SpiceJet Ltd.

October 22 2010 22,

A Qualitative Equity Research Company

Initiating Coverage

81.85 Risk Return Matrix

168

Investment Rationale
Given return of pricing power to sector owing to strong pickup in demand and calibrated capacity expansion, SpiceJet stands to benefit the most because of few structural changes in the company including planned fleet addition, focused long term promoter at helm, option to expand globally coming at most opportune time. Other factors like stable crude prices, easy access to capital, poor financial condition of the competition, strong track record, sound company fundamentals and inexpensive valuations make SpiceJet amongst the best companies to invest in. Companys topline stands to be benefit immensely with its fleet addition taking place in the backdrop of humongous growth in demand and limited sector level capacity addition because of poor financial condition of the key competitors. This in turn would also help the company in increase i load its factor thereby resulting in a disproportionate boost to the bottom bottom-line given the high operating leverage of the industry.

Market Data
BSE 500285 NSE BLOOMBERG SJET IN : 10 : -0.84 REUTERS SPJT.BO

Face Value (INR) Book Value (INR) INR) 52 -week range (INR M cap (INR Crs) mnth 12-mnth Avg. Daily Vol.

Valuation
Even though the airlines sales grew by CAGR of about 50% for the last five years, we have been very conservative in assigning multiples and our ry projections over the coming years We project the companys sales to grow at a CAGR of 31% between FY10 & FY13E while EBITDA to grow at astonishing 130% during the same period much because of fast improving dem demand scenario & high operating ratio. Based on the FY11E projections, at the current price the airline trades at an EV/Sales multiple of 1.0, EV/Passenger revenue multiple of 1.1 and EV/EBITDAR multiple of 3.8. The respective ratios for the company for FY12E stand at 0.77, 0.78 and 2.3. The average TMT multiples for E the domestic airlines Jet Airways & Kingfisher stand at 1.8, 1.8 & 7.3 while for international LCCs Tiger Airways & Ryan Air they are 2.5, 3.1 and 10.9 respectively. Using weighted average multiples we value SpiceJet at Rs.168 les per share. The company scores a 4 (out of 5) on our star matrix and has been assigned the low risk-high return rating.

Shares Outstanding Equity (Crs)* Free Float (%)*

* Pursuant to the share purchase agreement dated June 12, 2010 & considering KAL Airwayss majority holding as promoter stake

Shareholding Pattern ( (E)

Others 27% Promoter 38%

DII 20%

Earnings Estimates (INR Crs) & Financial Ratios Relative Performance

FY11E Revenue EBITDA PAT EPS P/E (x) P/Sales (x) EV/EBITDAR (x) EV/Sales (x) ROE (%) ROCE (%) 2872.9 348.7 266.1 6.6 11.4 1.1 3.8 1.0 120% FY12E 3856.2 700.8 546.7 13.5 5.5 0.8 2.3 0.8 73% 93% FY13E 4991.1 1056.0 826.1 20.4 3.7 0.6 1.7 0.6 58% 73%
Jet Airways Kingfisher SpiceJet Sensex 250 200 150 100 50 0

Analyst: Lovelesh Manocha Anirudh Attal

lovelesh.manocha@ideasfirst.in anirudh.attal@ideasfirst.in anirudh.attal

RNI

RNI

SpiceJet is one of the fastest growing and second largest low cost carrier (LCC) Indian airline with a passenger market share of around 13% and revenue passenger kilometre (RPKM) market share of about 15.5%. The company which started its operations in May 2005 with a fleet of just three aircrafts currently has a fleet of 22 Boeing 737 aircrafts with about 145 daily flights, connecting 20 domestic and two international destinations. The company plans to double its fleet size by 2013. SpiceJet has recently been approved to fly international routes and has become the first LCC and the third Indian private airline after Jet d Airways and Kingfisher to do so. With the companys strong fundamentals and the positive outlook for the sector, we believe SpiceJet is poised for growth. We recommend a Strong Buy on the stock.

CMP (

Target (

Rating

: 82.60/32.40 : 3,153 : 37,27,373 : : 40.45 62.3

FII 15%

SpiceJet Ltd.
Initiating Coverage

Table of Contents
Key Investment Rationale ......................................................................................... 3 Overview ................................................................................................................... 6 Investment Rationale ................................................................................................ 9 Key Concerns........................................................................................................... 24 Valuation ................................................................................................................. 26 Annexure ................................................................................................................. 28 Financials ........................................................................................................... 28 References & News Articles ............................................................................... 29 Glossary.............................................................................................................. 36

October 22, 2010

SpiceJet Ltd.
Initiating Coverage

Key Investment Rationale

Best Proxy for Indias Growth
SpiceJet can be expected to benefit tremendously from Indias increasingly favourable demographics & growth given its positioning & branding as a LCC Spicejet stands to benefit by being the fastest growing listed airline in one of the fastest growing sectors in the second fastest growing country. The airline sector demand & growth has an implicit correlation with a nations GDP growth, increasing as its multiple. As the per capita income crosses the threshold levels, more and more people prefer to travel by air not only because it is more comfortable but also cheaper considering the opportunity cost of time saved. Given Indias increasingly favourable demographics with growing young population, rising incomes and burgeoning middle class, the country is expected to grow faster than China did over the last 20 years. It is inevitable for the country to grow without the aviation sector matching pace. This can be seen from the fact that the air travel demand in India grew at a CAGR of 19% or about 2.5 times its GDP growth between 2003 & 2008. With the expected capacity expansion & international foray and given its low cost model, we believe SpiceJet would be one of the key beneficiaries from the robust demand from first time travelers anticipated over the coming years.

Return of Pricing Power

With supply constrained due to infrastructural bottlenecks & burgeoning demand, pricing power is bound to return in hands of airlines With the Indian economy spryly recovering from the temporary slowdown, air travel is experiencing strong demand from both ex and first time travelers. However the downturn in demand seen during FY09 has made both the Industry & the lenders cautious and now while the demand is growing over 25%, capacity addition has been limited to a mere 5%-7%. Further the aviation industry is facing a severe infrastructural bottleneck, making capacity addition difficult. With demand outpacing supply, we see the pricing power clearly returning to the sector. Moreover it is encouraging to note that unlike in 2007 & 2008, the demand growth this time around is not generated from low fares and rather it has grown irrespective of relatively higher fares. Given the high operating leverage, the pricing power along with improving load factor would significantly boost margins for companies in the sector.

International foray to boost Margins

After being well positioned as LCC in domestic market for more than five years, SpiceJet has got approval for flying to international destinations. This gives an option to the company to even further improve on its aircraft utilization during the off peak hours and seasons, which no other Indian LCC company has. Additionally, company would also be saving in fuel cost in international flights as applicable taxes on fuel are higher in domestic markets. Further the international routes are anticipated to increase its average trip distance per departure over the years, implying decreasing costs with increasing revenues.

International operations will improve aircraft utilization & boost top & bottom-line

October 22, 2010

SpiceJet Ltd.
Initiating Coverage Operational Excellence
SpiceJet is one of the best run airlines in the country and the only operationally profitable listed airline. The airline has one of the lowest costs on a per seat basis while having amongst the highest yields in the industry. Single fleet type and high personnel efficiency helps the airline to control costs while increasing passenger load factor and higher utilization of aircrafts imply higher revenues. Other efficiencies, like having the longest average domestic trip distance per departure further helps to reduce costs.

SpiceJet is one of the best run airlines with one of the best operating statistics in the industry

Strong & aggressive management

SpiceJet has a strong & aggressive management With a clear focus and foresight, the management has been able to increase revenues & expand operations while keeping costs under tight control. The ability to be cash positive when all other airlines were is huge losses, ability to raise capital when required and regularly increase market share even though there was no single promoter backing or easy access to capital unlike other airlines, shows the skills set of SpiceJets management.

Planned fleet expansion to further increase companys market share

The addition of aircrafts over the current & next year expected to increase airlines revenues by about a third each year Supported by strong balance sheet, SpiceJets plans to sensibly expand its fleet & routes to exploit the burgeoning demand, without taking unwarranted risks. The airline plans to responsively add about 12 aircrafts by FY12, with a target to double its present fleet by CY2013. The addition of aircrafts over the current and next year can be expected to increase the companys revenues by more than a third by FY12. Further with the addition of new aircrafts at a much higher rate than industry average, we expect the airlines passenger market share to increase substantially, from an average of 13.6% for last five months to over 20% by FY16E. Moreover the industry standard to measure the market share is based on the number of passengers flown on an airline relative to total passengers flown in the period while we believe calculating market share based on RPKM to be a better indicator of the true market share. Based on RPKMs, SpiceJet holds an average of about 16.2% for last five months as compared to 13.6% based on passengers carried. We expect the RPKM market share of SpiceJet to cross 20% by FY16E.

Higher load factors to disproportionate drive earnings

Higher PLFs coupled with high operating leverage will boost the bottom-line Limited capacity addition and strong growth in demand airline load factor are reaching all time high. For June 2010, SpiceJet had a load factor of over 90%. Given high operational leverage of the business, any increase in load factor has disproportionately positive impact on the bottomline.

October 22, 2010

SpiceJet Ltd.
Initiating Coverage

Kalanithi Marans coming in as a single largest shareholder

Sun TV promoter, Mr Kalanithi Marans has acquired controlling stake of 38% in SpiceJet from US investor Wilbor Ross and Kansagra family and has made the mandatory open offer to buy another 20 percent from the public. Mr. Maran's entry into SpiceJet can be hugely positive for the company, as earlier its shareholding was very fragmented resulting in little management control. Further unlike earlier, where there was a lack of focused long term promoter, now the decisions would be taken keeping long term interest of the company rather than boosting short term Moreover, SpiceJet stands to tremendously benefit from Mr. Marans deep pockets and proximity to political landscape.

Strong backing of Mr.Maran with both financial and political clout

Most Resilient Airline

SpiceJet was not only glided through the downturn but was the only profitable listed airline in FY10 The resilience and agility displayed by SpiceJet makes it stand out distinctly amongst its competitors. While the top three industry players by market share are crumbling under their debt burden, with bleeding financials, SpiceJet not only managed to survive downturn but was also the only profitable listed airline as per FY2010 results. SpiceJets strong cash reserves, positive cash flow from operations and negligible debt to equity ratio would make it easier for the airline to access capital, enabling it to undertake aggressive expansion and benefit from high growth in demand.

Low market value of free float stock

With only three listed airlines in the sector, the total free float available is less than 4,000 Cr or not even a billion US dollars. Further the free float of SpiceJet is less than Rs.2,000 Cr. Given the limited size of the sector, and its importance to a fast growing economy any new interest by even a couple of institutional investors would be at a substantial premium to the current market prices.

Market value of free float stock of entire industry is under a Billion USD

Listing of Indigo is expected to revalue SpiceJet

Listing of Indigo is expected to bring in higher & truer valuations As per 04 Oct, 2010 news article, Indigo, the biggest LCC in India, has announced plans to hit the capital markets soon to raise $500 million, close to the market cap of Spicejet. Given the fact that both are pure LCC with similar market share and growth trend, the listing of Indigo is expected to boost the valuation of SpiceJet upwards, which is available at fractional cost compared to Indigo.

October 22, 2010

SpiceJet Ltd.
Initiating Coverage

Overview
Airline is one of the few sectors perennially considered to be a bad investment by many globally. In addition, given the limited players in this segment in India, it is one of the least researched sectors. Thats why we believe that only a few have been able to identify the potential that the sector offers. After a period of successive losses faced by the industry, things seem to have turned around for good. With demand outpacing supply, the pricing power is returning to the sector. Given the high operating leverage, the pricing power along with improving load factor would significantly boost margins for companies in the sector. Indias huge market size, its booming economy, rising disposable income, huge & fast growing middle class almost the size of US and increasing business opportunities in small towns, all make us confident about the demand for air travel. However we believe the strong entry barriers like lack of easy access to capital and infrastructure bottleneck would keep supply under check. The downturn in demand seen during FY09 has made the industry wiser and now while the demand is growing over 25%, cautious outlook, both from the Industry & the lenders has limited capacity addition to mere 5%-7%, a trend expected to continue for a few more years. The industry is also facing a severe infrastructural bottleneck, especially for a few critical airports, a concern voiced by the Civil Aviation Minister Praful Patel himself clearly stating that we have almost come to a stage where no more flights in and out of Mumbai can be allowed. This would further aggravate demand supply growth mismatch resulting in even higher load factors and air fares. Because of the aforesaid reasons, we believe the Airline Industry has big surprises in store for the hoary industry sceptics & would offer exceptional returns over medium term. Amongst the listed space, we specifically find SpiceJet to be grossly undervalued. Given that the majority of the new demand for air travel over the next decade would be from first time travellers and given the value conscious mentality of Indian consumers we believe SpiceJet to benefit tremendously from its positioning and branding. SpiceJets strong financials, aggressive management and increasing operations further corroborates our stance.

October 22, 2010

SpiceJet Ltd.
Initiating Coverage

Industry
The last decade has seen the Indian economy grow rapidly, with its GDP expanding at a CAGR of 8.4% over 2003-2008. And it was during this rapid growth phase when the Indian aviation sector has seen a new beginning. Starting 2003, with the fast growing GDP, Indias per capita income and discretionary spending too have increased substantially. This growth, coinciding with the launch of new airline operators and the introduction of low cost carriers, sent the demand for air travel soaring. Increasing competition and capacity also insured that the air fares remained low. The sector has grown at a CAGR of 19.14% between 2003 & 2008, at a multiple of approximately 2.5 to the GDP. During 2008-2010 the sector demand had been absolutely flat. Thats when Indias GDP has grown by over 15% in real terms. With the economy moving back to a high growth path and individuals & business doing well, we believe that the latent demand of earlier years will result in high growth over next couple of years, similar to FY07 & FY08 where the industry grew by phenomenal 44% & 24% respectively. Moreover the Indian Aviation Industry is still in a very nascent stage. Indias air passenger per capita at 0.09 is still abysmally low as compared to 0.30 in China, 5.63 in Australia and 4.69 in US. With a peak annual average of less than 3.75 trips per 100 people, we feel it is this low base that offers a huge upside potential in the sector.

Domestic ASKM & RPKM

Billions
High economic growth coinciding with launch of new airlines & introduction of LCC sent air travel demand soaring

140 120 100 80 60 40 20 0

ASKM
Source: DGCA, Ideas1st Research

RPKM

October 22, 2010

SpiceJet Ltd.
Initiating Coverage

Company
SpiceJet, erstwhile Royal Airways (erstwhile Modiluft) started its operations in May 2005 with a fleet of three aircrafts. Today it is one of Indias leading low cost carrier (LCC) with a fleet of 22 Boeing 737 aircrafts and about 145 daily flights, connecting 20 domestic and two international destinations. With a market share of around 13.2%, it is one of the fastest growing airlines in the aviation industry. The airline plans to further increase its market share by doubling its fleet size by 2013. SpiceJet recently completed the mandatory five years of domestic operations, making it eligible to fly on international routes. The airline has launched its international operations on two routes, Delhi to Kathmandu starting October 7, 2010 and Chennai to Colombo from October 9, 2010, making it the third Indian private airline after Jet Airways and Kingfisher to fly on international routes. The airline was promoted by Kansagara family and further saw investments by Dubai based Istithmar PJSC and US based PE investor Wilbur Ross. In June 2010, media baron & SUN TV promoter, Mr. Kalanithi Maran bought the stake of all the three former investors. Mr.Maran along with his holding company, KAL Airways, holds 37.7% in the airline.

Operational Snapshot 2009 10

Fleet Size (As on 31st March) ASKM RPKM No. of passengers carried Scheduled Aircraft Depatures Scheduled Aircraft Hours Flown Market Share in Sch. Passenger Traffic Growth Rate in Sch. Passenger Traffic Average Pax. Load Factor
Source: DGCA, Ideas1st Research

Nos. Millions Millions Nos. Nos. Nos. (%) (%) (%)

21 8760 6713 5,692,049 44609 74242 12.6 38.80 76.60

October 22, 2010

SpiceJet Ltd.
Initiating Coverage

Investment Rationale
Best proxy for Indias growth story
The airline sector demand & growth has an implicit correlation with a nations GDP growth, increasing as its multiple. As the per capita income crosses the threshold levels, more and more people prefer to travel by air not only because it is more comfortable but also cheaper considering the opportunity cost of time saved. Given Indias increasingly favourable demographics with growing young population, rising incomes and burgeoning middle class, the country is expected to grow faster than China did over the last 20 years. It is inevitable for the country to grow without the aviation sector matching pace. This can be seen from the fact that the air travel demand in India grew at a CAGR of 19% or about 2.5 times its GDP growth between 2003 & 2008. Further bulk of this new demand would come from first time travelers as increasingly more people cross the thresh hold level, presently estimated to be between incomes (opportunity cost) of Rs.1,500 2,000 per day. This demand from first time flyers would be more in favour of LCCs than FSCs & can be corroborated from the success of low cost model in the country. The market share of LCCs in India has grown multiple times from ~17% in FY06 to more than 44% currently. With the expected capacity expansion & international foray and given its success as a low cost carrier, we believe SpiceJet would be one of the key beneficiaries from this robust demand growth.

Given that bulk of new demand would come from first time flyers, LCCs are poised to benefit more than FSCs from the demand growth

Increasing Domestic ASKM & RPKM

Billions
Demand for air travel, i.e. RPKM can grow over 2.25 times of the GDP growth

140 120 100 80 60 40 20 0

ASKM
Source: DGCA, Ideas1st Research

RPKM

October 22, 2010

SpiceJet Ltd.
Initiating Coverage Pricing power to return to airlines due to huge implicit entry barriers
With demand supply gap narrowing, we clearly see pricing power returning in the hands of the airline companies Even though the airline sector will continue to see double digit growth over next few decades in India, we anticipate the supply addition to be constrained at about 5 7% over the next few years with limited number of new players. The saturating aviation infrastructure, lack of easy capital availability and stringent regulations make it extremely difficult for new players to enter the segment. While other issues can be addressed in short to medium term, it would take atleast a couple of years before adequate infrastructure can be created. These entry barriers along with the cautious capacity addition by incumbent players in face of the recent crisis would ensue in limited supply growth while demand is growing rapidly. With the narrowing demand-supply gap, we clearly see the pricing power returning in the hands of the companies and anticipate higher revenues & margins per ticket going forward. Infrastructure bottleneck The lack of adequate airport infrastructure is one of the major barriers to the airline industry and has remained relatively unnoticed until recently. Execution can be a major hurdle for a new entrant, due to a host of these infrastructure issues. Further as commonly believed, airlines do not have Mobile Capacity. Airlines are understood to be able to move their capacity, airplanes, literally over night. However, owed to the lack of infrastructure, such capacity shifts from low demand markets to higher demand destinations is easier said than done in India. The aviation infrastructure growth in the country hasnt kept pace with the growth in air traffic. While fleet size has increased manifolds, from just 184 aircrafts in 2005 to around 420 aircrafts currently with scheduled operators, not much infrastructure has been added. This has resulted in big takeoff and landing queues at the major airports. Limited airport facilities and lack of parking bays is not only leading to congestion or delays but also forcing airlines to park their aircrafts in far flung places. At most major airports, slots i.e. the landing and takeoff rights, are saturated at peak hours, with the possibility of new flights coming in only during off peak or odd hours. These slots are an important consideration for an entrant as peak timed slots register higher passenger load factors as compared to other slots. We anticipate these capacity constraints and inefficiencies to act as a strong entry barrier for new entrants, providing incumbent players considerable pricing power. Luckily, lately, the sector and its infrastructure constraint is being given the due focus that it deserves. The Minister for Civil Aviation, Praful Patel, himself has recently voiced the foresaid concerns at several forums (refer annexure for supporting articles). While steps have been taken for restructuring of the aviation sector, these reforms would take several years to show colour. Unlike other industries, capacity in the aviation sector cannot be immediately augmented in face of rising demand. While metro airports are going through capacity up gradation process, we believe that all airports, other than Delhi will take at least 2-3 years for implementing any substantial addition in their capacity intake. Given improving expected demand we believe that this gap will continue to increase in major trunk routes even after these up gradations.

Severe infrastructural bottlenecks would limit capacity addition in the industry

Limited availability of free slots for new aircrafts on major trunk routes during peak hours provide incumbent players considerable pricing power

October 22, 2010

10

SpiceJet Ltd.
Initiating Coverage
Access to Capital The airlines sector is a highly capital intensive industry with high fixed & constant costs and variable revenues. Fixed costs include costs like aircraft acquisition cost, rental cost of leased planes, maintenance cost, crew & administrative staff salaries; that have to be incurred even if the flight is cancelled. Constant costs, which cease if the flight is cancelled but are invariant to the volume of traffic carried, are also high. Example of constant costs are ATF, landing fees, which do not depend on the number of passengers, but will not be incurred if the flight is cancelled. While majority of the costs are fixed, the industries revenues are variable, resulting in high operating leverage. That said, we believe that even at higher capital costs, existing and new players would find it very challenging to raise any funds. However, fortunately for SpiceJet, unlike its so called legacy competitors that are buried neck deep in debt and have incurred heavy successive losses over the last few years, raising capital shouldnt be difficult. SpiceJets strong cash reserves, positive cash flow from operations and negligible debt to equity ratio makes us believe the airline to have easy access to capital, enabling it to undertake aggressive expansion and grow inorganically.

Contrary to common belief, the airline industry has huge invisible entry barriers

Regulatory & other barriers Regulatory barriers are another stumbling block that may discourage new participants in the industry. There are some inherent policies that may discourage competition in the sector and may ensue in a loose form of oligopoly type of market structure. Some regulations that may prove as barriers to domestic operations include regulations governing minimum fleet size, minimum equity requirements, route dispersal guidelines et al. The regulation governing minimum fleet & experience requirements for international operations in a way strengthens the incumbents position. Further the exclusive right to National carriers to fly to Gulf Routes et al is highly discriminative. Other barriers like mandatory coverage of certain routes that may offer high passenger loads may act as a burden for the new players.

Operational Excellence
SpiceJet is one of the best run airlines in the country and the only operationally profitable listed airline. The airline has one of the lowest costs on a per seat basis while having amongst the highest yields in the industry. Single fleet type and high personnel efficiency helps the airline to control costs while increasing passenger load factor and higher utilization of aircrafts imply higher revenues. Other efficiencies, like having the longest average domestic trip distance per departure further helps to reduce costs.

October 22, 2010

11

SpiceJet Ltd.
Initiating Coverage
Increase in block hours Block hours are the industry standard measure of aircraft utilization. It is the time from the moment the aircraft door closes at departure of a revenue flight until the moment the aircraft door opens at the arrival gate following its landing. SpiceJet has been able to utilize its aircrafts more efficiently than most of its competitors. One of the key reasons is the companys quicker aircraft turnaround. While legacy carriers on an average use the aircrafts for 10 hours a day, SpiceJet has recorded an average of about 12 hours, which translates to one additional flight a day per aircraft. Higher Passenger Load Factor On an average, SpiceJet has enjoyed greater PLF as compared to most of its competitors. Also going further we expect the company to enjoy relatively higher PLF given the companys image as a value for money airline and the robust demand in the low cost segment. PLF for Domestic LCCs

SpiceJets higher aircraft utilization means about one additional flight over legacy carriers

95

90

85

SpiceJet has amongst the best PLFs in the industry, with the PLF dropping recently mainly due to capacity additions

80

75

70

65

60 FY07 FY08 FY09 FY10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 FY11E Indigo Jet Lite Spicejet

Go Air
Source: DGCA, Ideas1st Research

Single fleet type The present fleet of SpiceJet consists of 17 Boeing-737-800 aircrafts and five Boeing-737900ER aircrafts. The new aircrafts the company plans to add to its fleet are also of Boeing-737s series. Having similar make and type of aircrafts not only helps to reduce the recurring operational & maintenance costs but also ensures faster turnaround time implying higher aircraft utilization and block hours per day.

October 22, 2010

12

SpiceJet Ltd.
Initiating Coverage

Personnel Statistics The personnel efficiency for SpiceJet has improved substantially over the years. While there were 213 employees per aircraft in 2005, the ratio improved to 115 employees per aircraft in FY09. This cost saving directly adds to the bottom-line of the company. Also SpiceJet utilizes its staff better than most airlines. SpiceJets Decreasing Ratio of Employees Per Aircraft

225 200 175

SpiceJets employee utilization is expected to improve further

213

151 122 115

150 125 100 75 50 25 0

Source: DGCA, Ideas1st Research

Ratio of Employees Per Aircraft Across Private Airlines

225 200 175

With just 115 employees per aircraft SpiceJet has amongst the best ratio in the industry

200 163 122 123 122 122

200 149 115 99 123 115

150 125 100 75 50

Paramaount

Paramaount

KF

SpiceJet

KF

FY08
Source: DGCA, Ideas1st Research

FY09

October 22, 2010

SpiceJet
13

Indigo

Indigo

Jet

Go Air

Go Air

Jet

SpiceJet Ltd.
Initiating Coverage
Efficient Management & Cost Structure SpiceJet is one of the best managed and most effectively run company in the industry. It has been able to keep tight control over its costs and claims to be one of the lowest cost service provider on a per seat basis. The cost savings can directly been seen boosting the companys bottom-line. Employee Cost as % of Sales

18 16
Employee costs as a percentage for SpiceJet is not only the best amongst the listed players but is decreasing each year

17.0 15.8 13.1 12.0 10.8 9.2 11.5 8.3 13.6

14 12 10 8 6 4 2 0

Jet

KF FY08

SpiceJet

Jet

KF FY09

SpiceJet

Jet

KF FY10

SpiceJet

Source: Capitaline, Ideas1st Research

Selling & Administration Expenses as % of Sales

25 20.1 20
SpiceJet has been able to keep tight control over its costs

21.4

15.9 15 10 5 0 Jet KF FY08

Source: Capitaline, Ideas1st Research

13.0

12.8

13.2 11.3

12.5

11.3

SpiceJet

Jet

KF FY09

SpiceJet

Jet

KF FY10

SpiceJet

October 22, 2010

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SpiceJet Ltd.
Initiating Coverage

Other Operating Expenses as % of Sales

35 30 25 20 15 10 5 0 Jet 21.8

31.0 23.9 21.4 23.6 23.5

22.3

21.5

21.5

KF FY08

SpiceJet

Jet

KF FY09

SpiceJet

Jet

KF FY10

SpiceJet

Source: Capitaline, Ideas1st Research

Sale & Lease Back Strategy The sale & lease back strategy used by SpiceJet to maintain and expand its fleet has paid off very well for SpiceJet. While Kingfisher and Jet Airways own most of their aircrafts, SpiceJet follows an asset light model and its entire fleet is currently leased. The strategy has helped the airline to keep its debt levels to minimum, avoiding debt burden. Kingfisher and Jet Airways had borrowed aggressively to increase their fleet and are currently buried under debt. The graph below shows the consolidated lease & interest charges as a percentage of sales for the airlines across the years. While Jet has been able to keep its lease & interest charges under control, there is a clear uptrend owed to the burgeoning debt & interest charges. Similar trend can be seen with Kingfisher. Contrary to them, SpiceJet has been able to maintain its interest & hire charges to about 20 23% of sales. Interest & Aircraft Lease Expenses as % of Sales

45 40
SpiceJet has been successful with its sale & lease back strategy while interest & hire charges are increasing for its competitors, SpiceJet has been able to maintain them in a range of 20-23%

35 30 25 20 15 10 5 0 FY06FY07FY08FY09FY10FY06FY07FY08FY09FY10FY06FY07FY08FY09FY10 Jet
Source: Capitaline, AR, Ideas1st Research

KF

SpiceJet

October 22, 2010

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SpiceJet Ltd.
Initiating Coverage
Average fuel consumption SpiceJet records amongst the lowest fuel consumption per KM flown in the industry. This can be attributed to the companys pilots who have been trained to fly at optimum speed & height and follow most efficient takeoff and landing techniques. Though the difference looks small on a per KM basis, the difference is substantial about Rs.8.3 Lacs per million KMs flown on Jet and SpiceJet.

Average Fuel Consumption Per KM Flown (INR)

Though the difference looks small on a per KM basis, the difference is substantial about Rs.8.3 lacs per million KMs flown on Jet and SpiceJet

215 210 205 200 195 190 185 180 175 170 165

208.94

182.38

181.55

Jet Airways
Source: AR, DGCA, Ideas1st Research

Kingfisher

Spicejet

Average trip distance per departure Longer trip distances per departure imply lower CASK while generating higher revenue per RSKM. SpiceJet enjoys the highest average trip distance amongst all domestic airlines followed closely by Indigo. Even comparing it to the consolidated average trip distances for airlines with international operations, SpiceJet fairs very well. With the airline commencing two international routes and expected to add further international destinations to its network, the average trip distance can be expected to improve further for the airline. Average Trip Distance Per Departure in KMs (Domestic)

1050 900 750

Longer trip distances per departure imply lower CASK while generating higher revenue per RSKM

962

1002 758

919 685

1008

609

600 450 300 150 0

Source: DGCA, Ideas1st Research

October 22, 2010

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SpiceJet Ltd.
Initiating Coverage
Average Trip Distance Per Departure in KMs (International + Domestic)

1400 1200
Even after considering longer international routes for its competitors, SpiceJet has reasonably high average domestic trip distance per departure

1332

1008 1000 800 600 400 200 0 Jet

Source: DGCA, Ideas1st Research

918 787

Jet Lite

Kingfisher

SpiceJet

Passenger load factor SpiceJet has seen consistent improvement in its PLF. Higher PLF implies not just higher revenues but much higher margins as any additional revenue gets directly added to the bottomline . Over the next few years we anticipate the PLF for the airline to improve further owed to the relatively cautious capacity addition in the industry, the robust demand for air travel specifically in the low cost segment from first time fliers and the image of SpiceJet as value for money airline. The combined effect of higher load factors and increase in flights resulted in an increase in unit revenue per ASKM & per flight by about 6%. SpiceJet Increasing Revenue Per Flight (INR 000)

600 500 400 300 200 100 0 390 459 489

Source: AR, DGCA, Ideas1st Research

October 22, 2010

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SpiceJet Ltd.
Initiating Coverage
SpiceJet Increasing Revenue per ASKM (INR)

2.6 2.5
Any increase in the revenues directly adds to the bottom line. In addition to revenue increase owed to fleet addition, SpiceJet is expected to continue to increase its revenues per ASKM

2.49 2.34

2.4 2.3 2.2 2.1 2.0 1.9 2.15

Source: AR, DGCA

Recent PLF for Domestic LCCs

SpiceJets PLF decreased in August mainly owed to fleet addition towards end of the period

100 90 80 70 60 50 40 30 20 10 0

Go Air
Source: DGCA, Ideas1st Research

Indigo

Jet Lite

Spicejet

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International foray
International foray will result in disproportionately lower increase in expenditure than revenues owed to higher aircraft utilization & lower fuel costs After being well positioned as LCC in domestic market for more than five years, SpiceJet has got approval for flying to international destinations. This will help company to further improve on its aircraft utilization during the night time. Additionally, company would also be saving on fuel cost in international flights as applicable taxes on fuel are higher in domestic markets. Lastly, international flights would imply longer average trip distance, which means more efficient fuel consumption and lower CASK with higher revenues per ASKMs. SpiceJet recently commenced international operations on two routes, Delhi to Kathmandu starting October 7, 2010 and Chennai to Colombo from October 9, 2010.

Increasing fleet
SpiceJet plans to double its fleet over the next three years to exploit the anticipated air travel demand surge and to capture maximum possible market share. We believe the addition of new aircrafts would boost the companys top line and also see the bottom line grow more than proportionately. The company is expected to get deliveries of six aircrafts by January 2012 in addition to which it plans to lease another six aircrafts. The company has placed orders for another 30 aircrafts deliveries of which are anticipated to start from 2013. We believe most of the fleet expansion would be through sale & lease back, in line with the companys present strategy. SpiceJet Historic & Projected Fleet Size

60 50 40 30 20 11 10 0 5 19 19 21 26 38 32 44

52

Source: DGCA, Ideas1st Research

Higher Market Share

Using the industry standard to measure the market share, based on the number of passengers flown on an airline relative to total passengers flown in the period, SpiceJet on an average for last 5 months holds about 13.6% of the domestic market share. However while the market share measured using number of passengers flown gives one a fair idea, we believe calculating market share based on RPKM to be a better indicator of the true market share of an airline. It is worth nothing that SpiceJet enjoys a much higher market share at about 16.2% calculated xxxxxxxx October 22, 2010 19

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based on average RPKMs for last five months as compared to the market share computed using number of passengers carried.

Market Share as Per Passenger Carried

Nacil 13.8%

Go 6.0%

SpiceJet 13.6%

Indigo 17.1%

Paramount* 0.3%

Jet 19.7%

Kingfisher 21.5%
Source: DGCA, Ideas1st Research *- Operations discontinued

JetLite 8.1%

Market Share as Per RPKM

Nacil 13.1%
Against the industry standard to use number of passengers carried to calculate market share, we believe using RPKM gives a truer picture. Market share of LCCs are substantially higher using this metric

Go 6.1% Indigo 19.7%

SpiceJet 16.2%

Paramount* 1.1%

Jet 17.7% Kingfisher 17.7% JetLite 8.3%

Source: DGCA, Ideas1st Research *- Operations discontinued

With the addition of new aircrafts at a higher rate than most of its peers, we expect the SpiceJets market share based on RPKMs to increase substantially, from the current share of 15.5% to over 20% by FY16E.

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SpiceJet Market Share based on RPKM (%)

21 18 15.3
Fleet addition & increasing demand by first time flyers would increase in market share of SpiceJet substantially over the next few years

17.1 15.8

17.7

18.3

19.1

20.1

15 12 9 6 3 0

Source: DGCA, Ideas1st Research

Strengthening Balance Sheet & Resilience

The resilience and agility displayed by SpiceJet makes it stand out distinctly amongst its competitors. While the top three industry players by market share are crumbling under their debt burden, with bleeding financials, SpiceJet not only managed to survive downturn but was also the only profitable listed airline as per FY2010 results. SpiceJet has over the years improved its financial position and posted its first full year profits in FY10 and is expected to report a profit of Rs.376 crs in the current financial year. It is amongst the few airlines in the industry to have strong cash reserves and a positive cash flow from operations. The airlines ability to stay cash positive during worst of the time shows its resilience to withstand toughest of the conditions. SpiceJets strong cash reserves, positive cash flow from operations and negligible debt to equity ratio would make it easier for the airline to access capital, enabling it to undertake aggressive expansion and benefit from high growth in demand. Told Debt as of March 2010 (INR Crs)

Thousand Crs

16 14 12 10 8 6 4 2 0 Jet Kingfisher SpiceJet

SpiceJet is expected to have no or negligible debt on its books by end of FY11

Source: AR, Capitaline, Ideas1st Research

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Net Profit for FY10 (INR)

Hundred Crs

2 0 -2 -4 -6 -8 -10 -12 -14 -16 -18 Jet Airways Kingfisher SpiceJet

SpiceJet is expected to record operating profit of about Rs.350 Crs in FY11E

Source: ARs, Capitaline

Increasing load factors to boost earnings

With cautious capacity addition by the Industry and strong growth in air travel demand, the airline load factor is reaching all time high. SpiceJet has recorded an average PLF of more than 81% for the first five months of this year, which are traditionally the leanest months. Though recently the PFL appears to have dropped abruptly, the drop was due to addition of an aircraft towards the end of the period. It is worth noting that despite several aircraft inductions anticipated over the coming months, we expect SpiceJet to maintain reasonable load factors and report increasingly higher RPKMs. Given the high operational leverage of the business, any increase in load factor has huge positive impact on the bottom-line. Projected RPKMs for SpiceJet

Crs
October 22, 2010

1400 1200 1000 800 600 400 200 0

Source: DGCA, Ideas1st Research

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Initiating Coverage Kalanithi Marans coming in as a single largest shareholder Marans
Sun TV promoter, Mr Kalanithi Maran has acquired a controlling stake of 37.7% in SpiceJet from US investor Wilbor Ross and Kansagra family and had made the mandatory open offer to buy another 20 percent from the public. Mr. Maran's entry into SpiceJet can be hugely positive for the company, as earlier its shareholding was very fragmented resulting in little management control. Moreover, SpiceJet stands to tremendously benefit from Mr. Marans deep pockets and proximity to political landscape.

Strong backing of Mr.Maran with both financial and political clout

Low market value of free float stock

With only three listed airlines in the sector, the total free float available is just about 4,000 Cr or three not even a billion US$. Further the free float of SpiceJet is less than Rs.2,000 Cr. Given the dependence on aviation sector for success of any country & huge inte international interest of global players for India, , any new interest from an institutional buyer would send the sector soaring.

Market Value of Free Float Stock (INR Crs)

Kingfisher 706
Market value of free float stock of the Indian airline industry is currently less than Rs.4,000 Crs or a billion USDs

SpiceJet* 1,813

Jet Airways 1,361

Source: BSE, Ideas1st Research * - Pursuant to the share purchase agreement dated June 12, 2010 & considering KAL Airwayss majority holding as promoter stake

Listing of Indigo is expected to revalue SpiceJet

As per 04 Oct, 2010 news article, Indigo, the biggest LCC in India, has anno announced plans to hit the capital markets soon to raise $500 million, close to the market cap of Spicejet. Given the fact that both are pure LCC with similar market share and growth trend, the listing of Indigo is expected to boost the valuation of SpiceJet upwards, which is available at fractional cost compared to Indigo. Also due to a focused management Indigo was able to add aircrafts aggressively over the last two years, boosting its market share. With Mr. Maran coming in as a single largest promoter, SpiceJet is expected to be able to undertake similar aggressive addition, if not more, and doesnt deserve to be at much discount to Indigo as suggested by planned IPO price of Indigo Indigo.

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Key Concerns
Macro
Double Dip With most of the developed economies still struggling to get back on their feet, fears of a double dip or at least a long period of slow growth have been lingering around. Though we see more positive foretokens than negatives, we believe such a dip would be only temporary with little or no effect on India and the domestic air travel demand.

Crude prices As compared to international players, Indian airlines have a higher proportion of fuel costs in total operating costs due to the higher ATF tax structure in the country. Further the proportion is higher for LCCs when compared to FSCs. In India, expense on crude forms ~ 40% of the total expenditure of LCCs. Any increase in crude without proportionate increase in revenue would impact the bottom-line of the company.

Unfavorable exchange rate movement As over two thirds of the total expenditure of SpiceJet is directly linked to the USD and with little international or dollar revenue, the company has high negative USD exposure and any appreciation in USD vs INR would directly impact its bottom-line. However as the contribution to revenues from the international operations increase over the next few quarters, we can expect the negative USD exposure to come down reasonably.

Industry Specific
Inordinate Capacity addition by the Industry Rise in competition within the industry can lead to a tariff wars resulting in reduction in the yield from the current level. Also inordinate capacity addition by the airlines may lead to lower load factors. Both these mis-happenings can adversely impact companys top & bottom-line.

Load Factor Given high operating leverage, decrease in load factor due excessive capacity addition or reduction in demand has higher impact on bottomline. Reduction in Yields - As cost structure of the company is fixed, any reduction in yield because of aforementioned reasons would directly hit the bottomline. Regulatory - Adverse regulatory and policy amendments like higher airport, ATF or other taxes, more stringent norms for carrying on operations et al can impact the sectors growth negatively.

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Slower than expected capacity addition Slower than anticipated fleet and routes additions may impact the companys projected revenues and market share with a downward basis, impacting its bottom-line.

Personnel Attrition Given the high growth in the sector, any short fall in qualified personnel may lead to high attrition within the industry leading to higher recruitment & training costs. Alternatively in order to retain its staff, airline companies may have to offer higher compensation, reducing the bottomline of the companies.

International foray The company currently has plans for short haul to better utilize its aircraft. Any shift in focus will mean higher investment and given that the international markets are far more competitive, it may lead to reduction in overall margins.

Change in Management With the recent change in the companys shareholding and management, any changes in the positioning, branding or name of the company may adversely impact its market share and the revenues.

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Valuation
India is a country of saving oriented masses, where the basic ideology is value for money. With per capita income growing by over 15% annually and increased mobility of over 300 million middle class Indian, LCC is a key enabler for the success of the country. Not surprisingly, the sector has grown by leaps and bounds over last 5 years. Given that India has just started moving on this growth trajectory which many experts and economist believe should continue for decades, the sector should maintain its high growth momentum for next several decades. Within the sector, given strong revival in demand, high market share of the company, strong track record, sound company fundamentals and inexpensive valuations, SpiceJet is amongst the best stocks to invest in. We have used multiple approaches to value Spicejet. While using the comparative multiples SpiceJet fair value is at an average price of Rs.168 per share, using discounted cash flows it comes at Rs. 212 per share.

Comparative Multiples
Due to negative earnings for the other airlines listed in the country and in absence of any listed airline in the low cost segment we have used the average TMT multiples for similar LCCs listed on international stock exchanges. Further the limited financial and listing history for Indian carriers and the absence of any listed airline in the low cost segment makes it difficult to arrive at a valuation for SpiceJet purely based on Indian carriers. As can be inferred from table below, despite the robust growth shown by the Indian airlines over the last five years and the double digit growth expected over the next couple of decades, the Indian airline sector is grossly undervalued as compared to international standards. While SpiceJet has predominantly been a domestic airline, given its robust growth and with commencement of international operations, we expect the company to have an appreciable component of international revenues and hence believe the airline deserves to be benchmarked against its international competitors. Therefore, we have valued SpiceJet based on weighted average TMT multiples for domestic airlines (75%) and international low cost carriers (25%) Tiger Airways & Ryan Air.
Domestic Airlines TMT Multiples SpiceJet EV/Total Sales EV/Passenger Revenue EV/EBITDAR Sales CAGR (Last 5 yrs) 1.3 1.4 6.2 48.7% Kingfisher Airlines 1.9 1.9 40.5% Jet Airways 1.7 1.7 7.3 19.4% International Airlines Tiger Airways* 2.1 2.6 10.5 28.6% Ryan Air 2.8 3.6 11.3 15.3%

Given SpiceJets CAGR of about 2.5 times its international counterparts & the double digit domestic industry growth, we believe we have used very conservative multiples to value SpiceJet

* - Sales CARG calculated as growth over FY09 & FY10

Price Based on Domestic Multiples Multiple Industry Average Multiple 1.8 1.8 7.3 -

Price Based on International Multiples Industry Average Multiple 2.5 3.1 10.9 -

Price Based on Weighted Multiples (Domestic .75 & International .25) Industry Average Multiple 1.9 2.2 8.2 -

FY11E 144.1 147.2 159.6 150.3

FY12E 203.7 208.6 266.5 226.3

FY13E 277.8 284.9 384.3 315.7

FY11E 192.5 234.9 229.7 219.1

FY12E 268.7 327.0 381.5 325.7

FY13E 362.0 438.5 545.7 448.8

FY11E 156.2 169.1 177.1 167.5

FY12E 220.0 238.2 295.2 251.1

FY13E 298.9 323.3 424.6 348.9

EV/Total Sales EV/Passenger Revenue EV/EBITDAR Average Price

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To overcome the differences due to fares in different markets and revenues from sources other than passenger revenue we have used both EV/Total Sales and EV/Passenger Revenue multiples. Further to account for the fleet acquisition strategy, i.e. owned aircrafts v/s leased aircrafts we have used EV/EBITDAR multiple; offsetting the interest burden for owned fleet against the aircraft rentals. Amongst the three multiples, we believe EV/EBITDAR to give the best picture on a standalone basis. Unlike the EV/Sales & EV/Passenger Revenue multiples, EV/EBITDAR not only adjusts for the debt burden against rentals but also for the fare & costs differentials. It gives a clearly picture of the actual profitability of the airline. EV/EBITDAR gives us a higher fair value of Rs.177 per share on a standalone basis, compared to the average value of Rs.168. Again, given the robust sales CAGR for SpiceJet and for the Indian airline industry as a whole, and the potential of double digit annual growth rate over the next two decades, we believe we have been very conservative in assigning a weight of 25% to international average while arriving at the multiples. Based on the growth potential we see the Indian airline sector to be grossly undervalued to global standards & expect the valuations to at least match them if not trade at a premium. Using only international multiples as a benchmark, gives us an average value of Rs.219 per share for SpiceJet.

Discounted Cash Flow - FCFF

We have also discounted the projected cash flows for SpiceJet to arrive at a fair price. Unlike comparative valuation, DCF will capture the additional revenue that would be generated from the rapid expansion and reflects the intrinsic worth of the share. Based on our DCF approach, we have fundamentally valued the company at Rs.212 per share. WACC Calculation & Assumptions
Risk Free Rate Beta Equity Risk Premium Cost of Equity Cost of Debt (pre tax) Tax rate Total Long Term Debt / Equity Ratio WACC Growth Phase I - 5 yrs Growth Phase II - 5 yrs Growth Phase III - 10 yrs Terminal Growth 8% 1.17 8% 17% 17% 15% 13% 10% 3%

However we have been very conservative in our WACC calculations, valuing SpiceJet on the lower end. We have assumed the company to be debt free perpetually, resulting in a much higher WACC at 17%. Considering a long term debt / equity ratio of 1, with a WACC of 13%, gives us a much higher fair value of Rs.362 per share.

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Annexure
Financials (INR Crs)

Income Statement Total Income Total Expenditure EBIDTA Depreciation Interest & financial expenses PBT PAT

FY08 1438.6 1548.1 -109.6 7.8 13.7 -131.1 -133.5

FY09 1813.5 2139.5 -326.0 7.3 16.0 -349.3 -352.6

FY10 2242.1 2155.3 86.8 7.6 11.4 67.8 61.5

FY11E 2872.9 2524.2 348.7 7.4 9.0 332.4 266.1

FY12E 3856.2 3155.4 700.8 9.5 8.5 682.8 546.7

FY13E 4991.1 3935.1 1056.0 13.3 11.0 1031.7 826.1

Balance Sheet Shareholders Funds Share Capital Reserves Total Loan Funds Total Sources of Funds Net Block Net Current Assets Total Assets

FY08 28.0 240.7 -212.7 531.6 559.6 564.0 -4.8 559.6

FY09 -429.5 241.0 -676.5 488.8 59.4 252.8 -193.5 59.4

FY10 -342.2 241.9 -584.1 438.3 96.1 391.9 -295.8 96.1

FY11E 471.6 404.5 67.2 471.6 411.2 60.4 471.6

FY12E 1018.3 404.5 613.9 1018.3 446.0 572.4 1018.3

FY13E 1844.4 404.5 1440.0 1844.4 483.7 1360.7 1844.4

Cash Flow Statement PBT (Inc)/Dec in WC CF from Operations CF from Investments CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance

FY08 -131.1 -112.0 -67.7 251.9 62.7 246.9 352.7 599.7

FY09 -349.3 -329.3 -432.1 304.7 -163.7 -291.1 599.5 308.5

FY10 67.8 80.5 325.5 -146.6 -36.1 142.8 308.0 450.8

FY11E 332.4 392.4 248.0 -26.7 100.4 321.7 450.7 772.4

FY12E 682.8 564.7 725.7 -44.2 -8.5 673.0 772.4 1445.4

FY13E 1031.7 850.4 1053.7 -51.1 -11.0 991.7 1445.4 2437.0

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References & News Articles

Budget airlines race to meet demand in Asia

By Kevin Brow n in Singapore | September 20 2010 18:12 | www.ft.com Asias V-shaped recovery from the global financial crisis has triggered a boom among budget airlines in the region as carriers position to meet forecasts for rising traffic. With growth in gross domestic product in emerging Asia now forecast by the Asian Development Bank to reach 7.9 per cent this year, airlines are rushing to add enough capacity to meet predicted demand. Activity is most intense in south-east Asia, where Cebu Pacific of the Philippines last week announced an initial public offering to raise up to $730m to buy new aircraft. Tiger Airways, the low-cost carrier part-owned by Singapore Airlines, last week said it planned to buy nine new Airbus A320 aircraft, increasing its fleet to 26. The airline has already announced plans to launch a subsidiary in Thailand in a joint venture with Thai Airways International. Tiger also runs a subsidiary in Australia. Meanwhile, Malaysia-based AirAsia, the regions largest low-cost carrier, recently unveiled plans for a joint venture in Vietnam, alongside its existing operations in Thailand and Indonesia. Cebu Pacific would not comment on its planned IPO, for which Citigroup, Deutsche Bank and JPMorgan are joint global lead managers. However, a person with knowledge of the transaction said the airline was expected to raise at least $500m to expand its domestic network, the largest in the Philippines, and add to its southeast Asian international destinations. Boeing, the US aircraft manufacturer, is forecasting growth of 8.3 per cent a year for the next 20 years in route passenger kilometres a key measure of airline traffic flown within south-east Asia. That compares with 7.1 per cent for the Asia Pacific region, 4.1 per cent for Europe and just 2.8 per cent for North America. In addition to rapid economic growth, south-east Asia is also benefiting from the run-up to the implementation in 2015 of an open skies deal among the 10 countries of the Association of South East Asian Nations. The countries have a combined population of 600m and an economy the size of Indias. All the airlines are positioning themselves for this because instead of bilateral deals limiting them to flying between city pairs, the agreement will open a huge market into second and thirdtier cities that hasnt been tapped, said the person with knowledge of the Cebu Pacific IPO. Elsewhere in Asia, IndiGo, Indias biggest low-cost carrier, has announced plans to acquire 150 new aircraft, and is said by bankers to be preparing for an initial public offering in Mumbai aiming to raise about $400m. The company said recently, however, that an IPO was not imminent.

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All Nippon Airways, the full-service Japanese carrier, is launching a budget subsidiary in a partnership with First Eastern Investment Group of Hong Kong, and Garuda, the Indonesian flagcarrier, is buying 20 new Boeing aircraft and preparing for an IPO to raise about $300m. The expansion plans are causing significant strains, however. Some airlines, notably Philippine Airways, have had to cancel flights because of a shortage of pilots many of whom have been attracted to Gulf airlines, such as Dubai-based Emirates, by higher salaries and benefits. Emirates said recently that it plans to hire 250 pilots this year and 500 in 2011. Boeing forecast last week that Asia will be at the forefront of staff requirements over the next 20 years, with China alone needing an extra 70,600 new pilots and south-east Asia 42,000.

October 22, 2010

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Parking facility: A revenue generation potential, for Nagpur airport

The Economic Times, September 17, 2010 Among the various revenue generation streams at MIHAN, one that is proving to hold substantial potential is the night parking slots for low cost carriers. Mihan India Private Ltd (MIPL) project manager, Abid Ruhi, explains that domestic airlines (including Jet Airways and Indigo) have evinced interest to avail of the night parking facility being offered by MIPL, at Nagpur airport. With Mumbai and New Delhi airports becoming congested, there is not a single night parking slot available for airlines at these locations. Hence, airlines are opting for Nagpur airport. Consequently, MIPL is promoting this option, as one with minimum charges and maximum facilities, adds Ruhi. The MIPL authorities started working on such proposals, after taking over operations at Nagpur airport. In case JetLite and Indigo plan to shift their aircraft base here, as proposed, Nagpur airport could generate additional revenue during off-peak hours too, adds Ruhi. The airport has so far been earning revenue only during peak hours (from 7am to 11pm), from the few domestic flights and an international flight. Now, it plans to provide eight parking slots during the day and four new slots to private airlines during off-peak hours (12 midnight to 6am). Last year, international airlines, like Belgium based Sabena Airlines and US-based Goodrich Air, which are planning to start India operations, had sought night parking slots for their aircrafts at Nagpur airport. Another US based airline had asked for stop-over parking at Nagpur, as well. A few other international airlines have also conducted a survey of Nagpur airport, to use the night parking facility, reveals Ruhi.

October 22, 2010

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Civil aviation sector to be in world's top five: Patel

PTI, Jul 4, 2010, 06.38pm IST AHMEDABAD: India's civil aviation sector will be among the top five in the world in the next five years, Civil Aviation Minister Praful Patel said in Ahmedabad on Sunday. "In the last six years we have been successful in bringing a revolution in India's civil aviation sector, I do not mind saying that," Patel said after inaugurating the new domestic-cuminternational terminal at the Sardar Vallabhbhai Patel International (SVPI) Airport here, which is likely to become operational from August 15. "In 2004-05, we were considering our civil aviation sector as big, but at world level it was not much recognised. In just six years, India's civil aviation sector is ranked ninth in the world. "In the next five years, India's civil aviation sector will be among the top five in the world," Patel said. Patel, who had laid the foundation of the building in 2007, said inauguration of the new terminal at the Ahmedabad airport was a rare occasion. "It is a rare occasion when a minister lay the foundation of a building and inaugurates it too." The Aviation Minister also expressed the need for more air services in Gujarat, looking at the development. "There should be increase of air service in Gujarat be it Ahmedabad, Surat, Rajkot, Vadodara, or Bhavnagar. Central Civil Aviation ministry would support all projects for Gujarat and we assure you there would be no discrimination," he said. When Patel requested the Gujarat government to consider the viability gap funding (VGF) model of the Centre, chief minister Narendra Modi said, "In the VGF model for north eastern states, it is the Central government which is funding the gap for airline connectivity. If this is given to Gujarat, I will adopt it right now."

October 22, 2010

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Mumbai airport wont be able to take more flights

DNA / Sindhu Bhattacharya / Saturday, July 3, 2010 1:07 IST It may soon become difficult to allow new flights into and out of Mumbai, given congestion at the international airport and delays in building a new one at Navi Mumbai. Slamming the environment ministry for delaying clearance to the Navi Mumbai project, Union civil aviation minister Praful Patel said on Friday, We are reaching a point where we have to think whether new flights can be permitted or not. After the current upgradation, Mumbai international airports peak capacity will reach 40 million passengers annually, but more is needed. In 24 hours, we are using peak airport capacity for 15 hours every day. Patel said objections from the ministry of environment and forests over the Navi Mumbai project were beyond comprehension. We cant be overly obsessive about environmental issues. We cant give priority to 50-100 acres of degradation over a large infrastructure project. The new airport has been planned near Panvel, but Union environment minister Jairam Ramesh has raised concerns over the project destroying about 400 acres of forest. A Mumbai International Airport Ltd spokesperson pointed out that there were currently 32 aircraft movements per hour. But when the traffic reaches 40 million passengers, there will be 40 an hour. The airport will soon reach saturation point. We handled 26 million passengers in 2009-10 on a land area of 1,849 acres as against Delhi, which handled almost the same number of passengers at more than double the land area available at 5,200 acres. Even Hyderabad, which handles about seven million passengers a year, has 5,400 acres at its disposal. He said Mumbai airport was constrained in terms of land, and therefore in critical areas such as runways, aircraft parking bays and terminal expansion.

October 22, 2010

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Initiating Coverage Itll hurt. We are reaching capacity in Mumbai & new airport is stuck: Patel
July 5, 2010, www.economictimes.indiatimes.com Civil Aviation Minister Praful Patel is in favour of allowing foreign carriers to own stakes in domestic ones. Thats one way the aviation industry, which he describes as Indias ``new sunrise sector, can get a part of the capital it badly needs to keep pace with the growth in demand thats bound to be unleashed, he says. `If only 10% of us flew, the Indian civil aviation industry would still need to become six times its present size, he says. In a walkabout interview with ET NOWs Andy Mukherjee at New Delhis gleaming, new, state-of-the-art Terminal 3, Patel spoke about a host of issues, including making India an aviation hub for Asia, the turnaround of Air India and his concerns over the dithering in building a new airport at Navi Mumbai because of environmental concerns. Excerpts from the interview, which plays on ET NOW on Tuesday at 6:30 pm and 11 pm.

Is it time to revisit the issue of allowing foreign carriers to invest in domestic airlines? The entire government has to take a call on this. But yes, there is a case. Since the aviation sector is now turning around, and the growth and the volumes are coming, there will be a requirement of huge capital expenditure and a lot of investments. So I think there is a possibility.

At an IATA conference you perhaps jokingly said that by 2050, of the 12 surviving global airline brands, three will be from India. I mean it. When I said in 2004 that Indias aviation will grow and will arrive on the world scene, I am sure not many people would have believed it and I do not think four years back anybody in India would have ever thought that we could have an airport terminal as big and grand as this. Lets not underestimate India. With its huge population, geography and growing economic strength, India will be able to demonstrate all that I have said in Berlin. By 2050, if there are 12 carriers flying, three will come from India and three from China.

What about the losses at Air India? I am happy that a lot has changed in Air India since last year. The losses have started coming down and the outlook is good. But we are still talking about some 22,000 crore rupees of expensive longterm debt that Air India has taken because of the new aircraft orders that it has placed? Well that is unfortunately a thing which happened because we did not have a capital expenditure programme for 20 years. So when you have a large induction of aircraft, these kinds of issues will certainly be a factor which they will have to contend with, but as I said, things are looking better.

With T 3 operational, will India at least be a contender for the position of an aviation hub in this part of the world? October 22, 2010

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In fact, that is what its precisely meant to be. Its a game changer for Indias aviation. This airport will establish Delhi as a major hub for most of Asia. So this, I think, is a defining moment. The vision document which we have internally in the ministry is to make, to begin with, Delhi, Mumbai, Kolkata, Chennai, Bangalore and Hyderabad as the six major hubs of India. And if we are on course, I can assure you that aviation in India will also be on course. The strength of the airlines will be to be able to, say, bring a passenger from Paris into Delhi and to be taking the passenger from Delhi to, say, Hanoi or Shanghai or to any other city. All the carriers right from Air India to Jet Airways to Kingfisher and in future all the other airlines which will start flying internationally will take advantage of these kinds of airports. So an airport is not just a facility that looks big, grand and comfortable.

Will the Mumbai Airport also look as nice as the new airport in Delhi? The Mumbai Airport, when completed, will be absolutely on the same scale and size and grandeur. But what worries me about Mumbai is not whether the existing Chhatrapati Shivaji International Airport will be as grand or great like this; it will be. What worries me is that its a constrained airport, it has one major runway, one cross runway which is like a half runway, and if the second airport at Navi Mumbai which I am very concerned about is not coming up in the next five years, it will affect the economy of Mumbai because I have almost come to a stage where no more flights in and out of Mumbai can be allowed. It is coming to a stage where passenger capacity may exist in the terminals, but the number of aircraft movement in and out of Mumbai cannot happen, and that is why Navi Mumbai must be cleared at the earliest. Unfortunately it has been held up due to some environment concerns. I am not against addressing concerns. After all, we all have to ensure a good and a clean world. But in a country like ours where development and the aspirations and the needs of the Indian economy and the population have to be addressed, I think we will have to strike the right balance. So if 100 acres or hectares of some mangroves are an issue, well I think thats a larger call (for the government). But one thing is certain.

Mumbai used to be the No.1 airport in India until just two years ago, and Delhi has overtaken it. It means that over the years Delhi will be the premier airport of India and that should be a concern. It isnt that I come from Mumbai and it worries me because of I look at it from a parochial perspective, but Mumbai is the commercial capital of the country.

And what affects commerce in Mumbai will hurt India Its so unfortunate that Mumbai has a constrained airport. Pune, which could have had a satellite airport, has still not been able to find consensus on where to build the second airport. Navi Mumbai is stuck. I do not know what is going to happen. If tomorrow we have to put a ban on new flights in and out of Mumbai, what chaos it will create, thats for everybody to see.

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Glossary Aircraft Utilization Measure of aircraft productivity, calculated by dividing aircraft block hours by the number of aircraft days assigned to service on air carrier routes. Typically presented in block hours per day.

Available Seat Kilometers (ASKMs) A common industry measurement of airline output that refers to one aircraft seat flown one kilometer whether occupied or not. An aircraft with 100 passenger seats, flown a distance of 100 kilometers, generates 10,000 available seat kilometers.

Block Hour Time from the moment the aircraft door closes at departure of a revenue flight until the moment the aircraft door opens at the arrival gate following its landing. Block hours are the industry standard measure of aircraft utilization

Cost per Available Seat Kilometer (CASK) Measure of unit cost in the airline industry. CASK is calculated by taking all of an airlines operating expenses and dividing it by the total number of available seat kilometers produced.

Passenger Load Factor The number of Revenue Passenger Kilometers (RPKMs) expressed as a percentage of ASKMs, either on a particular flight or for the entire system. Load factor represents the proportion of airline output that is actually consumed. To calculate this figure, divide RPKMs by ASKMs. Load factor for a single flight can also be calculated by dividing the number of passengers by the number of seats.

Passenger Revenue Revenue received by the airline from the carriage of passengers in scheduled operations.

Revenue Passenger Kilometers (RPKMs) This is the basic measure of airline passenger traffic. It reflects how many of an airline's available seats were actually sold. For example, if 200 passengers fly 500 kilometers on a flight, this generates 100,000 RPKMs.

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