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Aviation Sector – Foreign Investment changing DNA of the Sector

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Indian Aviation / Airline Sector

Airline Sector has been one of the most challenging and under developed sector for the Indian economy. The rising fuel costs, inflation and other macroeconomic factors have made a severe hit on the industry. In order to provide some boost to the sector and help it grow further the government recently allowed Foreign Investment in the form of FDI in the sector.

Policy Reforms

It is needless to say that the airline sector has suffered a lot in the past few years over the concern of rising taxes on ATF, limited source of funding, competitive environment, etc. Following are some of the policy reforms which might help the sector grow in future:

i) Foreign Investment –  In order to revive the current state of the industry the government of late, has taken on the major step by opening the channels for investment. Government has opened the foreign investment up to 49% in Indian carriers. If we consider the long term growth prospects of the companies operating in the sector, we see that the domestic company has a bright future with growth potential, as the foreign carriers have started showing interest in the Indian aviation space after the announcement of FDI was made.

ii) Air Turbine Fuel Apart from this it was also seen that the aviation ministry is making an effort to notify air turbine fuel (ATF) so as to bring down the sales tax, which will help the companies improve on their operating income by lowering the operating costs. If the efforts made by the government and the ministry to help the sector grow are considered, we see a positive bias for future development and reforms in the industry.

iii) Growth in Business – It is expected that the year will remain in favor of existing carriers on account of lower fleet supply and strong yields. Apart from this, the improved fleet utilization due to the peak season will lead to growth in the number of passengers. Stable crude oil price is also one of the key reasons for expecting growth in the number of passenger.

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Industry Outlook

  • A string growth in yield per passenger was seen. It showed a growth of ~28-30% YoY in H1FY13 vs. growth of 5-7% in H1FY12. The stability in crude oil prices, capacity rationalization, etc. is some of the factors due to which it is expected that the domestic players will be reporting profitable numbers in the current year, as compared to the last year despite slowdown in passenger traffic.
  • Also the sector is currently getting better support from the government in terms of permission for fund raising through various options (ECBs, FDI by foreign carrier); which will enhance the attractiveness of the sector.
  • Going forward these positives will result in possible strategic alliances between foreign and domestic players thus helping for the development of the one of the most important sector.

Sales Tax on ATF – Major Concern of Aviation Industry

Air turbine fuel or the ATF currently remains a state subject matter due to which the sales tax rate varies from state to state in India. The average sales tax on ATF works out to be closer to 26%, after taking the average of the sales tax prevailing in some of the key Indian states. The high sales tax of 26% is one of the concerns for the industry. The fuel cost constitutes the maximum share of the total operating cost which is to the tune of 45%. If the ATF is declared as a “Good”, the fuel costs would considerably go down in the domestic segment. Thus in such a case, company generating revenues from domestic operation will be the most beneficiary companies. Companies like Spicejet which has over 40% of the revenues from the domestic segment will be the major beneficiary of the move.

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Incoming Foreign Players via Stake sale

After the opening up of the sector by the government to allow FDI in aviation a new source of funding for domestic carriers like SpiceJet, Jet Airways, debt ridden Kingfisher Airlines have started in full flow. The companies are in talks with the foreign carriers to invite them to enter the Indian market.

Jet Airways, which is currently the second largest domestic player, a major competitor and a string contender is seen bargaining with foreign players to collaborate. The company has wide global reach compared to its domestic peers which helps it bargain with foreign players in a more effective and efficient manner. It is expected that any strategic alliance with a foreign carrier via a stake sale would bring much more synergy. We could very well see synergy in terms of route network, fleet maintenance and its management over the longer term. This collaboration would also help in trimming down the debt and would be a medium to bring down the stake to 75% as per the regulatory requirement.



Niraj Satnalika

Niraj is an MBA in International Business (Finance). Prior to this he completed B.Tech in Electronics and Instrumentation. He is currently working with Confederation of Indian Industry (CII), Kolkata in capacity of Consultant. Satnalika is actively involved with an NGO and works towards promoting education among the underprivileged.

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