Indian aviation sector has witnessed a phenomenal growth chart in the last decade.

Today, India is the 9th largest civil aviation market in the world and ranks fourth in domestic passenger volumes with a market worth of US $12bn. As per AAI, passenger handling capacity has risen two-fold from 72 million (FY 06) to 143 million (FY 11), and freight traffic has risen from 1.5 million MT (FY 06) to 2.3 million MT (FY 11).

Introduction The aviation sector is one of the major economic drivers for prosperity, development and employment in a country. The rapidly expanding aviation sector in India handles about 2.5 billion passengers across the world in a year; moves 45 million tonnes (MT) of cargo through 920 airlines, using 4,200 airports and deploying 27,000 aircraft. Today, 87 foreign airlines fly to and from India and five Indian carriers fly to and fro from 40 countries. Currently, India is the ninth largest civil aviation market in the world. India is expected to be amongst the top five nations in the world in the next 10 years. An efficient civil aviation sector is important for India as it is inter-linked with other sectors in the economy and generates income and employment through global commerce and tourism, as per a National Council of Applied Economic Research (NCAER) study titled Emirates in India Assessment of Economic Impact and Regional Benefits India is an exciting market for us. We expect Indias contribution to our global (cargo) revenues to increase from 3.5 per cent to five per cent this fiscal and 10 per cent in the next three to four years, as per Nick Rhodes, Director Cargo of Cathay Pacific. Clearly, India has the potential to play a much larger role in the air cargo market, especially with international carriers looking at Asia as a major growth driver for their air cargo business. India will be the fourth biggest market in terms of value for all new aircraft deliveries during the next 20 years, according to aircraft maker Airbus. Market Size The domestic airlines carried 39.82 million passengers during January-August 2012, as against 39.63 million passengers during the corresponding period of previous year, according to data released by the Directorate General Civil Aviation (DGCA). The revenue on the domestic network increased by 33 per cent during April-August 2012 period as compared to the same period last year, presenting an increase of Rs 531 crore (US$ 98.33 million). The passenger traffic has grown at the rate of 17-18 per cent in the last few years. According to an assessment of the overall outlook of the sector, the fleet of the commercial airlines is expected to touch approximately 1,000 aircraft in 2020, as per Mr Ajit Singh, Union Minister for Civil Aviation, Government of India. The air transport (including air freight) in India has attracted foreign direct investment (FDI) worth US$ 438.39 million from April 2000 to June 2012, as per data released by Department of Industrial Policy and Promotion (DIPP). Foreign airlines carry 82 per cent of Indias air cargo traffic, which is projected to grow at 10-12 per cent rate over the next five years. Market Players

Air Works India Engineering Ltd has made investments worth Rs 120 crore (US$ 22.22 million) in the Dubaibased Empire Aviation Group (EAG). The new company will offer end to end aircraft asset management services for private business jet owners Piramal Enterprises has picked up 27.83 per cent stake in Bluebird Aero Systems, an Israel-based unmanned air systems manufacturer, for about Rs 40 crore (US$ 7.41 million) Air India plans to deploy its newly-acquired Boeing 787 Dreamliner in service from September 19, 2012, with the first commercial flight slated between New Delhi and Chennai

IndiGo has signed a definitive agreement for the purchase of 300 Pratt and Whitney engines. The engines will power the 150 Airbus A 320 New Engine Option (NEO) family aircraft that the airline has ordered Ramco Systems has announced order win from Wadia Group owned Go Airlines for its Maintenance and Engineering suite of software. With this win, Ramco's software would be used in providing MRO, M&E and ERP services to nine aviation organisations in India

Aerospace on a High

Wipro Infotech, the India and Middle East IT Business unit of Wipro, has inked a multi-year, multi-million dollar engagement with Qatar Airways SilkAir, the regional wing of Singapore Airlines, will commence services from Visakhapatnam to Singapore from October 28, 2012. With this new air link, the global route network of the airlines will grow to 42 in 12 countries, according to G M Toh, General Manager, Singapore Airlines (India) GippsAERO, the Australian manufacturing arm of Mahindra Aerospace and manufacturer of the GA8 Airvan utility aircraft, has announced the appointment of Hawker Pacific as its authorised dealer for the ASEAN region Jet Airways, Indias premier international airline, has a truly unmatched bouquet of unique travel options from India to multiple destinations in the ASEAN region, Australia and New Zealand

Recent Developments

IBM announced that it has enabled Jet Airways, Indias premier international airline, to more accurately calculate, track and report aircraft emissions. Realising this significant milestone as a part of the strategic outsourcing construct allows, Jet Airways to use advanced analytics to map the carriers carbon emissions, optimising its fuel usage by detailed analysis of each flight The first 'Made in India' helicopter cabin is ready to take off in global skies. The cabin has been manufactured by the Tata Group in Hyderabad and has been fitted in the helicopters by the US-based firm Sikorsky

Government Initiatives In a major step aimed to boost the Indian civil aviation sector, the Cabinet Committee of Economic Affairs (CCEA) has relaxed the FDI norms in aviation, which will allow foreign aviation companies to invest in Indian aviation companies. The foreign carriers can now pick up to 49 per cent stake in domestic Indian aviation firms. The 12th Five Year Plan (2012-17) estimates the domestic and international cargo to grow at the rate of 12 per cent and 10 per cent, respectively, with the total traffic projected to touch 5.9 million tonnes (MT) by 2020. Thus, a significant potential lies for the Indian airports to become transhipment hubs, as per a KPMG report. >Buoyed by the success of implementation of public-private partnership (PPP) model in airport development, the Government of India plans to invest more on expansion of existing airports, by means of modernisation. The Government has planned to invest US$ 30 billion in next 10 years," according to Mr S N A Zaidi, Secretary, Civil Aviation. The Government's open sky policy has attracted many foreign players to enter the market and the industry is growing in terms of number of players and the aircrafts. Given the strong market fundamentals, the civil aviation market in India is expected to register a compound annual growth rate (CAGR) of more than 16 per cent during 2010-2013, as per a RNCOS report. The Government has taken various steps towards structural policy reforms and have come out with new policies which are liberal and will encourage public-private partnerships (PPP)

The Government of India allows 100 per cent foreign direct investment (FDI) for green field airports, via the automatic route. Moreover, foreign investment up to 74 per cent is permissible through direct approvals while special permissions are required for 100 per cent investment Private investors are allowed to set up general airports and captive airstrips while maintaining a distance of 150 kms from the existing ones. Complete tax exemption is also granted for 10 years

About 49 per cent FDI is allowed for investment in domestic scheduled passenger airlines and investment up to 100 per cent by non-resident Indians (NRI) via the automatic route. FDI up to 74 per cent is allowed for non-scheduled and cargo airlines

Furthermore, Mr Ajit Singh, Union Minister for Civil Aviation, has approved changes in the byelaws regulating building activities around airports. The Central Government through appropriate amendment in the existing regulations would issue directions to the Airports Authority of India (AAI) to incorporate new procedure in their own regulations/ byelaws. The AAI in collaboration with local authorities will then implement new rules and procedures. Road Ahead The Indian aviation industry is exploring opportunities to improve connectivity and is also looking at enhancing the number of Indian carriers to various countries. In next five years, we plan to expand the airport network and provide connectivity to tier II and III cities, said Ms Pratibha Patel, the former President of India. In addition, the Ministry of Civil Aviation has released the Vision-2020 document, which is an assessment of the overall outlook of the aviation sector in 2020. It highlights that the aviation sector has a growth potential to absorb investment worth US$ 120 billion. Furthermore, the fleet size of commercial airlines sector will be approximately 1,000 aircraft, domestic passenger numbers could reach 150-180 million, helicopter fleet is expected to be 500, while the air cargo movement is expected to reach the level of 9 million metric tonnes (MMT) by 2020.

Aviation sector opened up

NEW DELHI, September 14, 2012 The Cabinet Committee on Economic Affairs, on Friday, approved 49 per cent foreign direct investment (FDI) in the aviation sector, allowing foreign carriers to pick up stake in domestic airlines. This is likely to pave way for the much-needed equity infusion into domestic carriers, including loss- making Kingfisher Airlines, which are passing through turbulent times as majority of them are crying for funds to support their operations. Though FDI of up to 49 per cent, 75 per cent and 100 per cent was there in the aviation sector, foreign airlines were not allowed, Civil Aviation Minister Ajit Singh told reporters after the Cabinet meeting. Current norms Current FDI norms allow foreign investors, not related to airline business, to directly or indirectly own an equity stake of up to 49 per cent in an Indian carrier. Allowing foreign airlines to pick up stakes in Indian carriers has been a long-pending demand of the aviation sector. The Indian aviation industry and the domestic carriers are suffering losses because of high taxes on jet fuel, high airport fees, costlier loans, poor infrastructure, and cut-throat competition. Except IndiGo, all airlines have posted losses in the financial year ending March 31. Cash-strapped Kingfisher Airlines, which is burdened with a debt of over Rs.7,000 crore, and is operating with a bare minimum fleet, has been the most vocal supporter of allowing FDI in the sector.

The opening of the sector to foreign airlines may, however, bring good news for passengers who would benefit from more competitive fares, better product and services and better international connectivity. Foreign carriers such as British Airways and Virgin Atlantic Airways have expressed interest in investing in Indian carriers. However, Lufthansa Airlines said it had no plans to make further investments in Indian carriers.

Heavy losses for Kingfisher Airlines, Jet Airways and SpiceJet in challenged Indian aviation sector
The challenges continue in Indias aviation sector with the countrys three-listed carriers Kingfisher Airlines,Jet Airways and SpiceJet posting losses in the three months ended 31-Dec-2011 (3QFY2012), traditionally the strongest quarter for Indian carriers, marking four consecutive quarters in the red. Kingfisher Airlines, as expected, posted the heaviest loss among the listed carriers in what was a tough quarter for Indias aviation sector as a whole. Government-owned Air India is also heavily loss-making. SpiceJet, while also feeling the pain, is better placed than some of its rivals, while unlisted IndiGo is likely to be the sole profitable carrier in the current fiscal year. Jet Airways, SpiceJet and Kingfisher net profit (loss) margin: 1QFY2010 to 3QFY2012

Source: CAPA Centre for Aviation & company reports

The losses in the quarter reflect not only issues at the individual carriers but some fundamental and structural challenges in the Indian aviation sector. As previously noted, growth in the robust domestic market has failed to translate into profits for India's airline industry, where all the major carriers except IndiGo are loss-making, as a result of the impact of high jet fuel costs (during the quarter crude oil price remained well above the USD100 mark to constitute around 40-50% of airline operating costs), compounded by heavy taxation, inefficient infrastructure and an inability to raise fares in a highly competitive market. In addition, rising debt levels and a depreciating rupee (leading to increased payments for fuel and aircraft rentals) are placing further pressure on margins. As a result, the nations airlines are seeing a sharp increase in their cost base at a time when yield and unit revenue growth is pressured. Carriers in the market are attempting to rectify this situation through a number of measures such as entering into sale and leaseback agreements to reduce debt and interest costs, restructuring their operations and divesting non-core assets. The road to recovery for the nations airlines will likely be bumpy, with the heavily indebted sector having already accumulated losses of USD6 billion in the last five years, which will be compounded by a record USD2.5 billion loss in the 12 months to 31-Mar-2012. Lender banks are now increasingly concerned about their exposure to the troubled sector at a time when financing requirements are significant and the net worth of the nations airlines have declined substantially, as noted by the carriers' auditors.

Combined losses of USD2.5 billion in FY2012 forecast

CAPA estimates Indian carriers combined will lose USD2.5 billion in the 12 months ending 31-Mar2012. This is on total revenues of just under USD10 billion a worse result than even FY2008/09, when traffic was declining and fuel prices spiked at USD150/barrel. In the domestic market, Indias airlines lose USD25-30 every time a passenger boards an aircraft. All three listed carriers have been weak performers on the stock exchange in 2011, losing considerable value amid concern from investors about the financial state of the industry. Shares comparison (indexed) for SpiceJet, Kingfisher Airlines and Jet Airways: Mar2011 to Feb-2012

Source: CAPA Centre for Aviation & Rediff

The Indian Government is, however, responding to these very real challenges, with plans in the works to open up foreign direct investment (FDI) in domestic carriers by international airlines to bring in much-needed capital and management expertise. The Government has also stated it will permit domestic airlines to directly import jet fuel (a positive sentiment but the practicality of this questionable) and open up more bilaterals to private Indian carriers to operate international routes. Pressure is also mounting on the Government to lower taxation on jet fuel, third party maintenance and aircraft lease payments, with certain changes to the Income Tax Act and the duty structure also being recommended. Looking forward, greater pricing discipline and a focus on cost-containment efforts are necessary, while simultaneously focussing on ancillary revenue development. Capacity rationalisation is expected to continue in the domestic market, led by Kingfisher, with downward yield pressures in the domestic market easing since Nov-2011 for all carriers.

Kingfisher Airlines reports heaviest losses among listed Indian carriers

While the financial results for all three listed Indian carriers were less than ideal, Kingfishers profitability situation is the most concerning. While the carrier reported an EBTIDAR profit of INR1.25 billion (USD25 million) in the quarter (EBITDAR margin declined from 17.5% to 8.1%), it

was loss-making at the EBITDA level (INR1.47 billion/USD30 million) with its EBITDA margin declining from 2.5% to -9.5% in the quarter. The carrier also reported a loss before exceptional items and tax of INR5.78 billion (USD117 million) and a net loss of INR4.44 billion (USD90.2 million) for a net loss margin of 33%.

...consistently loss-making due to an ill-timed expansion...

Kingfisher has been consistently loss-making due to an ill-timed expansion that included ordering A380s (subsequently deferred) and a merger with Air Deccan. The global economic crisis and rising fuel prices contributed to the carrier's problems and has left it heavily indebted to lessors, suppliers, lenders, airline partners, employees and the tax department. This financial situation is now impacting its operations, with the carrier this month grounding aircraft, cutting services and withholding salaries as India's tax authorities recently froze the airline's bank accounts for the second time. The carrier, which is seeking additional loans from banks to fund its continued operations, is now operating less than half its fleet (although it will add aircraft progressively at the beginning of Mar-2012) and a significantly curtailed schedule. Kingfisher Airlines, which has featured heavily in local and international media in the first two months of the year, faces a pivotal year in 2012. Accumulated losses have left the company heavily indebted and requiring urgent recapitalisation to support its ongoing operations. The financially stressed carrier has limited funding options available given recent performance and market sentiment, unless the promoter first infuses additional equity.

Jet Airways posts fourth straight quarterly loss

Jet Airways, meanwhile, posted its fourth straight quarterly loss in 3QFY2012. While the carrier, which is reportedly seeking to raise USDINR10 billion (USD203 million) in working capital loans, was profitable at an EBITDAR level with an INR2099 million (USD40 million) profit in the quarter (for an EBITDAR margin of 1.9%, down from 22.7% in p-c-p), its loss after tax stood at INR1012 million (USD19 million) compared with a profit of INR1182 million (USD26 million) in 3QFY2011. Jet Airways, like its peers, will post a full year loss in FY2011/12 and the coming financial year looks equally challenging. However, the airline is likely to benefit from the weakness at both Kingfisher and Air India, with the carrier having success at attracting corporate customers and improving yields and loads factors, which are now in the 85-90% range in the domestic market.

Air India also heavily loss-making

While not reporting financial results in the quarter, it is well known that Air India is also heavily lossmaking and suffering under high-debt levels. The carrier is expected to face yet another challenging year, although the Government has approved a debt-restructuring package which should provide the carrier with some breathing space.

...there are few grounds for optimism...

However, there are few grounds for optimism about the airlines ability to make progress on the more challenging task of turning around at an operational level. In order to become a viable airline,

Air India needs to address fundamental issues such as its bloated workforce, an inefficient route network combined with inappropriate deployment of aircraft, commercial ineffectiveness, poor staff morale and a deficit of middle and senior management to handle the huge task ahead. The major milestone for 2012 will be the induction of its first Boeing 787 aircraft, offering lower costs and capacity that is better matched to demand on key routes. Yet, with only a handful of aircraft expected to be delivered this year, the impact on overall performance will be minimal.

SpiceJet also loss-making but more fundamentally robust

SpiceJet reported a loss before and after tax of INR392.5 million (USD8 million) in the quarter, compared to profits of USD24 million and USD19.3 million, respectively, in 3QFY2011. Despite the losses in the first three quarters of the current fiscal year, SpiceJet has reported growth at both the top and bottom lines in the past two financial years.

Revenue declines for Kingfisher but double-digit revenue growth for Jet Airways and SpiceJet
Kingfisher Airlines reported a 5% decline in revenue in the quarter to USD314 million, reflecting the carrier curtailing operations during the Dec-2011 quarter. Revenue moved in the other direction for Jet Airways and SpiceJet, with revenue growth of 14% to INR39,869 million (USD794 million) for Jet Airways and 42% to INR11,758 million (USD240 million) for SpiceJet. Jet Airways, which expects revenue to remain flat in FY2013, benefited from revenue gains from a real-estate agreement and foreign exchange gains in 3QFY2012. "Going forward, there are more gains to be had on foreign exchange," the carrier said. Jet Airways reported unit revenue growth of 3.8% to INR4.06 (USD8.09 cents) while Kingfisher Airlines reported unit revenue of INR4.03 (USD8.18 cents), a 0.1% year-on-year reduction. Kingfisher revenue per ASK vs cost per ASK: 1QFY2012 to 3QFY2012

Source: CAPA Centre for Aviation & airline reports

Jet Airways revenue per ASK vs cost per ASK: 1QFY2010 to 3QFY2012

Source: CAPA Centre for Aviation & airline reports

Fuel weighs heavily on operating cost base

SpiceJet reported the largest year-on-year increase in total operating costs, by 67% to INR11,949 million (USD244 million). Jet Airways also reported double-digit operating costs increases, of 34% to INR44,527 million (USD887 million). While Kingfisher Airlines reported a lower increase in operating costs, of 7% to INR16,940 million (USD344 million), its unit costs remained high at INR4.42/USD8.97 (+12%), and its staff and fuel costs remained higher than its peers as a proportion of revenue. By comparison, Jet Airways cost per ASK increased 25.3% INR3.63/USD7.23 cents, with the carrier noting that while everyone is selling below cost, high fuel and wage costs are driving up the cost of operations.

SpiceJet noted aircraft fuel expenses increased 90% year-onyear...

The cost of fuel was an issue for all carriers in the quarter. SpiceJet noted aircraft fuel expenses increased 90% year-on-year and fuel costs "constituted 50% of the total revenue" in the quarter, compared to 37% in the Dec-2010 quarter. The carrier stated the increased cost of crude oil plus 24% tax on ATF is "continuing to impact" the sector "very adversely". Fuel costs as a percentage of sales, however, declined for SpiceJet, from 63% in the Sep-2011 quarter to 51.4% in the Dec-2011 quarter. Jet Airways also pared this ratio slightly, from 47.7% to 47.4%. It was the opposite for Kingfisher, whose fuel cost grew from 53.5% of sales in the Sep-2011 quarter to 55% in the Dec2011 quarter. Meanwhile, Kingfisher's employee expenses as a percentage of sales increased from around 12% in Sep-2011 quarter to more than 13% in Dec-2012 quarter. On the other hand, Jet Airways and SpiceJet saw the ratio of employee expenses to sales reduce, from 13% to 11.4% for Jet Airways and from 11.4% to 9.7% for SpiceJet.

Kingfisher Airlines revenue down 5% financial highlights for three months ended 31Dec-2011:

Revenue: USD313.9 million, -5% year-on-year; Total operating costs: USD343.7 million, +7%; o Fuel: USD149.9 million, +37%; EBITDA (loss): (USD29.8 million), compared to a profit of USD8.1 million in p-c-p; Profit (loss) after tax: (USD90.1 million), compared to a loss of USD51.5 million in p-c-p; Passenger numbers: 2.6 million, -15%; Passenger load factor: 75.2%, -8.4 ppts; Total revenue per ASK: USD 8.18 cents, -0.1%; Cost per ASK: USD 8.97 cents, +12%; Cost per ASK excl fuel: USD 5.05 cents, -4%; Fleet: 64 aircraft, compared to a fleet of 66 aircraft in p-c-p.

*Based on the conversion rate at USD1 = INR49.2888 Jet Airways revenue up 13.6% financial highlights for three months ended Dec-2011:

Total revenue: USD794.2 million, +13.6% year-on-year; Total costs: USD887 million, +34%; o Fuel: USD349.3 million, +59.9%; o Labour: USD84.1 million, +26.1%; Profit (loss) before tax: (USD20.2 million), compared to a profit before tax of USD43.4 million in p-c-p; Net profit (loss): (USD20.2 million), compared to a net profit of USD23.6 million in p-c-p; Passenger numbers: 4.5 million, +15.1%; Passenger load factor: 77.8%, -1.5 ppts; Breakeven seat factor: 89.3%, +15.3 ppts; Revenue per RPK: USD 8.09 cents, +3.8%; Cost per ASK: USD 7.23 cents, +25.3%; Cost per ASK excl fuel: USD 3.73 cents, +12.8%.

*Based on the conversion rate at USD1 = INR50.20 SpiceJet revenue up 42% financial highlights for three months ended 31-Dec-2011:

Total revenue: USD239.7 million, +41.5% year-on-year; Total costs: USD243.6 million, +66.7%; o Fuel: USD120.7 million, +90.1%; Profit (loss) before tax: (USD8.0 million), compared to a profit of USD24.0 million in p-c-p; Net profit (loss): (USD8.0 million), compared to a profit of USD19.3 million in p-c-p.

*Based on the conversion rate at USD1 = INR49.055

Jet Airways maintains market share dominance with Kingfisher relegated to fifth in 3QFY2012
During 3Q2012, Indian domestic demand increased by 12% year-on-year, although capacity additions outstripped demand with a 17% capacity increase. Consequently load factors declined from 77% to 74%. Jet Airways, last month, stated it expects the Indian domestic market will continue to grow at a rate of 12-15% in the short to medium term. India domestic industry capacity and passenger numbers: Dec-2010 to Dec-2011

Source: Jet Airways

During 3Q2012, Jet Airways maintained its market share dominance, with a combined market share of 26.5% for Jet Airways and JetLite, ahead of IndiGo (20.0%) and Air India (17.2%). Kingfisher Airlines saw its market share decline substantially, relegated to fifth place in the domestic market. Kingfisher Airlines was until the end of Sep-2011 the largest single carrier in the domestic market. India domestic market share: 3QFY2012

Source: Jet Airways

The market share decline at Kingfisher Airlines, and the 15% year-on-year reduction in passenger numbers in the quarter to 2.6 million, occurred after the cash-strapped carrier grounded aircraft and cut routes, resulting in significant capacity reductions in the month. Up until recently, IndiGo and Kingfisher had been almost neck-to-neck in the market share race, although Kingfishers market share has seen a slump from a high of 20% in Apr-2012 to around 12% in Dec-2012, while IndiGo has continued to add capacity and is operating with industry-leading load factors. With continued service cancellations, Kingfisher will likely see further market share losses in the coming months.

Jet Airways largest beneficiary of Kingfisher developments

Jet Airways, which reported a 15% increase in revenue passengers in 3QFY2012 to 4.5 million, is the largest beneficiary of the developments at Kingfisher Airlines, as it has also been able to increase its corporate travel market share, with yields understood to have benefited from the capacity cutbacks by Kingfisher Airlines seen across the board. Kingfisher passenger numbers and passenger load factor: 1QFY2010 to 3QFY2012

Source: CAPA Centre for Aviation & airline reports

Looking forward, the carrier expects to see continued yield improvements in the market, with the carrier noting: The capacity induction in the market has slowed down thereby giving considerable scope for airlines to push for higher yields and we saw some semblance of this from November 2011". The carried added: "Passenger bookings in the fourth quarter show encouraging trends, however, it will reflect some seasonality." Jet Airways, which continues to report a sizeable gap between load factors and breakeven load factors, also stated it is "continuing to see a steady increase in our corporate and business class bookings over the last few weeks, given what has been happening in the industry and with competition." Jet Airways passenger load factor vs breakeven passenger load factor: 1QFY2010 to 3QFY2012

Source: CAPA Centre for Aviation & airline reports

Most dramatic passenger growth continues to be witnessed by the LCCs

Meanwhile, the most dramatic passenger growth continues to be witnessed by the LCCs, driven by SpiceJet and IndiGo with surging growth in the quarter. Standalone LCCs held 50% of the domestic market in Dec-2011, with LCC penetration almost doubling over the past five years. Including the low-cost subsidiaries of Jet Airways and Kingfisher, the LCC market share is estimated to be over 70%. SpiceJet, along with its unlisted LCC peers, plan to continue their expansion path, both domestically and increasingly internationally. SpiceJet is expected to increase its domestic market share in 2012 as it continues to grow whilst the big three airline groups consolidate their operations. SpiceJet CEO Neil Mills this month stated the carrier plans to maintain its growth rate in terms of fleet additions, passenger traffic and destinations. The carrier, which has a market share of around 17%, plans to induct eight Q400s and between three to four 737 aircraft into its fleet by the next calendar year. With this expansion, SpiceJet will strengthen its position in the regional market, where it is the only carrier focussing on growing connectivity to Tier 2 and Tier 3 cities with its fleet of Q400 turboprops. The carrier has significantly expanded its fleet since it started regional operations with Q400 aircraft to connect smaller cities in 2011. It has added 10 new locations to its network, with the number of daily services rising from 161 to around 255 departures. In Dec-2011, domestic market share at the carrier increased from 13.6% to 16.8% in Sep-2011. Capacity (ASKs) increased 32% year-on-year, with a 60% increase in the number of departures and a 29% increase in passenger levels.

Jet Airways will further embrace the low-cost model in 2012...

The move to low cost is a trend in the Indian aviation sector. Despite being the strongest of the three Indian carriers in the full service segment, Jet Airways will further embrace the low-cost model in 2012, increasing the proportion of domestic capacity operated by its low-cost subsidiaries. Furthermore, an expected rationalisation this year of its two low-cost operations, JetKonnect and JetLite, under a single brand in the current quarter should remove some confusion in the market and strengthen its positioning. Any changes in domestic and international capacity are expected to be marginal. Meanwhile, IndiGo is expected to remain the fastest growing airline in India in 2012, as it continues to add capacity on both domestic and international routes, with the latter expected to generate a growing proportion of total revenue. As with Jet Airways, sale-and-leaseback transactions will contribute positively to the financial performance of the carrier, however, at the underlying operating level profitability will remain under pressure, although the carrier is likely to be the best performer in the market.

Outlook: Challenges and changes ahead as Indian aviation sector sees red
Indias domestic aviation sector is a tough place to be in at present. All three listed carriers have been weak performers, both financially and on the stock exchange in 2011, as a steep increase in their cost base and lack of pricing power has translated into increasing losses and financial pressures in the quarter ended Dec-2011.

Meanwhile, while the domestic market continues to see an increase in passenger volumes, pricing continues to be weak despite recent improvements in light of cutbacks at Kingfisher Airlines. However, with capacity growth slowing in 2012/13, yield improvement will likely follow. However, there are some positives, with the outlook for the industry considerably better now, as noted by SpiceJet CEO Mr Mills, in light of some demonstration by the Government of an intent to address structural distortions to assist the sector.

Appendix: 3QFY2012 financial results tables

Jet Airways financial results: 3QFY2012

ROE used for conversion: USD1 = INR 53.105 for 3QFY2012 and USD1 = INR 44.705 for 3QFY2011 Source: Jet Airways

Jet Airways operating results: 3QFY2012

Average revenue per passenger includes Fuel Surcharge and Congestion Surcharge ROE used for conversion: USD1 = INR 53.105 for 3QFY2012 and USD1 = INR 44.705 for 3QFY2011 Source: Jet Airways

Jet Airways P&L results: 3QFY2012

ROE used for conversion: USD1 = INR 53.105 for 3QFY2012 and USD1 = INR 44.705 for 3QFY2011 Source: Jet Airways

Jet Airways domestic operating results: 3QFY2012

Average revenue per passenger includes Fuel Surcharge and Congestion Surcharge ROE used for conversion: USD1 = INR 53.105 for 3QFY2012 and USD1 = INR 44.705 for 3QFY2011 Source: Jet Airways

Jet Airways domestic P&L results: 3QFY2012

ROE used for conversion: USD1 = INR 53.105 for 3QFY2012 and USD1 = INR 44.705 for 3QFY2011 Source: Jet Airways

Jet Airways international operating results: 3QFY2012

ROE used for conversion: USD1 = INR 53.105 for 3QFY2012 and USD1 = INR 44.705 for 3QFY2011 Source: Jet Airways

Jet Airways international P&L results: 3QFY2012

ROE used for conversion: USD1 = INR 53.105 for 3QFY2012 and USD1 = INR 44.705 for 3QFY2011 Source: Jet Airways

JetLite financial results: 3QFY2012

Source: Jet Airways

JetLite operating parameters: 3QFY2012

Source: Jet Airways

Kingfisher Airlines operating parameters: 3QFY2012

Note: Cost per ASKM calculated at EBITDA cost level Source: Kingfisher Airlines

Kingfisher Airlines P&L results: 3QFY2012

Source: Kingfisher Airlines

Kingfisher Airlines domestic operating parameters: 3QFY2012

Note: Cost per ASKM calculated at EBITDA cost level Source: Kingfisher Airlines

Kingfisher Airlines domestic P&L results: 3QFY2012

Source: Kingfisher Airlines

Kingfisher Airlines international operating parameters: 3QFY2012

Note: Cost per ASKM calculated at EBITDA cost level Source: Kingfisher Airlines

Kingfisher Airlines international P&L results: 3QFY2012

Source: Kingfisher Airlines