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Indian Aviation Limps Back

Hyderabad. As the aviation industry awaits the much delayed but almost implemented Civil Aviation Policy, and traffic figures bounce back, there is hope that yields start to rise.

India’s airlines, more than the rest of the world, suffered severe losses with massive deliveries of aircraft and falling yields following the economic slowdown.

Hope seems to be on hand as airlines start to narrow losses and come close to returning to 2007 figures. According to a survey carried out by the International Air Transport Association (IATA), airline business confidence was up, though it did not necessarily mean a return to profit.

The Centre for Asia Pacific Aviation (CAPA), a Sydney-based consulting firm, also estimates a 15% increase in passenger volume this year. IATA had earlier predicted that airline net losses will halve from $11 billion in 2009 to $5.6 billion in 2010. In the four years to March 2010, CAPA estimates Indian carriers will have accumulated operational losses of in excess of INR260 billion, of which the three large airline groups (Air India, Jet Airways and Kingfisher Airlines) account for almost INR230 billion.

It says losses for the current financial year will be around INR 65 – 70 billion. Although it might take longer to get over total accumulated losses, India’s private domestic airlines are expected to make a combined profit of $250million by the end of the fiscal year ending in March 2011, says a recent report by CAPA.

India is starting to see a more favourable environment as the economy appears to be recovering earlier than expected, with GDP growth of 7.9% in the last quarter, ahead of expectations. The World Bank projects an annual growth of 8% per annum from 2011 to 2014, says Kapil Kaul CEO, Indian subcontinent & Middle East, CAPA.

Domestic traffic is bouncing back to previous levels though yields continue to take a beating. The country’s major airlines – SpiceJet, Kingfisher Airlines and Jet Airways released their quarterly earnings for three months ending December 2009.

Indian Aviation Limps Back-1Jet Airways led in market share at 26.9% for the main line carrier and JetLite combined. It posted a profit of $23 million, up 149% from the same period last year. Kingfisher Airlines captured a market share of 20.8% and recorded a loss of $91 million widened by a marginal loss of 2%, compared with the third quarter of fiscal 2008. SpiceJet garnered a market share of 12.9% and registered a net profit of $24 million, up from a net loss of $3.8 million in the same quarter year-ago period.

The decrease in fuel prices helped operating profits. For the three months ending in December, airlines spent nearly 32%-33% of operating revenues on fuel. Last year, the companies had spent about 38%- 48% of operating revenues on fuel.

The profitable and privately owned airline, budget carrier Indigo, is expected to have a higher profit (around $17.6 million in 2009) than in previous years. The carrier is said to have the best on-time performance record — 82% for the year.

Even national carrier Air India, which releases limited financials and operating metrics, posted a net loss of $318 million, a 9.7% improvement from the October-December quarter in 2008.

The rise in traffic to 43.8 million passengers carried last year on Indian carriers, was up from 42.8 million in 2007, contributed to the improving financial state of the three listed Indian airlines. They benefited from an increase in passenger traffic in the December quarter as well.

Year-on-year, Kingfisher flew 2.74 million passengers, an increase of 4%, while Jet Airways carried 3.41 million passengers, a growth of 33%. SpiceJet’s passenger traffic also reached 1.5 million during this year’s fiscal third quarter from nearly 1 million in the year-ago period. Air India posted a 24.8% year-over-year increase in passenger numbers to 3.17 million and a 14.4-point surge in load factor to 69.7%.

Airports

Reduction in traffic in the past year leading to delayed fund raising has slowed down the government’s plan to upgrade and modernize 35 nonmetro airports. It is now expected that work on 8-9 airports will be completed by March 2010, and an additional 4-5 airports by the end of 2010. The target is to upgrade all 35 airports by 2012, according to Praful Patel Minister of Civil Aviation, answering a query in Rajya Sabha.

It was recently decided that terminal and cargo operations will be retained by the Airports Authority of India and landside development will be opened to external parties. Tender documents for ten of these non-metro airports are expected to be issued shortly.

The government has also given an ‘inprinciple’ approval for setting up new Greenfield airports at Navi Mumbai, Sindhudurg in Maharashtra, Mopa in Goa, Bijapur, Simoga, Hassan and Gulbarga in Karnataka, Pakyong in Sikkim, Durgapur in West Bengal and Datia/Gwalior in Madhya Pradesh.

Airports Authority of India (AAI) plans to incur expenditure of Rs.12434 crores for modernisation of airports and air traffic services across the country during XIth Five Year Plan period (2007-2012).Two Greenfield Airports each at Bangalore and Hyderabad with an investment of Rs. 2400 Crores and Rs. 2920 crores have been made operational in 2008 under Public Private Partnership. Besides, development of IGI Airport, New Delhi and CSI Airport, Mumbai with estimated cost of Rs. 8975 crores and Rs. 9802 crores respectively has been undertaken under PPP.

Air Traffic Control

The Airports Authority of India manages one of the largest airspaces in the world, including a large oceanic component – a total of 6 million square kilometres.

Fast growth in traffic over the last five years has led to serious air congestion. The AAI has been investing in increased automation and improved ground infrastructure, although several hundred million dollars of further equipment is required to upgrade India’s CNS/ ATC systems, says CAPA.

In addition to the planned induction of the satellite-based system GAGAN, AAI will initially have a VSAT network covering 8 major airports, which will be extended to all airports progressively. Separately, the AAI has connected 80 airports in the country through the digital satellite communication network, to prevent a failure of voice communication systems between pilots and the ATC.

A key challenge remains a shortage of air traffic controllers. As of October 2009, India had 1640 controllers against a sanctioned strength of 2162. Compensation packages for controllers may therefore need to be reviewed if these continuing shortages are to be addressed, says CAPA. Also training will be the key.

General Aviation

Indian Aviation Limps Back-2The explosive growth in 2005- 06 driven by economic growth followed by an economic slowdown, has affected the business aviation segment. General aviation continues to be a neglected sector of Indian aviation industry. “

General aviation cannot be wished away. It will always be required especially when commercial carriers are going through tough times,” says Madan Thadani, the new president of the Business Aviation Association for India (BAAI).

A BAAI study done earlier in the year says there are 490 general aviation aircraft in India.With 24 billionaires in India according to Forbes in 2007, millionaires in India grew by about 23% last year. But the downturn has resulted in fewer sales. While 2006 saw applications for import of 300 GA aircraft with 100 cleared in 2008, the outlook is somber for the moment. BAAI expects major business houses, medium (and some small) companies and High Net worth Individuals (HNI’s) to become aircraft owners or look at charters.

Hurdles to growth include lack of infrastructure such as parking bays. Skies are overcrowded and air traffic control needs major improvement in terms of training and technology. “Regional connectivity is poor and regional hubs need to be created,” says BAAI vice president Karan Singh.

Most of the smaller airports lack basic facilities like VOR/ILS approaches and are at best fit only for VFR flights.

Import duties of around 16.5% are weighing private operators down who have to pay duty for importing spares. “It is difficult to convince the government as private planes are not looked at a public cause,” adds Thadani.

A key driver will be the availability of helipads and landing facilities. The new greenfield airport policy announced in April 2008, included a streamlined process for approval of new private airports and helipads.

“With the Indian economy set for strong and sustained long term growth, we can expect to see the general aviation sector in India undergoing a dramatic transformation in a very short period of time, though key challenges remain,” says Kaul.

Maintenance, Repair and Overhaul (MRO)

The MRO sector has been held back in part by a negative taxation structure, an absence of high quality training institutions to develop the skills base and deferment of fleet plans of carriers and a reduction in capacity.

The prohibitive costs of getting the aircraft serviced outside the country, due to the absence of domestic service providers, are eating into airlines’ profits, says a Frost & Sullivan report. Labour costs in India are around $30 to $35 per man-hour, compared to $55 to $60 in Southeast Asia and Middle East. “Therefore, India has the potential to service not just Indian aircraft but also those from neighboring regions,” says Frost.

The report notes that growth rates for the various services in the maintenance cycle are positive and MRO service requirements in the country are expected to grow at a compound annual growth rate (CAGR) of 13.5 percent between 2009 and 2015.

“Airlines will also be keen to know the MRO’s operating/service structure; therefore, the strategy for MROs will be to identify the key segments of the MRO value chain and address the needs of the current fleet and expected fleet additions,” says Frost.

Investment in Airports Security

Countries in South Asia are paying increasing attention to security related procurement as they face growing pressure to comply with international security standards and regulations. Aviation security regulations are becoming more stringent, forcing airports to upgrade their security systems with a view to meeting global standards. Those seeking to invest in India’s airport security equipment market can look forward to bright prospects

. India is expected to become one of the major civil security or homeland security markets in the world with expected cumulative spends of about $10 billion by 2017, according to a Frost & Sullivan study.

Homeland security concept came in the limelight after the Mumbai incident of 9/11 “Airports, mass transportation and maritime security are expected to be biggest verticals under growing homeland security market in India,” says Ratan Shrivastava, Director-Aerospace & Defense, South Asia and Middle East.

“The presence of Indian Coast Guard along the country’s coastline is expected to involve the installation of approximately another 20 coast guard stations, along with all the relevant systems, technologies and equipment. Similarly the modernisation and up gradation of current airports, in addition to the planned construction of over 35 new airports around the country, is expected to dramatically increase the amount being spent on airport security,” Shrivastava said.

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