.
Airlines protested that this would increase their costs and the outsourcing of terminal
handling would diminish their ability to control the service quality of critical customer
facing roles, and the matter went to the courts where it remains. The latest date for a

HighlightsofCAPAIndiaAviationOutlook2013/14 Page24
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INDIA
decision is Jul13. If security was indeed the major concern then this has clearly been
compromisedforthelastfouryears.
What is emerging is that a compromise agreement may be reached under which airlines
are expected to be permitted to selfhandle and could also form JVs to offer 3rd party
services, subject to a revenue sharing arrangement with the airport operator. Further
clarity is required with respect to whether a revenue share would be applicable for an
airlineJVprovidingservicestotheparentairline.
However,providersofoutsourcedmanpowerwillnolongerbepermittedatairportsand
staffwouldneedtobeabsorbedeitherbytheairlinesorthegroundhandlingcompanies.
Theintroductionofthepolicyislikelytoresultina20%increaseingroundhandlingcosts
for Indian carriers. We would expect Indian LCCs to outsource all of their airport
operations to 3rd party handlers. However Jet Airways could possibly tieup with Dnata
andbringgroundhandlingforJet,EtihadandEmiratesunderoneroof.
MROcontinuestobeunviableevenafterrecentfiscalconcessions
With its labour cost advantage and large pool of engineering talent, India should be a
competitive location for MROs. However, the multiplicity of taxes, high hangarage costs
and royalty fees at airports, poor training facilities and tight regulations make viability a
majorchallenge,especiallyupagainstcompetitivefacilitiesintheregioninSriLankaand
the UAE. The recent decision to exempt 3
rd
party MROs from customs duty on imported
sparepartsishighlywelcomebutthisalonewillnotchangetheviabilityscenario.
GeneralAviation,theCinderellasectorofIndianaviation,feelingthesqueeze
Indias estimated active general aviation (GA) fleet of 709 aircraft is around 65% larger
than the scheduled airline fleet yet the sector remains extremely neglected. It is
underdeveloped in terms of airports, airspace, maintenance and training. And while the
scheduled sector is seeing improvements on the ground, things are moving much more
slowlyforGA.Atapolicyandregulatoryleveltheindustryhaslargelybeenignored.There
has been limited consideration given to the specific requirements for GA in air traffic
managementplanning,orinthedevelopmentofdedicatedinfrastructure.
For 709 aircraft there are just 10 dedicated hangars (of which five are likely to be
dismantled shortly) and 40 dedicated parking bays. And in Mumbai, the market with the
greatest business and general aviation potential, airport constraints are gradually
squeezingthesectoroutofthecityasscheduledoperatorstakepriority.
There was a spurt in growth between 2005 and 2010 during which time the business jet
fleetincreasedalmostfivefoldto125aircraft,andhelicopternumbersdoubled.However
inthelastcoupleofyearsasaresultofthestructuralchallengesandtheslowdowninthe
economymuchofthatenthusiasmhasevaporated.
IftheunderlyingissuescanbeaddressedthereisgreatpotentialforGAinIndia,however
limitedprogressisexpectedinFY14.

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