Sector Update | 16 June 2016
Aviation
Aviation
Domestic Passenger
growth (YoY %)
New Civil aviation policy: Taking flying to masses
Targeting 300m passengers by 2022; 5/20 rule changed to 0/20 rule
Indian government’s new civil aviation policy takes an integrated approach to take
flying to masses and has set an ambitious target of 300m domestic passengers by 2022
from ~85m in FY16.
The policy focuses on driving traffic growth in un-served/under-served airport
locations. While this growth will be driven by scaling of India’s airport infrastructure,
the policy announces several initiatives to overhaul India’s aviation eco-system.
All airlines will benefit from (a) initiatives to develop MRO (Maintenance, repair and
overhaul) sector in India - can lower costs in the long run, (b) freedom in ground
handling – will bring in efficiencies and (c) boost to air cargo segment - will increase
Load
factor (%)
airline profitability.
While clarity is yet to emerge on finer aspects of the policy, successful implementation
of RCS (Regional connectivity scheme) and other initiatives will nevertheless boost
84.1
87.0
83.3
80.5
84.3
84.9
82.8
growth of the Indian aviation market, in our view.
0/20 v/s earlier 5/20 rule with a view to give level playing field
Passenger
Market Share (%)
Civil aviation policy has given respite to newer airlines by scrapping minimum 5
years domestic operations requirement for flying on international routes.
However, airlines will still have to deploy at least 20 aircraft or 20% of their total
capacity on domestic routes.
While private operators such as IndiGo, SpiceJet and Jet Airways already have
international operations; AirAsia India (fleet size: 6) and Vistara (fleet size: 11)
will be the key beneficiaries as and when they expand their fleet to 20.
Mar-16
IndiGo
Jet
AI
Spice
Jet
GoAir
Others
Apr-16
35.8
38.8
21.4
18.9
15.7
14.8
13.3
12.9
8.4
8.6
5.5
5.9
Airport upgrades and Regional Connectivity Scheme to drive pax volumes
The policy clearly states government’s desire of including masses in aviation
growth and has set a target of 300m passengers by 2022. This growth will
primarily be achieved through scaling of India’s airports. Airports with scheduled
commercial operations will increase to 127 by 2019 from 77 in 2016.
The government will launch a Regional Connectivity Scheme (RCS) in 2QFY17
targeting un-served/under-served airports; fares on these specific routes will be
capped at ~INR2,500 per hour.
Airlines flying on RCS routes will be subsidized for losses through Viability gap
funding (VGF), which will be financed through levies on existing routes.
MRO and ground handling initiatives to lower costs for airlines
Government has announced a number of incentives to develop India’s MRO
sector. Incentives include fiscal relaxations and land adequacy.
Freedom in ground handling services will benefit airlines to reduce turnaround
time, lower costs and ensure fair competition.
We believe these initiatives will reduce the cost pressures on Indian airlines.
Harshad Borawake
(HarshadBorawake@MotilalOswal.com); +91 22 3982 5432
Rajat Agarwal
(Rajat.Agarwal@MotilalOswal.com); +91 22 3982 5558
Investors
16 June 2016
are
advised to refer through important disclosures made at the last page of the Research Report.
1
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Aviation
Await more clarity on the policy
We seek further clarity on the following:
Definition and names of the airports falling under un-served/under-served
category;
Quantum of levy of cess on departures on existing route:
The new policy
stipulates that VGF will be funded by introduction of a small levy on eligible
existing routes. We await clarity on the quantum/calculation of levy on the
same.
RCS routes and aircraft below 80 seats at rates
decided by the Ministry
VGF will be shared between MoCA (Ministry of Civil
Aviation) and State Governments in the ratio of
80:20. For the North Eastern States, the ratio is
90:10
Civil Aviation Policy, 2016
The aim of the policy is to take flying to the masses by
making it affordable and convenient, establish an
integrated eco-system which will lead to significant
growth of the civil aviation sector to promote tourism,
employment and balanced regional growth, enhance
regional connectivity through fiscal support and
infrastructure development and enhance ease of doing
Route Dispersal Guidelines (RDG)
business through deregulation, simplified procedures
Category I routes have been now been defined as
and e-governance.
routes (a) with flying distance of more than 700km
(b) average seat factor not less than 70 and (c)
Salient features of the policy are:
annual traffic of 0.5m passengers
Regional Connectivity Scheme
Guidelines for Cat II, and IIA deployment are same;
This scheme will come into effect in the second quarter
Cat III deployment will be at 35%. Uttarakhand and
of 2016-17.
Himachal Pradesh are now included in Category II
Airfares will be capped at INR2,500 per passenger
Revised categorization to apply from winter
for a one-hour flight
schedule of 2017 and will be reviewed once every 5
The scheme will implemented through:
years
Revival of airstrips/airports as No-Frills Airports at
NE operations can be revised, subject to RDG
INR500m to INR1b.
guidelines, with at least three months prior
Target
Airports/airstrips will be chosen in
intimation to MoCA
consultation with State Govt. and airlines based on
demand factors
5/20 Requirement changed
Airlines
will be provided Viability Gap
All airlines can now commence international
Funding(VGF)
on these airports
operations
provided that they deploy 20 aircraft or
RCS only in those states which reduce VAT on ATF
20% of total capacity (in term of average number of
to 1% or less, provide other support services and
seats on all departures put together), whichever is
20% of VGF
higher for domestic operations
These no-frills
airports will not have airport
charges.
Bilateral Traffic Rights
Service tax on tickets will be (on 10% of the taxable
GoI will enter into 'Open Sky' ASA on a reciprocal
value) for 1 year initially; excise duty on ATF picked
basis with SAARC countries and countries located
at RCS airports will be reduced to 2%
beyond 5000 km from Delhi
State government will provide free security. Power,
For countries within 5000 km radius, where the
water and other utilities at concessional rates
Indian carriers have not utilised 80% of their capacity
Regional Connectivity fund will be created and will
entitlements but foreign carriers /countries have
be funded through a small levy per departure on all
utilised their bilateral rights, a Committee headed
domestic flights other than Cat II/ Cat IIA routes,
by Cabinet Secretary will recommend a method
for the allotment of additional capacity entitlements
16 June 2016
2

Aviation
Whenever designated carriers of India have utilised
Maintenance, Repair and Overhaul
80% their capacity entitlements, the same will be
The MRO business of Indian carriers is around
renegotiated in the usual manner.
INR50b crore, 90% of which is currently
spent outside India.
Ground Handling Policy
In the budget for FY17, customs duty has been
Every major airport will have three Ground
rationalised and the procedure for clearance of
Handling
Agencies
(GHA)
including
Air
goods simplified. Further incentives proposed in the
India's subsidiary/JV at all major airports
policy to give a push to this sector:
Non-major airports will decide the number of
State Governments will be persuaded to make VAT
ground handling agencies based on demand and
zero on MRO activities
capacity
Service providers will be provided adequate land in
Airlines and helicopter operators can have self-
all future airport/heliport projects that have MRO
handling at all airports through their regular
potential
employees
Airport royalty and additional charges will not be
Contractual employees will not be permitted for
levied on MRO service providers for five years.
security reasons
Airport PPP/AAI
Aviation Education and Skill Building
Airports will continued to be developed by
AAI, State Governments, the private sector or in
PPP mode
Future tariffs at all airports will be calculated on a
'hybrid till' basis,
unless specified otherwise in
concession agreements.
30% of non-aeronautical
revenue will be used to cross- subsidise
aeronautical charges
Non-aeronautical revenue will be increased by
better utilisation of city side land
AAI will be compensated in case a new greenfield
airport is approved in future within a 150 km radius
of an existing unsaturated operational AAI airport
(not applicable to civil enclaves)
Estimated
direct
additional
employment
requirement of the Civil Aviation Sector by 2025 is
about 3.3 lakh. All training in non-licensed category
will conform to National Skill Qualification Framework
standards. MoCA will provide full support to the
Aviation Sector Skill Council and other similar
organisations/agencies for imparting skills for the
growing aviation industry. There are nearly 8000
pilots holding CPL (Commercial Pilot Licence) but
who have not found any regular employment.
MoCA will develop a scheme with budgetary
support for Type- rating of Pilots. The detailed
scheme will be worked out separately.
16 June 2016
3

Aviation
Exhibit 1:
India domestic passenger volumes have increased
grown at a CAGR of 10% to 85.2m in FY16
85.2
60.8 57.6 60.4
70.1
Exhibit 2:
and are targeted to increase to 500m passengers
by 2027
500
35.8
44.4
39.5
45.3
53.8
300
85.2
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Source: MOSL, DGCA
FY16
*According to Draft policy
2022
2027*
Source: MOSL, MoCA
Exhibit 3:
Top 6 airports have accounted for ~60% of
domestic passenger movements in FY16…
Delhi
21%
Others
42%
Exhibit 4:
…and contributed to ~58% of the domestic
passenger growth from FY09 to FY16
Delhi
21%
Others
42%
Chennai
4%
Chennai
4%
Mumbai
15%
Bangalore
9%
Hyderabad
4%
Source: MOSL, AAI
Mumbai
15%
Kolkata
5%
Kolkata
5%
Bangalore
Hyderabad 9%
4%
Source: MOSL, AAI
Exhibit 5:
IndiGo operates 2x domestic flights than any other
operator on Delhi Airport…
143
Exhibit 6:
…while has comparable flights on Mumbai Airport
with Jet Airways
93
89
49
61
33
75
23
42
33
Spice Jet
Air India
Go Air
Indigo
Jet Airways
Spice Jet
Air India
Go Air
Indigo
Jet Airways
Source: MOSL, DGCA
Source: MOSL, DGCA
16 June 2016
4

Aviation
Exhibit 7:
Top 12 city pairs contributed ~35% of domestic passenger traffic data from Aug 2015 to April 2016
4.6
2.6
2.5
1.7
1.6
1.6
1.6
1.5
1.5
1.4
1.4
1.2
BOM - DEL BLR - DEL BLR - BOM BOM - GOI
AMD -
BOM
DEL - HYD CCU - DEL
BOM -
MAA
DEL - MAA BOM - HYD DEL - PNQ BOM - CCU
Source: MOSL, DGCA
BOM = Mumbai, DEL = Delhi, MAA = Chennai, CCU = Kolkata, HYD = Hyderabad, AMD = Ahmedabad, PNQ = Pune
Exhibit 8:
India currently has 77 operational airports out of a total available ~475
airports/airstrips lending sufficient headroom for brownfield infrastructural expansion
Source: MOSL, AAI
16 June 2016
5

Aviation
Exhibit 9:
Categorization of routes under the earlier route dispersal guidelines
Category-I Routes
Mumbai - Bangalore
Kolkata - Delhi
Mumbai - Kolkata
Kolkata - Bangalore
Mumbai - Delhi
Kolkata - Chennai
Mumbai - Hyderabad
Delhi - Bangalore
Mumbai - Chennai
Delhi - Hyderabad
Mumbai - Trivandrum
Delhi - Chennai
Category-II Routes
Stations in:
North Eastern region,
Jammu & Kashmir
Andaman & Nicobar
Lakshadweep
Category-III Routes
Routes other than Category I and II
Source: MoCA , MOSL
Exhibit 10:
Guidelines for defining new Category-I routes
Category-I Routes
The routes should have a flying distance of at least 700 km
The routes should have an average seat factor of 70% (timeline for computing average factor not
specified)
The routes should have an annual traffic of 50mn passengers
Source: MoCA , MOSL
16 June 2016
6

Aviation
NOTES
16 June 2016
7

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Aviation
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