Expert Speak: India aviation at the cusp of a favorable curve

8 January 2015

India Aviation

Expert Speak

India aviation at the cusp of a favorable curve

Expect double-digit demand growth; Indigo capacity addition highest

We hosted a conference call with Mr Kapil Kaul, an expert on the aviation industry. We

gleaned insights on India aviation growth, airport infrastructure, airlines’ fleet financing

strategies, competitive landscape, and regulatory environment. Key takeaways:

Airline industry at the start of a favorable curve; demand to remain robust



The Indian Aviation industry is at the cusp of a favorable curve and is moving from

the negative extreme towards the positive.

While economic revival is yet to fully contribute to growth, the reflection of the oil

price collapse in ticket prices has helped to boost demand in the last few quarters

(YTD FY16 domestic passenger growth at 21% YoY).

In domestic aviation, passenger growth over the next decade should be in strong

double digits (~15%). Demand would remain strong even if Brent prices were to

move up to USD50-60/bbl.

CEO & Director – Center for

Asia Pacific Aviation

Mr Kaul has more than 25

years’ experience in the

aviation

and

hospitality

sectors.

He has led CAPA South Asia for

more than a decade now and

under his leadership, CAPA has

become the largest and the

leading aviation advisory in

Asia. Prior to CAPA, Mr Kaul

has worked with ITC, EWA, Air

Sahara, Crown Air, Kuoni and

Aviation Resources group.

Mr Kapil Kaul

Domestic airlines’ order book large; A320 Neo delay not a huge concern



Indian airlines have an order book of 680-730 aircraft (can reach 1,000 by March-

June 2016), of which Indigo’s share is the highest, with 430

(refer

to our latest

report on IndiGo),

followed by Spicejet ~150 and Go Air ~70. 80-90% of these

aircraft will be financed through operating lease.

On Airbus A320 Neo delay, Mr Kaul indicated that typically, delivery of aircraft gets delayed when there is a

technological advancement in the aircraft manufacturing industry. However, airlines can easily mitigate the

impact by extending the lease terms or by inducting aircraft on short-term lease.

More transparency desired in slot allocation; strong airline has an advantage



Airlines have limited visibility on airport slot allocation, making it difficult to manage network and do efficient

scheduling. Ability to negotiate better slots will be a differentiator for airlines at the key metro airports, which

are nearing full capacity utilization.

Commerciality is an important factor for airports to allocate slots. Hence, a strong airline with higher market

share in any airport will have an advantage in allocation. The key criteria for allocation of slots by airports

include size of the customer airline, past payment record, and operational performance indicators such as on-

time arrival and departure.

Airport infrastructure expansion critical; airside debottlenecking a near-term solution



Key metropolitan airports will witness severe capacity constraints in the next 3-7 years, if not de-bottlenecked

soon. While terminal capacity is adequate, airside capacity (number of landings and take-offs) will be a

constraint at all the key metro airports – Mumbai (in 2-3 years), Delhi (in 5-7 years), Calcutta and Bangalore (in

8-10 years) and even in Chennai. Except Navi Mumbai, there are no plans for a second airport in other cities.

A structural master plan is required to expand airport capacities at the key locations at the earliest. The new

land bill has already made land acquisition more costly.

Near-term respite is through debottlenecking of airside capacity through efficiency improvements in ANS (Air

Navigation Services). The Mumbai airport has seen per hour flights improving from 25-30 to 45. Similar

improvements are seen in Delhi, Chennai and Bangalore as well.

Harshad Borawake

(HarshadBorawake@MotilalOswal.com); +91 22 3982 5432

Rajat Agarwal

(

Rajat.Agarwal@motilaloswal.com); +91 22 3982 5558

Investors are advised to refer through important disclosures made at the last page of the Research Report

Motilal Oswal research is available on

www.motilaloswal.com/Institutional-Equities,

Bloomberg, Thomson Reuters, Factset and S&P Capital.

Expert Speak

Expect domestic pricing scenario to be soft led by lower crude prices



Despite low capacity additions this year, pricing on domestic routes has been soft due to pass-through of lower

fuel prices. However, international air travel prices are not low due to capacity constraints on the international

routes under bilateral agreements with other countries. Increased capacity allocation by other countries to

India under negotiated bilateral agreements will help in reduction of fares.

Typically, airlines pass through 80-90% of the fuel cost changes, though fares might not be changed in the same

quarter. In the off-season though, airlines typically pass through 100% of the reduction in fuel costs. However,

Indigo stands apart among domestic airlines, as it does not compromise yields for the sake of higher utilization.

Leasing companies do not take large positions on their own and work with airlines that have already placed

orders with the aircraft manufacturers and convert those into sale and lease back and then into operating

lease.

On the lessor front, there is a significant appetite to lease aircrafts, as demonstrated by the foray of East Asian

banks (China, Japan, Korea) and creation of Islamic bonds to finance aircraft in the Middle East.

Low cost carriers (LCCs) take advantage of bulk aircraft purchase discounts and use the gains to lower their

ownership costs. In fact, earlier Air India used to purchase aircraft, but it has now started selling aircraft and

leasing them back to take advantage of the comparatively flexible operating leases.

While availability of aircraft is not a constraint, terms of lease agreement depend on the financial position of

the airlines. Due to this, the leasing costs for airlines with overleveraged balance sheets are higher, and such

airlines might not be able to induct the desired aircraft model/age and would also have to lease aircraft from

multiple lessors.

Exhibit 1: Over the last decade, domestic ASK/RPK grew at a CAGR of 12%/14% along with

increasing load factors

Domestic ASK (billions)

Domestic RPK (billions)

Passenger load factor (%)

Good liquidity in the aircraft leasing market; better terms for financially strong airlines



FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

*based on annual domestic seats per capita

Source: DGCA, Company, MOSL

Exhibit 2: Indian market is expected to be the fastest growing Origin-and-Destination

routes in RPK CAGR (2013-2033)

9.5%

8.9%

8.6%

8.4%

8.3%

8.2%

8.0%

7.9%

Source: Airbus 2014 GMF, Company

8 January 2016

Expert Speak

Exhibit 3: Domestic capacity (ASKs b) to grow at ~13% CAGR

154

Exhibit 4: Domestic passengers (m) to grow at ~13% CAGR

103

115

128

103

120

138

FY15E

FY16E

FY17E

FY18E

FY19E

FY20E

FY15E

FY16E

FY17E

FY18E

FY19E

FY20E

Source: CAPA, Company, MOSL

Exhibit 5: India trips per capita averaged 0.07 in 2014

Exhibit 6: By 2034, India will reach the current China levels

Source: Sabre, IHS Economics, Airbus GMF2015

Exhibit 7: IndiGo’s market share increased on the back of fleet expansions

Airline-wise ASK market share (%)

FY08

FY09

FY10

IndiGo

SpiceJet

Jet Airways

Go Air

FY13

FY14

Air India

Others

FY15

FY11

FY12

Source: CAPA, DGCA, Company, MOSL

8 January 2016

Expert Speak

Exhibit 8: IndiGo has >50% market share on the top 10 non-metro to non-metro routes

IndiGo

Jet Airways

Air India

Top 10 Metro to Non-metro

routes

SpiceJet

Go Air

Others

Top 10 Metro to Metro routes

Top 10 Non-metro to

Non-metro routes

Source: DGCA, CAPA, Company, MOSL

Exhibit 9: Top 10 major city pairs accounted for ~27% domestic passengers in Oct-2015

City pairs excl. top 10

Bengaluru - Mumbai

Ahmedabad - Mumbai

Delhi - Chennai

Mumbai - Delhi

Mumbai - Goa

Mumbai - Kolkata

Kolkata - Delhi

Bengaluru - Delhi

Mumbai - Chennai

Mumbai - Hyderabad

5.6%

3.6%

73.1%

26.9%

3.5%

2.2%

2.1%

1.9%

Source: DGCA, CAPA, Company, MOSL

Exhibit 10: Current airport infrastructure will saturate in the next 5- 10 years; no concrete plans for another greenfield airport

except in Navi Mumbai

Airport

Delhi

Mumbai

Navi Mumbai

Chennai

Bangalore

Hyderabad

Kolkata

Other Airports

Current annual

pax capacity (m)

2025 annual pax

capacity (m)

Notes



Expected to saturate in the next 5-7 years.



One of the Delhi runway falls under the VIP zone, any runway expansions

pose a security risk, thereby limiting any expansion.



Expected to saturate in next 2-3 years.



Airport running close to full capacity not on landside, but on airside; slot

availability limited.



As of now no clarity on timelines of this new planned airport.



Airside constraints limit capacity to 18m.



No confirmed plans for expansion, though land has been earmarked.



Fastest growing airport in India (~25% growth YoY); saturation expected in

next 10 years, will require another airport.



Witnessing double digit passenger growth



Will require another airport in 10 years



Expect saturation in 10 years



AAI manages 43 airports; expect saturation in 3-5 years.

AAI airports in Pune and Goa in military airfields, hence limits expansion

and operating hours.



E.g. Operations prohibited between 8.30 am and 1.00pm on weekdays in

the Goa Airport.

Source: CAPA, MOSL

12 - 15

8 January 2016

Expert Speak

Exhibit 11: Indian airports have increasingly handled higher scheduled aircraft movements

Annual movement ('000)

148

Per hour movement (unit) - RHS

154

160

177

171

174

183

143

750

FY05

850

FY06

1250

1300

1350

1400

1550

1500

1525

1600

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

*Per hour movement on All India basis

Source: CAPA, MOSL

Exhibit 12: Airlines in India currently have huge order books

430

192*

140

Air Costa

Air India

Source: CAPA, MOSL

IndiGo

SpiceJet

Jet Airways

Go Air

*Based on media reports

Exhibit 13: India's fleet is expected to grow rapidly with a current order book of 680-730

aircrafts

Narrow body

Regional Jet

Turboprop

Wide body

Total

6,706

2,470

564

Australia

China

235

Hong Kong

400

India

192

Singapore

456

UAE

905

USA

Source: CAPA, MOSL

Key terms used throughout the report

ASK: Available Seat Kilometer - The Basic Measure of Capacity

One seat (empty or filled) flying one kilometer is an ASK

A 180-seat A320 flying 100 kilometers creates 18,000 ASKs



RPK: Revenue Passenger Kilometer - The Basic Measure of Production

A paying passenger flying one kilometer creates an RPK

150 passengers flying 100 kilometers generate 15,000 RPKs



Load Factor: Production Compared to Capacity

To calculate the load factor, divide RPKs by ASKs

For an individual flight, 15,000 RPKs divided by 18,000 ASKs, or 83%

8 January 2016

Expert Speak

NOTES

8 January 2016

OIL & GAS / LOGISTICS GALLERY

COMPANIES

SECTOR UPDATES

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