Investing In India with Dr. Uday Lal Pai

Indian Aviation - soaring into greater heights

By Dr. Uday Lal Pai
Exclusively for InvestorIdeas.com
posted July 11, 2006

Though Aviation is a booming industry in India, rising fuel costs and stringent competition could be the area of concern.

The aviation sector in India has been marked by fast-paced change in the past few years. Until liberalization, just the two government-owned carriers flew to both domestic and foreign destinations. From being a service that few could afford, the sector has now graduated to being a fiercely competitive industry with the presence of a number of private and public airlines and several consumer-oriented offerings.

The sector being a growth sector is expected to do good over a long-term. Passenger traffic grew to 52.12 million in the last fiscal, from 43.47 million in 2004-05, to register a growth of 19.9 percent.

In the last fiscal, the Indian aviation industry logged a robust growth of 24 percent and experts say the sector will expand by at least 16 percent annually for the next five years, riding on the overall economic growth of eight percent.

According to estimates by a top analyst at the International Air Transport Association (IATA), the investment needed by the Indian aviation industry is around $90 billion in the next 24 years and this provides big opportunities for investors world-wide.

The Centre for Asia Pacific Aviation (CAPA) is of the view that the pie could get even bigger with $40 billion investment potential in the next five to seven years.

Though estimates are diverse, there is consensus on the boom in India which could be turn out to be biggest the global aviation industry has seen so far. To catalyze the growth process, the government is finalizing a new civil aviation policy. "The new policy will address all issues that will benefit the aviation sector in the long run," said Indian Civil Aviation Minister Praful Patel.

There is also a fancy attached to this sector in Indian markets as the airline companies in easily raising funds through the IPOs. A clutch of aviation firms led by Air Deccan, Kingfisher Airlines and the two state-owned airlines, Air-India and Indian Airlines, are in the process of tapping the booming IPO market to raise funds for their expansion plans, but analysts remained cautious on the investment prospects in the sector considering the rising fuel costs, stringent competition and wafer-thin margins.

Analysts estimate domestic airline companies to mobilize over $500 million in the next 12-16 months through the IPO route. However, this would largely depend on the government's success in pushing through the IPOs of Indian Airlines and Air-India. They said the low-cost airlines are likely to perform below par in the near future, though there could be growth prospects over the long-term.

With domestic air travel forecast to grow by 25 percent a year for the next five years, the Indian aviation market is booming, and carriers, the government, and aircraft manufacturers are working overtime to keep up with demand.

High velocity domestic market

The domestic aviation sector too is showing strong growth in India. In the last financial year, the civil aviation industry has achieved the biggest ever growth in aircraft movement and passenger traffic.

The domestic passenger traffic during '05-06 was about 28% over last year, a strong growth by any standards. Aircraft movements during the year were up by 17%. Passenger traffic in the domestic airports increased by 22.3 per cent to 59.54 million, while aircraft movement increased by 14.2 percent.

The main drivers of traffic growth they say are economic upswing, concentration of population, wealth and industries leading to higher propensity to travel and increasing liberalization. And add to this there are penetrations of low-cost carriers which are offering exceptionally low airfare that can be compared with railway AC fares. India is the only country where the number of air travelers a year equals the number of rail passengers in a day. The potential is huge. So low-cost carries are not ready to waste their time and are very much into business.

The boom in the aviation sector in India can be gauged by the fact that in one year, the number of people seeking pilot licenses has multiplied three times. In April 2005, it was 300. In April 2006, the number rose to 1045.

Jet Airways along with Sahara India has about 47 percent share of the domestic aviation market, followed by Indian Airlines (28 per cent), Air Deccan (11 per cent), Kingfisher (6 per cent) and SpiceJet (5 per cent) as on October last year. Jet Airways tops the list of domestic and national carrier operators with 8,168 flights operating till June 2005. Indian Airlines ranks second with 7,562 flights, followed by Sahara (3,225 flights), Air Deccan (2,889 flights), Spice Jet (483 flights) and Kingfisher Airlines (267 flights).

Kingfisher COO Alex Wilcox says, "The Indian domestic market is begging for more capacity. Trying to make a success in this market will be like being a one-eyed man in a blind world." Statistics bear Wilcox out. Domestic flights are very often overbooked and seats are difficult to find in the busy season. The Mumbai-Delhi trunk route is the busiest, with 25 flights a day between the four airlines and over 50,000 seats up for grabs every week."

Indian aviation is witnessing a mushrooming of new airlines, however, this time they seem to be on safer grounds, with better funding of equity, and more optimism. It is likely that aircraft manufacturers, airports, aviation training institutes (for pilots, cabin crew, and ground staff), airline IT providers, oil companies supplying ATF, aircraft maintenance centers, and air travelers will benefit from the rush of new airlines in Indian skies.

Enter the low cost Airlines

The sudden growth of low-cost carriers is to boost point-to-point travel. In the case of India, these are being promoted by companies having diverse business interests, often remotely connected with aviation.

Besides the existing Air Deccan, newly launched Spicejet and value airline Kingfisher Airlines, there are Indus Airways, Air One, East West Airlines, Go Airways, Magic Air and Crystal Air are getting ready to fly Indian sky soon. As the newcomers are getting into cut-throat fare-war, the Indian domestic passengers are going to have a good time ahead.

A large component of the domestic market growth is attributable to the increased activity by low-cost-carriers (LCCs), sometimes also known as budget-carriers. a research firm Globalysis projects that in 2008 LCCs will control approximately 50 percent of India's aviation market

Low cost start-up carrier IndiGo President and CEO Bruce Ashby (the airline had stunned the aviation industry by placing orders for 100 aircraft at a list price of over $6 billion last year) bullish on the Indian aviation sector, Ashby said IndiGo, which will be positioned as "not too expensive, not too cheap" airlines was targeting to have about 7-8 departures a day with 70-80 per cent of full capacity. "Normally, airlines like us take 18 months to break even. So when we have 15-20 aircraft operating within the time frame, we should be able to break even," he said.

India is to see the launch of at least 14 such airlines. "India is witnessing an unprecedented growth in the aviation sector," SpiceJet CEO Siddhanta Sharma said, adding that he was confident that the airline would get "even better response in the days to come".

Infrastructure bottlenecks

The increase in passenger traffic calls for upgraded infrastructure facilities. "As the Indian aviation market is growing rapidly, the question arises weather the infrastructure is growing at same pace. Currently, India is having less than 200 aircraft operating domestically which operate only 600 flights a day", say industry observers.

Yes. The industry is growing rapidly which is the good thing but unless the aviation infrastructure grows with same pace, this new traveling group may continue to face such problems of flight delays and cancellation. This is certainly not an encouraging sign for these low-cast carriers who are calculating huge customer inflow in coming years.

All those experts also warned of poor infrastructure - especially at airports. "We all know India's air transport infrastructure is out-of-date. In fact, the overall situation is critical," said Giovanni Bisignani, chief of the International Air Transport Association (IATA). It is for this reason that the government also took some unprecedented decisions in recent months to build airport infrastructure. Private consortiums were given mandates to upgrade two existing airports and build two new ones. "The expansion of air transport in India is among the fastest in the world," said IATA chief Bisignani, adding, "The airlines are moving fast. Government policy is moving in the right direction. But infrastructure must catch up."

"Thirty-five non-metro airports are being developed as virtual gateways for our passengers. The funds required for the modernisation of the secondary airports is huge and the private sector is being roped in," Patel said. Patel, said all aeronautical activities at these airports would be handled by the Airports Authority of India (AAI) while a public-private partnership (PPP) model would be followed for the development of non-aeronautical activities at city side of these airports. The PPP model is likely to peg the foreign direct investment (FDI) levels at 49 per cent with the private sector partner being allowed to pick up 74 per cent equity in the project.

"The modernization process will start soon and we hope to complete it by 2008-09. The funds required would be garnered from the internal resources of the AAI. We could also look at coming out with bonds at a later stage," Patel said.

India needs more plans and better-equipped airports to handle growing traffic and this calls for huge investments.

Global players land in

The global airline industry body feels that India should allow foreign airlines to invest here and encourage growth of infrastructure through further reforms. The sudden boom in Indian aviation has caught even the normally market savvy global aerospace manufacturers unawares. Recently, both Boeing and Airbus said they had underestimated Indian growth.

>From global aircraft manufacturers to airport managements, and training academies to in-flight entertainment companies, there has been a beeline to grab a share of the opportunities that are being thrown by the exploding Indian skies.

France is eyeing India's growing aviation market and planning to expand trade with the country. "We foresee greater co-operation between both countries especially in the aeronautical sector. We are planning to set up aircraft manufacturing and training facilities here," French Ambassador to India Dominique Girard. He added that his country intends to set up aircraft manufacturing and training facilities in this sub-continent nation.

American Airlines has managed to achieve several strategic objectives with the launch of its non-stop daily return flight between Chicago and Delhi. Thomas Aichele, Managing Director, Passenger Sales, Chicago, commenting on the future roadmap of the airline in India, indicated that going by market size, the airline could look to operate to Mumbai and Bangalore. However, no date has yet been set for launching flights to other Indian destinations. Interestingly, it is not only American Airlines that has launched non-stop services between India and the US. Another US airline, Continental, has also launched daily non-stop flights between Delhi and Newark (New York). .

Eurocopter, a unit of European aerospace firm EADS, will invest more than $1 billion in India over the next two years. The helicopter maker has bid for more than 500 helicopter manufacturing contracts for India's defense sector and plans to set up a subsidiary, a training school, and a maintenance, repair and overhaul centre for helicopters in India.

"Two years ago it was impossible to even conceive that India could be such a big player in the aviation market. The civil aviation industry is booming. Indian carriers placed orders for over 400 aircraft worth a whopping $30 billion," said Kapil Kaul, the India head of the Centre for Asia Pacific Aviation.

It wasn't surprising since statistics compiled by Airbus Industrie showed that Indian carriers accounted for 327 out of the 2,140 firm orders for new aircraft that were placed with it and rival Boeing in 2005.

This does not take into account the orders placed for smaller airplanes with other manufacturers like ATR and Dassault - which, too, are flooded with offers from private Indian carriers.

"Given the projected growth of the Indian economy and its aviation industry, we foresee that the demand for air travel in 2025 will be met by 959 aircraft," said Colin Stuart, vice president, marketing, Airbus Industrie. "Of these, 935 aircraft will be new acquisitions valued at $93 billion," Stuart said.

US-based Bell is bullish about the prospects in both the civilian and Defense markets in India. the Vice-President, Asia-Pacific Sales, Max E. Wiley stated: "In the last two years, we have taken orders for close to 20 helicopters a year from the commercial market. The India market will continue to expand as the skies continue to open up.

The Brazilian aircraft manufacturer, Embraer, is bullish on the prospects in the Indian market. The Company's Managing Director, Asia-Pacific, J. Bruce Peddle" "Our forecast is that between 2006 and 2025, the demand for 30-120-seater planes in India would be around 165, which is about 40 per cent of the demand of the Asia-Pacific region. The value of these aircraft would be around $4 billion. We feel that a majority of the aircraft required will be in the 61-120-seat capacity segment. We believe that 70 per cent of these would be required for market growth while there would be a small demand for replacement."

Buying Spree, investments too

Indian corporate houses - like Reliance Industries, Videocon, Raymond, and Jaiprakash Associates - are buying private jets like ATRs, Falcons, Cessnas, Bombardiers, Beech Kings and Gulfstreams in large numbers.

Apart from the $30 billion that airlines of India are planning to spend on purchase of aircraft, the global industry's focus is on the huge investments that Indian airports would require to meet growing demand. Patel's mention about upgradation of 35 non-metro airports was watched keenly, industry sources said.

India's civil aviation industry will need to purchase 490 aircraft over the next 20 years, according Dinesh Keskar, vice-president for sales at Boeing. According to estimates from the aircraft manufacturer, falling ticket prices and an increase in passenger traffic will cause an increase in the demand for aircraft. Keskar stated that the passenger traffic in India is likely to increase by 20% over the next three to four years.

European aircraft maker Airbus has said that they are looking with keen eyes towards the Indian aviation market, which has seen a boom in the recent months. The company believes that the growing demand and the booming aviation sector would result in demands of around 1000 aircrafts over the next 20 years. Kiran Rao, Airbus Industries' senior vice president said in a statement: "The Indian market is very strong. We see between 800 to 1,000 aircraft being ordered from the country over the next 20 years." We have already seen Indian airline companies placing huge orders with both Boeing and Airbus this year.

IndiGo, lifted the tally of Indian deals to US$ 13 billion. The Delhi-based airline ordered a full fleet of 100 jets in the single-aisle A320 family. Low-cost carrier Spicejet signed a US$ 700-million deal for ten aircraft with Boeing, even as Jet Airways and state-owned Air-India and Indian Airlines placed orders worth US$ 3 billion for aircraft engines.

General Electric said it had won an order worth more than US$ 2.2 billion from Air-India for engines for the airline's new Boeing 777 and 787 fleets. The company said in a statement that Air-India had placed an order for the GE90-115B engine for eight 777-200LRs and fifteen 777-300ERs. In addition, the airline has ordered for the GEnx engine to power twenty seven 787-8 aircraft. Indian, as Indian Airlines is called now, signed a deal worth US$ 500 million with CFM International to purchase engines for its newly acquired fleet of Airbus aircraft. The CFM56-5b engine will power Indian's new fleet of 43 Airbus A320s scheduled for delivery between late 2006 and 2010. The other deal at the world's largest air-show was an order for A380 superjumbos and A320s by Kingfisher Airlines.

The Indian authorities have reportedly said that the domestic and international air traffic will increase by about 20% annually, due to investments from the government and private sector. The investments have been estimated at $ 20 billion over the next five years and the increase of aircraft numbers is expected to double the number of civilian passenger aircraft in India to 400.

According to industry estimates, aircraft orders worth over $12 billion are expected to be placed in the next five years. And almost a matching amount will be invested in upgrading airports. It is no surprise that venture capital and private equity firms as well as investment bankers are keen to bite into the airline pie.

A promising market

Aircraft manufacturer Airbus said, "India is one of the world's most promising markets and it is predicted that 100 million new urban middle-class consumers will become potential air travelers by 2010."

Globalysis Ltd.forecasts growth in India's aviation market, to be one of the fastest growing in the world, for the years 2007-2008. The Globalysis research report forecasts growth in India's aviation market of approximately 28% in 2007 and 24% in 2008, for a total of approximately 52 million passengers being carried in 2008.

Domestic air travel in India is predicted to grow 20 per cent over the next five years. Boeing has raised its 20-year market forecast for India for aircraft purchases from US$ 25 billion to US$ 35 billion. Both Airbus and Boeing are waiting for the next big order, expected from Air India. The airline is evaluating medium and large capacity aircraft and is expected to order 50 wide-body jets, worth almost US$ 5 billion at list prices.

Centre For Asia Pacific Aviation (CAPA) has predicted that the fleet strength of airlines in India will move up from 175 currently to above 400 aircraft in another five years. "About 15 million more seats will be added in the next one year", says CAPA's India representative Kapil Kaul. There will be five to six large national airlines and a similar number of regional players, he says. Part of the expansion will also be spurred by the expansion plans of Indian Airlines and Air-India, which have activated their dormant plans. The flag carrier Air-India is set to fire the first salvo with its own low cost subsidiary Air India Express, which will operate on the India-Gulf routes.

The aviation sector is likely to see the launch of many new airlines, including Premier Airways, Star Air and East West Airlines this year. The first of these, Premier Airways, is formed by a group of ten non-resident Indians (NRIs) in the US. The airline will be based in Chennai. With increasing globalization, this sector will play a more significant role in integrating the Indian economy with the rest of the world.

Disclaimer
Dr. Uday Lal Pai is an independent columnist for this web site. Dr. Uday Lal Pai may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article. Dr. Uday Lal Pai is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.

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