Consult Club, IIM Ahmedabad October 2017

Sector Report: Aviation

Introduction
The International Aviation Industry is expected to see a steady
passenger traffic of about 9-10% in 2017-18 due to the growth
in tourism and increased bilateral agreements. An
improvement in the Indian and global economies is expected
to increase the international air freight traffic due to increased
trade.
Airfares are expected to increase, although only 0-2%, owing
to capacity expansion, competition, increase in fuel prices and
marginal depreciation in rupee-dollar exchange rate,
compared with a decline of about 7% in 2016-17.

*Source: IBEF

Aviation Business Model

Evolution of the Aviation industry Porters five forces

The domestic airlines industry was nationalized in
1953, forming Air India Intl. and Indian Airlines.
Although the act was repealed in 1994, the sector
saw sluggish growth until 2004.
It was in the year 2006-07 that the industry started
seeing growth and intense competition. This was a
result of rise in FDI caps accompanied by the entry
of Low Cost Carriers (LCCs) such as Spice Jet.
Between the years 2007 and 2008, the industry
witnessed increased aviation fuel costs and
extreme competition and price wars; this led to the
consolidation phase in 2008-09. Kingfisher airlines
exited the industry in late 2012.
In 2013, Etihad Airways bought a minority stake in
Jet Airways. The year 2014 saw the entry of three
new LCCs in the domestic market. Regional
carriers Air Pegasus & TruJet commenced
operations in 2015.
During 2016-17, regional airlines such as Air Costa
and Air Pegasus halted operations indefinitely due
to the issues with aircraft lessors. A new regional
carrier, Zoom Air has started operations since Feb *Source: IBEF
2017.
Indian Regulatory environment
In June 2016, Union Cabinet unveiled the civil aviation policy, announcing relaxation of overseas flying norms.
In October 2016, ministry of civil aviation has released Final Regional Connectivity Scheme (RCS) to increase the
penetration of aviation into Tier II and Tier III cities under the Ude Desh ka Aam Nagrik (UDAN) scheme.
On June 20, 2016, FDI up to 100% was allowed in the aviation sector after taking approval from the Government of
India. However, foreign airlines were to continue to be allowed to invest in aviation up to 49% only.
The Cabinet Committee on Economic Affairs (CCEA), the apex body for formulation of government's economic
policies, on June 2018 granted its in-principle approval for considering strategic disinvestment of Air India and five
of its subsidiaries, which include Air India Express as well as engineering and ground handling units. The
government was unable to cope with Air Indias debt burden of more than Rs 52,000 crore, which was the primary
reason behind the disinvestment.

Key Challenges for the Aviation sector Main players

Airline Market share
Intensified Competition among LCCs: The entry of several new players in the
industry has led to players warring on fares, quality of service & connectivity. Air India 14.1%
Competitive pricing efforts by Full service carriers (FSCs) has reduced the Jet Airways 15.5%
value proposition of the LCCs. The airlines are now competing fiercely over SpiceJet 12.8%
customer service, reliability and connectivity. GoAir 8.2%
Decline in the user development fee (UDF) at Delhi airport, from INR 275-550 IndiGo 39.8%
to INR 10 for Domestic passengers and INR 635-1270 to INR 45 for Others 9.6%
international passengers, is expected to put pressure on the air fares. Others - AirAsia India, Air Costa, Vistara,
Due to a shortage in trained employees, the employee costs (10% of operating Air Pegasus, Trujet
cost) are expected to increase, as airlines look to retain employees. *Figures as of Feb 2017 Crisil report

Key metrics of the Aviation sector

The ASKM (Available Seat KMs) & RPKM (Revenue Passenger KMs) are expected to steadily increase over the next few
years, while PLF (Passenger Load Factor), a measure of capacity utilization of an airline is projected to be ~80%. The
operating margins of domestic carriers have recovered since 2014 and are expected to decline but stay positive until 2018.

Key trends driving the Aviation industry in India

Substitutes: In September 2016, Indian Railways announced a flexi-fare system for Rajdhani, Shatabdi & Duronto trains.
This move is expected to increase the average fare realisation for railways. Moreover, in 2016-17, average ticket prices
of the Indian Railways are estimated to grown by 5-7%. This could narrow the fare gap between Railways and Flights.
Aviation fuel price: Over the next five years, CRISIL Research expects crude oil prices to remain range bound at $50-
60/barrel. In the past, high fuel price has put severe pressure on the Aviation industrys bottom line. Therefore, this
stability comes as good news to the industry.
The ban of electronics through cabin baggage by U.S & U.K. is expected to support international passenger traffic
growth in India in the short run, as passengers flying from Gulf countries opt to fly through alternatives like India.