Overview of the Indian Aviation sector

1. IMPACT OF THE ECONOMIC CRISIS ON THE INDIAN AVIATION INDUSTRY

6. INDIAN AVIATION: BEARING THE BRUNT OF RECESSION

8. RISING FUEL PRICES… The relentless rise in global crude prices is threatening to take the sting out of aviation industry’s tail. Losses of industry is in the range of Rs.4000 crore and it is expected to double by the end of next year. The operating cost for airlines across the country during the past six months has gone up from 30 percent to a whopping 47 percent now Airlines across the country are finding it difficult to pay the increased fuel bill and in some cases the wages, industry experts say.

9. HIGH FUEL PRICES ONLY PART OF THE PROBLEM… RISING AIRCRAFT LEASE RENTALS A BIGGER ISSUE… Recent near collapse of AIG (American Insurance Group), which was bailed out by Federal Reserve through a $85 billion package at the last minute. International Lease Finance Corporation (ILFC), a subsidiary of AIG is the largest aircraft leasing company in the world. Its Indian customers are Air India, Jet Airways, Kingfisher Airlines and Spice Jet. A little over one-third of the 370 commercial aircraft registered in the country are new, many of which are leased structured in an ingenious way rather than bought outright. Lease rate fixed as per LIBOR…Rise in LIBOR due to international credit and liquidity crisis…Higher lease rentals passed on to customers as higher fares…

10. OTHER ISSUES… Kingfisher, which has catapulted to the top-spot among private airlines, recently shed 300 employees. Following “rationalisation,” it “returned surplus aircraft ” back to the lessors. “Airlines have cut capacity by about 17% in the first half of this fiscal. Expected to return atleast 20 more aircraft. Domestic air traffic plummeted to an 18% negative growth this September. In the fourth quarter of current fiscal, air traffic expected to fall by upto 15% due to fall in domestic incomes. The domestic carriers carried about 2.6 million passengers during Sep, 08 as against 3.3 million passengers in the corresponding period last year.

11. MEASURES TAKEN BY THE SECTOR. Excessive salary cuts – Reduction in the salaries of pilots by 20% in Jet airways. Cutting down on excessive frills in business class – Air India switching over from expensive menu items to comparatively cheaper options. Sale and Lease back policy - Air India trying to raise USD $165 million. Dilution of stake – Kingfisher planning to dilute 25% of their stake. Jet Airways planning to dilute 10% of its stake to Temasek. On October 13, Kingfisher and Jet Air announced an alliance that included code-sharing, rationalization, and some undisclosed arrangements for cutting costs. Cutting down on uneconomical flights - Industry wide capacity reduced from 1630 flights daily to around 1450. Air India cancels some flights for a certain specific duration.

12. MEASURES TAKEN BY THE SECTOR. Other options for sourcing ATF – Kingfisher talking to Reliance industries for direct import. Increase in fares – Airlines have been forced to increase fares and fuel surcharges in order to meet higher lease rentals and fuel price rise. Elimination of unwarranted travel by staff.

13. EXPECTATIONS OF THE INDUSTRY FROM GOVERNMENT… Lower taxes on aviation turbine fuel (ATF) which is 35% of the operating cost of airlines. They have been dropped from Rs 73.67 per litre to Rs 40.69 in the past four months. But still further reductions required . The industry’s wish list includes : Extending exemption of withdrawal tax on lease rentals of aircraft The Indian aviation sector’s double-digit growth has been the fastest in the world. But the airlines have not made much out of the profitless growth, with most players stepped deep in red. Reduction in landing charges – In India low cost carriers (LCC) pay the same as full service airlines. As per international standards, it is lower for LCCs.

14. EXPECTATIONS OF THE INDUSTRY FROM GOVERNMENT… Interest-free loans with repayments that kick in after three years Relaxation of route dispersal guidelines under which they have also to service non-profitable routes. Withdrawal of duty on spare parts and a sharp cut in landing, route and navigation charges for at least two years. Relaxing fringe benefit tax (FBT) Removing service taxes on first and business-class travellers.

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