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y Deccan Aviation Ltd.: The aviation company has its presence in 8 places namely,Mumbai, Ranchi, Surat, Hyderabad, Bangalore, Katra, Colombo (Sri Lanka) and

Delhi. It has 350 daily departures and covers 65 destinations in India. It offers the benefit of no-cost travel to infants, ticketing counters, lavish aircraft interiors and

ticketing flexibility.

y Indigo: Indigo is a utilitarian low-price domestic airline which offers feasible flyingalternatives for millions. The airline was facilitated by the Air Passengers Association

of India (APAI) as the Best Low-Fare Carrier in India for the year 2007. Indigo has

120 daily departures and a fleet of 19 Airbus A320. The airline covers 17 destinations

namely, Agartala, Bangalore, Bhubaneshwar, Ahmedabad, Delhi, Chennai, Guwahati,

Hyderabad, Goa, Imphal, Kolkata, Mumbai, Vadodara, etc.

y Paramount airways: Paramount Airways is a business class airline which has its

base in India and headquarters at Chennai. Endorsed by Madurai-based Paramount

Group and Paramount Railways was inaugurated in 19th October 2005. Its fleet

comprises 5 aircrafts and it operates in 8 destinations.

y Go Air Airlines: Like SpiceJet, a Go Air airline is also a low price airline endorsed by the Wadia group. It was inaugurated in Mumbai in June 2004. It operates in 11cities with 61 daily departures. It has started its functions in Ahmedabad, Chennai,

Bangalore, Coimbatore, Goa, Cochin, Jaipur, Mumbai, Pune, Delhi, Srinagar, etc.

y Kingfisher Airlines: It is the one and only 5-star airline in India which offers

excellent first class service on domestic itineraries also. A part of UB group,Kingfisher Airlines has received 30 awards for its novelty and customer satisfaction.

After its tie-up with Deccan, the airline covers 64 cities and has 484 daily departures.

y Spice Jet: Spice Jet is basically a low cost airline which incorporates many Boeing

737-800 airplanes in its fleet. It covers 14 destinations in India.

y Air Sahara: Air Sahara was inaugurated on December 3, 1993 with a fleet of only

two Boeing 737-200s. Now it comprise of 27 aircrafts, 135 daily departures and

availability of 16500 seats on regular basis. It reaches various Indian destinations like

Bangalore, Kolkata, Delhi, Lucknow, Mumbai, Chennai, etc.

y Jet Airways: Jet Airways was established on May 5, 1993. At present it is. It covers

50 destinations with 340 regular departures. Jet Airways has pacts with foreign

airlines, such as Lufthansa, Swiss, Gulf Air, Austrian Airlines, Qantas and Thai.

Industry Structure and developments

Global and Indian Economy

The economy grew at 7.2 percent in 2009-10, on the back of an 8.2 percent growth in the industrialand an 8.7 percent growth in the service sectors, despite decline in agricultural output. Per Capitaincome grew by 5.3 percent in 2009-10.The macro-economic fundamentals were positive inspiring ageneral confidence about the medium to long term prospects amidst uncertainty in the globaleconomy.

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GDP growth is expected to be at around 8.5 percent in 2010-11 with a full recovery and in excess of 9percent in 2011-12. There is a historically established correlation between economic growth andgrowth in air traffic it has been observed that aviation grows at the rate of 1.2 to 1.8 times the GDP 1.2 times in developed nations and 1.8 times in developing countries with pent updemand.Assuming a very conservative 6% GDP growth and a 1.5 times multiple, it is estimated that domesticaviation traffic alone will grow 2.5 times from the current 40 million passengers to100 millionpassengers by 2020.

Recent trends in the Indian Aviation Industry

Number of passengers carried

The total domestic passengers carried have increased from 25.57 million in FY 06 to 46.64 million inFY 10. After registering a growth for 3 successive years from FY 06 to FY 08, the industry witnesseda drop in FY 09 due to the global economic slowdown. Domestic passenger traffic grew by 16.5%during FY 2009-10 over the previous year heralding the return of passenger demand for the domesticaviation industry. This growth was despite a weak first quarter which saw domestic traffic continuingthe declining trend of FY 2008-09 with a 5% decline in passenger numbers.

Passenger Load Factor

The passenger load factor for the domestic aviation industry has been steady around the 72%mark for the last 5 years, barring the year 2008-09 when the load factor for the airlines

slumped to 66.6% owing to the economic slowdown. However, it has picked up again in2009-10.

0

5

10

15

20

25

30

35

40

45

50

2005-06 2006-07 2007-08 2008-09 2009-10

Domestic Passengers (million)

Domestic Passengers

(million)

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The share of private carriers in terms of the number of passengers carried has increased from

68.2% in FY06 to 82.8% in FY09.

SWOT Analysis of SpiceJet Airlines

62.00%

64.00%

66.00%

68.00%

70.00%

72.00%

74.00%

76.00%

2005-06 2006-07 2007-08 2008-09 2009-10

Loa Factor

Load Factor

0.00%

10.00%

20.00%

30.00%40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

2005-06 2006-07 2007-08 2008-09

Share ofprivate carriers

S

are of private

carriers

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Strengths

Rising market share

SpiceJet is one of the fastest growing airlines in the aviation industry, with a market share (in terms ofnumber of passengers carried) of around 12%. Its market share has shown a steady increase since itsinception in 2005-2006

S e sLower depreciation costs than peers

Higher Load factors than industry

Only listed airline to declare profit for FY10

Be

e

i

e

e

ce

esse

c

cell

i

s

We k essesG

s i

he d

es

ic

e

w

k

h e s w e y ie s d hi hc e i i

i

he

! "F c

s

s

h

i

e

i

l

s

d

ds

we h ex ec ed ic w h

u i ies

Sh e # $ CCs i I di ke

$ d

# c

s ex

ec

ed

e

i

he

l

hy

P

sse %

e # #

ic

ised#

s %

%

w

h

SW

lysis

4.33%

7.17%

9.13%

10.24%

12.40%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

2005-06 2006-07 2007-08 2008-09 2009 -10

Market Share ofSpiceJet Ltd

Market S & are

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Passenger Load factors higher than the industry average

Barring the year 2008-09' when the aviation industry witnessed a s(owdown, S

)ice

0

et has always

maintained its passenger load factors at higher levels than the industry average1

Lower depreciation costs than peers

Spice0

et follows the Operating lease model for its aircrafts 1 An analysis between theFinancial Lease

and the Operating Lease business models adapted by different airlinecompanies, to find out which

is best suited for the Indian aviation sector, and how the profitability of thecompanies is determined

by the model that they adapt shows that Companiessuch as Kingfisher and Jet Airways, which use

the financial lease mode where they own aircrafts, haveshown weaker balancesheets, owing to a

higher incidence of depreciation and interest costs, ascompared to companies likeSpiceJet, which

follow the operating lease model, where, rather than buying the aircraft, they lease it for a fixed

period of time1

The table below lists the depreciation expense and the Interest expense for the 3 listed airline

companies for the financial year 2009-2010

Co 2 p 3 n4

D 5 p 6 5 7 i 3 tion Exp5 ns 5 8 Rs 7 6 o 6 5 9 @ nt 5 6 5 st Exp 5 ns 5 8 Rs 7 6 o 6 5 9

SpiceJet 7A64 11

A38

Jet Airways 961A96 993

A01

Kingfisher 162 A 8 1096 A 51

Only listed airline to register a profit for FY 10

SpiceJet was the only listed airlinecompany to register a profit for FY 10 A SpiceJet reported a net

profit of INR 61A45crore, while Jet Airways and Kingfisher reported losses of467

A64crore and

1647A22crore respectively

AOne major reason for this difference is because of the financial lease

model that SpiceJet follows, which has been explained aboveAIt was able to reduce its depreciation

and interest costs because of this and hence was able to report a profit.

Less cancellations and better on time performance than peers

0.00B

10.00 C

20.00C

30.00B

40.00 C

50.00B

60.00C

70.00C

80.00B

90.00 C

2005-06 2006-07 2007-08 2008-09 2009-10

Pass n Load acto s

Industry average

SpiceJet

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The airline continues to focus all efforts on ensuring that SpiceJet maintains a healthy On-TimePerformance track record. Flight cancellations are a key measure of on-time performance andSpiceJet has one of the lowest cancellation rates amongst domestic airlines. The chart below givesthe average cancellation rate ofSpiceJet versus peers:

Weaknesses

GapD

E

nFh

Gdo

H

G

D

F

E

In

G F Po

Q

k

SpiceJet operates flights to only 20 domestic destinations; this number is much less than its peers

Kingfisher and Jet Airways.

Opportunities

ShaQ

G oR

S o P CoD

F CaQ Q

E

G

Q D

(S CCD

)E

n F h G IndE

anH

aQ

kG F

The share of low-cost carriers in the domestic traffic continued to increase during FY 2009-10 and byend of the financial year nearly 70% of all domestic traffic was carried by low-cost carriers or the low-fare services of the full-service carriers.

The month of May 2009 witnessed a major strategic shift in the domestic industry with the introductionof the Low-Fare service Jet Konnect by Jet Airways. By end of FY 2009-10, the Jet Konnect servicewas more than two-thirds of the seats deployed by Jet Airways. A similar shift of capacity fromKingfisher to Kingfisher Red was seen during this period with Kingfisher Red service accounting formore than two-thirds of the seat capacity deployed by the airline.

These large-scale capacity conversions from Premium service to Low-Fare offerings seemed tovindicate the low-fare business model adopted by SpiceJet. By the end of FY 2009-10, it is estimated

that more than two-thirds of the capacity deployed in the domestic market was a low cost and low-fareoffering.

0.89% 0.70%1.46%

1.72%

5.24% 5.20%

2.31%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

SpiceJet Go Air Indigo Indian

Airlines

Jet

Airways

Jet Lite Kingfisher

Flight Cancellations (July '09 - Mar '10)

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Loadfa T U oV W

expectedto remaX

nheaY

th

Driven by huge losses, most airlines reduced fleets and no new capacities were added since Fa

2009.

With FCCs like Air India and Kingfisher still making huge losses, and Jet Airways barely breaking even,

negligible fleet additions are eb

pected over Fa

2010-11E. But demand has bounced back sharply in

Fa

2010 and Low-Cost Carriers (LCCs) have been reporting 80%+ load factors. Given that the demand

is eb

pected to outpace supply, the load factors are eb

pected to remain around 77% for Fa

2011E.

Pac c

enger trafficpoisedfor stronggro d th

Prior to the economic turmoil, the domestic aviation industry witnessed strong demand in passenger

traffic,registering a CAGR of 18% over Fe

2001-2008. With the growing demand in passenger traffic,

airline companies started ramping up their capacity(some by nearly 2 times) to meet the current and

the future demand, which resulted in a huge increase in capacity in terms of Available SeatKilometres (ASKM), which nearly doubled from 35,077mn in Fe

2006 to 60,590mn in Fe

2008).

However, the Aviation sector was amongst the worst hit by the economic crisis in Fe

2009, where

demand in terms of passenger traffic declined by 11%, from 44.5mn in Fe

2008 to 39.5mn in Fe

2009,

which was the biggest fall in a decade. Due to the huge capacity ef

pansion in the last few years and

the plummeting demand in Fe

2009, almost all airlines suffered huge losses, which forced some

companies to rationalise their capacity to cut down costs and to reduce future losses (Kingfisher

rationalised its fleet from 88 to 66).

However, demand has bounced back significantly over Fe

2010. Historically, economic growth has

been the primary driver of air traffic and this relationship has been even more evident in developing

countries. It has been observed that aviation grows at the rate of 1.2 to 1.8 times the GDP (1.2 times

in developed nations and 1.8 times in developing countries with pent-up demand). Assuming anannual GDP growth of ~8% and a 1.5 times multiple, it is estimated that domestic aviation traffic

alone will grow around by 12-13% annually, or by 2.5 times, from the current 40mn passengers to

100mn passengers by 2020. Given that the demand has historically grown at an average of around a

13.7% CAGR over the last ten years, it is ef

pected that this trend will continue, with an ef

pected

GDP of 8-9%e

oe

for the nef

t three years; thus, we ef

pect the passenger traffic demand to register

CAGR of around 13% over Fe

2010E-Fe

2012E. In absolute terms, it is ef

pected that the passenger

traffic will be around 56.6mn in Fe

2012E.

0%

10%

20%

30%

40%

50%

60%

70%

2005-06 2006-07 2007-08 2008-09 2009-10

Lowfare airli es - s are i t e

omestic market

LCC share

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Threats

Lo g entrybarriers andhigh competition

There is low entry barrier for the aviation sector, as any company can start an airline based on theoperating lease model, which requires minimum capital to begin with and most of the fixed assets can beacquired at 1% of the total cost per month. The entry of new players can lead to an increase in capacity

and will eventually lead to an increase in competition among airlines resulting in a price war as companieswill be forced to reduce their ticket prices, which will result in a lower average yield and will have a negativeimpact on revenues in the short run (it can also lead to losses). Such intensive competition was clearlyvisible during FY2007-08, due to excessive capacity additions, which resulted in lower industry load factorsand lower profitability. Existing players can also increase their capacity which will lead to lower thanexpected load factor due to higher capacity.

Higher ATFcosts than internationah

standards

An increase in ATF prices usually leads to a decrease in load factors, because the companies pass on theadditional fuel cost to the consumers. Thus, if the price of crude oil moves above $100, the companiescould face a significant dip in load factors, which will lead to lower profitability. In India, the ATF costs arehigher than the International levels and Fuel expenses typically make up around 35% of the Operatingexpenses of the airline companies; an increase in the ATF prices, will lead to significant increase in costs.

The table below shows the Power and Fuel costs as a percentage of total Operating expenses for the 3listed companies (FY 10)

Company Total Operating expenses (i

s crore) Power and Fuel expense (i

s crore)

SpiceJet 2,155.25 816.59

Jet Airways 9,206.04 3,170.88

Kingfisher 6,017.51 1,802.99

Lo p er than expectedtraffic gro p th

Any downturn in the economy can lead to lower-than-expected passenger traffic growth, which can have a

negative impact on load factors, and can eventually have a negative impact on the profitability.

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Financial q atio Analysis

The table below shows the comparison between the key financial ratios of the 3 listed airlines.

Category q atio Name SpiceJet Jet Airways Kingfisher

Net Profit Margin 2.82% -4.51% -32.50%

Operating Ratio 98.82% 88.86% 118.74%

Profitability Return on Equity ( ROE or RONW) -17.96% -17.70% 42.25%

Return on Invested Capital ( ROIC or ROCE) 74.67% 3.18% -22.37%

Leverage Debt-Equity Ratio ( DE ratio) -1.28 5.26 -2.03

Interest Coverage Ratio 6.96 0.53 -1.01

Asset Turnover 2.20 0.51 0.64

r fficiency

q

atio Inventory Turnover 0.00 0.00 0.25Debtors Turnover 115.04 12.78 15.71

Liquidity Current ratio 0.67 1.02 1.34

Earnings Per Share ( EPS) 2.54 -54.19 -61.95

Market q atios Price Earnings Ratio ( PE ratio) 29.87 -14.90 -1.09

Payout Ratio 0.00% 0.00% 0.00%

DuPont Analysis: Comparing the q Or and explaining the

difference SpiceJet Jet Airways Kingfisher

Net Profit Margin ( Net Profit/Sales) 2.82% -4.51% -32.50%

Asset Turnover ( Sales/ Total Asset) 2.20 0.51 0.64

Leverage related Factor ( Total Assets/Equity) -2.89 7.67 -2.05

q Or = Net Profit Margin * Asset Turnover * Leverage

q elated Factor -17.96% -17.70% 42.25%

Legend

Company performancebetter than Other

Lesser the Ratio, Better

the Performance

Net Profit Margin

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SpiceJet was the only listed airline to report a +ve net profit in Fs

10. This was on account of the

lower interest and depreciation costs due to the operating lease model it follows as compared with

Jet Airways and Kingfisher which follow the financial lease model.

Operating Ratio

Jet Airways has the best operating ratio. This is because of 2 factors

y Lower Power and Fuel costs as a percentage of the Net Income

y Lower Selling and Administration et penses as a percentage of Net Income

Company Net Sales

Power and fuel

expense percentage

SpiceJet 2,181.08 37.44%

Jet Airways 10,359.69 30.61%

Kingfisher 5,067.92 35.58%

Returnon Equity

ROE isnt a reliable profitability measure for the airlines industry since Spice Jet had a negative Total

Net Worth at the end of Fu

10; Jet Airways had a negative Net Profit while Kingfisher had both Net

Worth and Net Profit negative.

ReturnonCapitav

Empv

oyed

ROCE is a more reliable measure than ROE for the airlines sector since it computes the return on

Debt + Equity in terms of the profit before interest ew

pense (the interest ew

pense is adjusted with

the taw

rate). Kingfisher continued to have a negative Return in spite of the interest ew

pense being

added in the numerator, while Spice Jet had best ratio. This is because the debt for Jet Airways isquite huge, as compared to SpiceJet (and Kingfisher). While Jet Airways and Kingfisher have a debt of

close to 14,000 crore and 8000 crore respectively, Spice Jet has a debt of only 438 crore.This is again

because of the Operating lease model that the SpiceJet follows as opposed to the financial lease

model followed by both Jet and Kingfisher.

Debt Equity ratio

While both Kingfisher and SpiceJet have a negative debt equity ratio owing to the negative value of

equity, Jet Airways is substantially leveraged with a DE ratio of 5.26. This is on account of the

capacity addition that Jet did before the financial downturn.

InterestCoverage ratio

SpiceJet has the best Interest coverage ratio of the 3 listed airlines. This is because of the lower

interest cost of SpiceJet due to the Operating lease model already described.

Asset Turnover ratio

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Spice Jet has a better asset turnover ratio. This is because of the lower number of aircraft in its fleet

as compared to the other 2 airlines. Furthermore, it doesnt own any aircraft but has taken them on

lease, which helps in projecting a healthier asset turnover ratio.

Inventory Turnover ratio

Because COGS for both SpiceJet and Jet Airways was 0 for Fx

10, the value of Inventory Turnoverratio for both these airlines was 0

Debtors Turnover ratio

SpiceJet had the best Debtors Turnover ratio of the 3 airlines.

Current Ratio

Kingfisher had the best current ratio; its current ratio value is nearly twice of the current ratio value

for SpiceJet.

EarningsperShare (EPS)andPE ratio

Only SpiceJet had a positive EPS value for Fx

10 since it was the only listed airline to report a

positive net profit. The same argument holds true for PE ratio as well.

Payout Ratio

None of the airlines was paid a dividend for Fx

10.

MAJOy ISSU S FACED BY THE INDIAN AVIATION SECTOy

Higher cost of ATF as compared to international standards

ATF is a major cost component for Airlines in India being about 40% of the operating cost of the

domestic carriers. E

cessive ATF rates in India over the years have hurt the financial health of the

domestic airlines and contributed to their accumulated losses. The high cost of ATF coupled with the

high airport charges in India have adversely affected Indian airports' prospects of emerging as global

or regional aviation hubs. There are a host of elements, which all contribute to raising the cost of

ATF in India to levels which make airlines in India lose competitiveness.

The table below compares the average ATF prices per kilo litre across Singapore, Kuala Lumpur,

Sharjah and India. Although this data is fairly old, the trend of a higher ATF price in India has

continued over the years.

Singapore Kuala Lumpur Sharjah India Date

Rs 20,779 / kl Rs 20,874 / kl Rs 21,700 / kl Rs 36,100 / kl Mar-07

Rs 22,111 / kl Rs 21,427 / kl Rs 23,017 / kl Rs 37,000 / kl Mar-06

Rs 15,816 / kl Rs 15,589/ kl Rs 16,349 / kl Rs 27,400 / kl Mar-05

Rs 11,272 / kl Rs 11,044 / kl Rs 11,697 / kl Rs 21,200 / kl Apr-04

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The ATF pricing mechanism in India:

ATF prices for domestic operations include Freight charges from Gulf to India; Customs Duty of 10%

ad valorem (which adds up to an effective rate of appro

20% inclusive of the CVD & cess); domestic

transportation and other charges; E

cise Duty of 8.24% (including cess); Sales Ta

(levied by the

State Governments) averaging across the country at 25% as add-ons to the AG prices, besides the Oil

Companies' marketing margin; and throughput charges paid to the Airports Authority.

Customs duty

India is an ATF surplus country, with its production being higher than the consumption ofATF in the country. Even though the ATF supplied at Indian airports (both for domestic and

international operations) is not imported into India but is the product of crude refined in

Indian refineries from imported crude, the Customs Duty of 10 % ad valorem (effective duty

of approx 20% inclusive of the CVD & cess) is taken into account in fixing the prices of ATF

supplied to the airline operators.

Excise duty

An Excise Duty of 8.24% (including cess) is levied on ATF. Given that the crude prices have

increased by around 40% between January 2005 and September 2006 as well as the increasein the number of flights operated by domestic carriers in India by over 50%, the revenue

collections by the center has also increased significantly over this period.

Sales Tax

Sales Tax on ATF for Indian carriers flying international routes has already been withdrawn.

The situation needs to be redressed for the domestic flights as well.

While the VAT rates on inputs & final products across the different states have been set at 4

% & 12.5%, the VAT act allows special rates to be charged for fuel and ATF under

Schedule-III of the state VAT Acts. This has allowed states to charge sales tax on ATF at

excessively high levels.

Northern States Eastern States Western States Southern States

Rajasthan 28% Bihar 29% Gujarat 30% Andhra

Pradesh

33%

Himachal 25% West

Bengal

25% Maharashtra 25% Tamil Nadu 29%

UP 21% Chhatisgarh 25% Madhya

Pradesh

28.75% Karnataka 28%

Delhi 20% Assam 22% Goa 20% Kerela 28.75%

Punjab 20% Nagaland 15% Andaman 0%Mizoram 0%

Lack of Transparency in pricing:

Based on the import parity pricing mechanism, changes in domestic rates should be similar to

the changes experienced in AG prices. However, in the majority of such instances, when

there are increases in benchmark oil prices, the corresponding increase passed on to airlines

in India are higher than the increase in benchmark prices. Conversely, when benchmark

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prices have been reduced, the corresponding decreases have not been fully passed on toairline operators in India.

Whilst from April 2005 to October 2006, the benchmark prices have reflected a net increase

of 16.2%, the oil companies have passed on a net increase of 31.6% to domestic airlines in

India.

Monopoly of PSU oil companies:

A major reason for high price even after deregulation of ATF price, is the monopoly of the 3

state owned Oil companies. Because of limited number of suppliers there has hardly been any

effective choice for the airline industry, with the 3 state owned oil companies fixing the ATF

price on a mutually agreed common formula between them.

The government has granted marketing rights to some companies in the oil sector like Reliance,

Essar, ONGC etc. None of these companies however, could start supply of ATF as they were not

allotted space by the Airport Authority. Recently Reliance has been allotted land at 25 airports in

India; and is moving towards setting up Aviation Fuelling stations at some of these airports.

It is hoped that the resultant competition will bring about a reduction in the unreasonable ATF price

levels prevalent in India.

Lack of Open access for fuel supply through a Common Distribution

Infrastructure:

In order to enable the private oil companies to supply ATF to airlines at Indian airports, it isnecessary to make suitable distribution infrastructure & facilities available at the airports,

including common terminals for ATF distribution. Additionally, installation of Hydrant Fuel

Dispensation systems (as opposed to current bowser based systems) should be undertaken ona priority basis. The entire logistics for supply of fuel to Indian airports should be properlyscrutinized to ensure that no supplier has a stranglehold on any portion of the supply

infrastructure (e.g. pipelines to the airport) that would hinder the entry of competition.

Without the same, simply granting marketing rights to new oil companies will not have any

meaningful impact on bringing about competition led decrease in ATF prices.

The Naresh Chandra Committee on a Road Map for the Civil Aviation sector' had earlier

recommended that the Airport Authority of India (AAI) could buy out the distribution

infrastructure of the state-owned oil companies and provide all oil companies equitable

access to such facilities. Alternately, the state-owned oil companies should be required to

provide private oil companies access to these facilities on a "common user / carrier"

principle. In either case, the Committee had suggested that fuel supply infrastructure atairports should come under the purview of the proposed AERA Airport Economic

Regulatory Authority.

This would result in improved efficiencies, reduced delays for airlines, & cost reduction for

the oil companies.

RECOMMENDATIONS

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A reduction in the cost of ATF cost has a significant impact on the airline balance sheets. Aquick calculation to estimate the impact of a reduction in ATF price on the losses being

registered by the Indian carriers indicates that a reduction in ATF price by 65% (to bring itcloser to international benchmarks) results in a close-to 25% increase in operating profits.

The distortion in ATF price by the domestic oil companies and the taxation structure results

in a huge burden on the airline bottom-lines making airlines in India uncompetitive and

unattractive for equity capital and debt financing.

The following is recommended to prevent further losses for the Airline industry

Tax Structure

y Customs duty on ATF for domestic operations should be reduced

y Excise duty on ATF should be made 4%

y ATF should be given "declared goods" status, thereby attracting a uniform 4% salestax across India

ATF Base Price, Pricing mechanism & competition

y The Ministry of Petroleum & Natural Gas should instruct the state owned oil

companies to provide immediate relief to the Airlines by reducing the base price of

ATF.

y The ATF pricing should be made transparent by building in the various sub-heads in

the billing process.

y The increases in ATF prices passed on to the domestic carriers should not be higher

than the increases in the benchmark prices;

y The decreases in the benchmark prices should be fully passed on to the Airlines;&

y The marketing margins built-in by the oil companies in fixing the ATF prices shouldbe reduced and competition be introduced in the supply of ATF by allowing private

players to supply ATF at Indian airports.

ATF Distribution Infrastructure

y The current storage and supply facilities for ATF at the Indian airports should be

converted to Common User facilities owned by a neutral agency instead of

duplication of such infrastructure, by investments in separate facilities by the state

owned oil companies as at present.

ROLE OF THE GOVERNMENT

The airline industry continues to look for support from the government to ensure that the domestic

industry is structurally stable and the domestic airlines are globally competitive.

Some of the specific thoughts being discussed and proposed are:

y To e tend support to the industry by classifying ATF as declared goods which will bring about areduction in Sales Ta

rates from the current levels of around 24-25%.

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y Ta e emptions from fringe benefit ta , service ta on input/ output services, customs/e ciseduty on ATF/ other spares can help make Indian carriers more cost competitive as they look to

spread their wings.

y Infrastructure development is critical to the growth of the industry. However, this should lead tolowering of costs for the airlines.

y Increasing the FDI limits for the sector will allow funds and e pertise to come into India and

allow the aviation industry to mature and be more competitive.

References

www.capitaline.com

www.fiaindia.in

www.spicejet.com

www.jetairways.com

www.kingfisher.com

www.dgca.nic.in