Managing Change in Civil Aviation in India

www.capaindia.com


New Delhi, 21 October 2011
South Asias largest aviation
consulting, research and
knowledge practice
About CAPA India
Leadership: CAPA India is the leading aviation consulting, research and
knowledge practice in South Asia.
Influence: Established in 1990, we help to shape the direction of the
aviation industry through strategic analysis and advisory services. We
have advised more than 550 global and Indian clients, and connect with
the leaders of industry and government on a continual basis.
Applied Research: Our research division has produced over 8,000
reports for the global aviation community across all areas of the aviation
value chain. Recent and forthcoming reports include:
Global Low Cost Airline Outlook;
India Travel Retail Report;
Global Airport Privatisation Report;
White Paper on Corporatisation of Air Traffic Management;
White Paper on Aviation & Technology with SITA;
Growth Prospects for General Aviation;
Skills Crisis in Indian Aviation;
Trends in Airline Distribution;
Outlook for Maintenance, Repair & Overhaul.
About CAPA India
CAPA Aircraft Advisory: Indias first professional, transparent and
comprehensive, end-to-end aircraft advisory service, covering business
jets and helicopters.
CAPA-GVIC Aerospace & Helicopter City: CAPA is to co-develop general
aviation and helicopter enclave, at the proposed GVIC SEZ being
developed by the State Government of Gujarat and the Korea Land
Corporation.
CAPA Knowledge Process Outsourcing: establishing a JV to provide high
performance outsourced analytics to the aviation industry, based on the
use of database mining.
CAPA Ventures: established to assist clients with raising debt or equity
funding for aviation and tourism projects in South Asia.
CAPA AeroPark: an integrated aviation education and training campus,
in partnership with the leading providers in the world. First campus
launching in Bangalore, Q1 2012.

CAPA AeroPark
World class aviation university and
training campus providing academies for
pilots, engineers, cabin crew, air traffic
controllers, regulators and management.
Will include courses dedicated to the
business and general aviation sector.
Flagship campus in Bangalore with
satellite academies in New Delhi and
Mumbai.
Launching Q1 2012
CAPA Research & Development Centre
Unique global initiative to develop solutions for critical aviation issues;
A centre of excellence to position India at the forefront of industry thought
and practice, investigating issues such as:
o Aviation and the environment;
o Aircraft noise;
o Efficient use of fuel;
o Innovation in air traffic management;
o Sustainable business models;
o Travel technology;
Complemented by venture funding to incubate new ideas and businesses;
Led by a former MIT Professor, supported by leading global researchers;
Located in Bangalore at the CAPA AeroPark campus.
Peter Harbison
Executive Chairman & Regulatory Affairs

Derek Sadubin
COO & China Specialist
Elizabeth Thompson
Head of Research, LCCs and Asia Pacific
Simon Elsegood
Aerospace Desk
Ron Kuhlmann
International Affairs Desk
David Bentley
Airport Research Desk

Sharon Dai
Head of Aviation Research


Global Research
Our analyst team covers a comprehensive range of global issues, with high level contacts and
regular interaction across the industry:
Kathryn Creedy
North America & Regional Airlines Desk
Brendan Sobie
ASEAN and Latin America Desk
Geoffrey Tudor
J apan & North Asia Desk
Melissa Stuart
Europe Desk
Jackson Flint
Europe Desk
Shannon Swainston
Africa Desk

Janet Kim
Traffic & Capacity Desk



CAPAs Global Research clients include
CAPAs Global Consulting clients include
CAPA Forecast
Growth Ahead will Dwarf Recent Experience
Domestic
Airline Pax
Intl Airline
Pax
Airport Pax Growth
Multiple
Absolute
Growth
2000/01 14m 14m 42m
2010/11 52m 37m 142m 3.4x 100m
2020/21 178m 90m 452m 3.2x 310m
* CAPA Forecast
Forecast is based on a GDP growth assumption of just over 8% per annum, however the
Planning Commission has a more optimistic target of 9% until 2027.
Several forecasts Airbus, Boeing, Airports Council International - project that India will have
the fastest growth rate in the world in air traffic over the next 20 years (close to 10% p.a.)
CAPA believes that the growth in traffic and aircraft movements over the next decade may be
even stronger and more sustained than anticipated.
India is expected to emerge as the 3
rd
largest aviation market in the world within 7 years.
The last decade stretched the system to its limits at times. The task ahead is more than 3
times the scale are we up to the challenge?

India will be the 3
rd
largest aviation market
before the end of this decade
Source: India forecasts (CAPA); Other markets (Airports Council International 2008)
ACI forecasts for China have proven to be very conservative, China has already far exceeded the
2012 forecast, reaching 564 million in 2010).

Ranking Country Passengers (m)
2012
Ranking Country Passengers (m)
2017
1 USA 1,552 1 USA 1,790
2 China 497* 2 China 792*
3 UK 282 3 India 327
4 Spain 251 4 UK 324
5 Japan 228 5 Spain 294
6 Germany 218 6 Japan 259
7 India 176 7 Germany 252
8 France 168 8 Brazil 224
9 Brazil 165 9 France 192
10 Italy 154 10 Italy 180
And what about beyond 2020?
* CAPA Forecast
Aviation is a capital intensive industry that requires
long lead times for investment in infrastructure,
equipment and people.
Decisions that we make today will have implications
in 10 and 20 years from now. We already need to be
thinking beyond 2020.
Post-2020, airport traffic could be growing at 50
million pax per annum almost equivalent to adding
a current Delhi and Mumbai airport every year.
CAPA forecasts domestic passengers numbers to
grow to 907 million per annum by 2037 (1.8 billion
airport pax!), 15x current levels, and the domestic
fleet alone to reach 3,230 aircraft.
These are staggering numbers, but they reflect
market demand. Failure to act could result in traffic
being choked and/or serious stresses on the system.
Safety could be a casualty.
We need to move ahead from the current pre-
occupation with short-term thinking towards
building a genuine vision for the sector.

Domestic Pax
(m)
Domestic Fleet
2002 13
2007 35
2012F 61 276
2017F 113 456
2022F 202 735
2027F 349 1,240
2032F 575 2,051
2037F 907 3,230
CAPA India Domestic Forecasts to 2037
Source: CAPA India Aviation Masterplan
2037
Our Objectives
CAPA believes that we should be working towards a framework where:
Governments role is to focus on policy and strategic issues, and to create confidence in an
environment where;
Private sector is enabled to develop and grow the industry in an equitable manner and to earn a
reasonable return on investment;
Consumers have access to a safe, efficient and professional aviation system that represents fair
value for the service provided;
Economy benefits from connectivity that supports trade, tourism and social flows.

CAPA recognises that the government shares the above goals and has serious intentions to
achieve it, but we are concerned that progress has slowed dramatically in the last 10 months.

What we should be doing?
Policy: Prepare a civil aviation policy and national
aviation agenda;
Bilaterals: Allow private Indian carriers to expand
overseas;
Long Term Masterplan: Develop a 20-30 year masterplan
for airspace, airport infrastructure and human resources;
Regulator: Strengthen the regulatory regime and create a
unified regulator with expertise in safety, economics,
airspace and consumer protection (changing the name of
the DGCA to a CAA will of itself achieve nothing);
Public Sector: Restructure PSUs in aviation, government
ownership of Air India and AAI creates a structural
impediment that distorts policy;
Fiscal Framework: Remove the negative fiscal regime,
particularly with respect to fuel;
Economic Regulation: Ensure clarity with respect to the
regulatory framework to provide certainty to investors
and to allow airlines to operate according to market
forces;
Investment: Encourage FDI and allow foreign airline
ownership;
Security: BCAS to be restructured to reflect the rapidly
evolving requirements for efficient security operations.
What we are doing?
Policy: Pre-occupation with protecting AI has created
policy paralysis since 2008, which is damaging for all
carriers;
Bilaterals: Holding private carriers hostage to Air Indias
inefficiencies, with implications for business and tourism,
jeopardising Indias hub potential. Ironically, foreign
carriers may be the winners of this approach;
Long Term Masterplan: There is no defined vision for the
sector beyond the next 5 years, limited strategy for
developing skills and training;
Regulator: Strengthening of the DGCA which had
commenced last year has slowed considerably in the last
10 months, increasing safety challenges. Increasing and
unnecessary interference in issues such as wheelchair
charges, pricing of exit row seats, international operations
at IGIA T1D;
Public Sector: Failure to take decisive actions to prepare AI
or AAI for the realities of the future;
Fiscal Framework: No concerted action in progress;
Economic Regulation: the framework remains unclear
which will continue to impact investment in airports and
ancillary services. Meanwhile airlines are prevented from
increasing fares at times of high demand, but there is no
intervention to stop AI from engaging in predatory pricing.
How are we performing?
Safety challenges and industry viability will overwhelm us if we dont take action
Indian Aviations Financial Performance is Bleak
Airlines
Airline losses are headed for unprecedented levels
Fuel, already at high levels globally is exacerbated by taxes
Weak Rupee is impacting dollar denominated costs
Air India continues to price below cost, destabilising market
Airports
DIAL is reporting losses, MIAL is increasingly challenged;
Most AAI airports are loss-making relies on revenue share
from DEL/BOM and ANS profits;
General Aviation
Most GA operators are in the red, except Pawan Hans.
Others
Only suppliers and aircraft manufacturers are profitable.

India cannot develop an effective aviation system if the core
players are unviable this critical issue is largely
unaddressed.


US$5+ bn
Accumulated losses of Indian
carriers since 2006


US$2.5 bn
Projected losses of private carriers
(excl IndiGo) in FY2011/12


US$20 billion
Projected debt levels of Indian
carriers by end FY2011/12

Global Issues in ATC
Air traffic management will play a critical role in the growth story of Indian aviation.
Significant investment will be required to expand and upgrade infrastructure, technology and skills.
These are global issues, although the key challenges vary by market.

Europe
European airspace encompasses 39 different countries resultant inefficiencies are estimated to cost
the aviation industry EUR4-5 billion per annum. Single European Sky program (SESAR) aims to
achieve the following by 2020:
Triple system capacity;
Reduce unit costs by 50%;
Reduce environmental of each flight by 10%;
Reduce delays by 8-14 minutes per flight.
However airlines are concerned that targets are not ambitious progress is not fast enough and that
the program is falling behind schedule. Seeking to impose penalties for ANSPs that fail to meet
targets.

Global Issues in ATC
USA
Projected investment of US$11-12 billion in NextGen ground infrastructure by 2018;
Airlines will invest US$5-7 billion to equip aircraft with technology.
Over the next 8 years this investment is expected to:
o Generate US$23 billion in benefits
o Reduce airline delays by 35%
o Reduce fuel consumption by 1.4 billion gallons


China
China has an opportunity to demonstrate strong leadership in ATM practice, given certain advantages
over Europe and the US:
Unlike fragmented Europe it has a large single sky;
Unlike the US it is not burdened with dated infrastructure and can leapfrog technology.
Chinas greatest challenges are:
o keeping pace with double digit growth;
o shortage of air traffic controllers;
o opening up more airspace for civil use (currently 70% is restricted for military);
o incorporating private and general aviation which has in the past been very limited.

Growth in Air Traffic Movements - India
At Delhi and Mumbai annual air traffic
movements are around 250,000 per annum.
Delhi has recently overtaken Mumbai.
At the other four metros, movements fall in the
range of 80,000 to 110,000 per annum.
All metros experienced strong growth between
2005 and 2008. Hyderabad saw the strongest
expansion with movements increasing 133% in
3 years. Mumbai saw the least at 58%.
At all airports movements have remained
steady over the last 3 years due to the
downturn in 2008/09. The recent recovery was
met in part through higher load factors.
However, with load factors reaching 85-90% in
high season, future traffic expansion will see a
resumption in movements growth.
The recent respite in movements growth should
not lead to complacency, the challenges are
imminent.
-
50,000
1,00,000
1,50,000
2,00,000
2,50,000
3,00,000
2005 2006 2007 2008 2009 2010 2011
BOM DEL MAA BLR CCU HYD
0
50
100
150
200
250
2005 2006 2007 2008 2009 2010 2011
BOM DEL MAA BLR CCU HYD
Annual Air Traffic Movements FY05-11
Indexed Air Traffic Movements FY05-11
Source: CAPA, AAI
Efficiency of Runway Operations
Indian airports lag global best practice in the
efficiency of airside operations. London Gatwick
is able to achieve 50 aircraft movements per
hour in a single runway operation. Delhi
achieves a similar rate with 3 runways.
At Mumbai, runway capacity issues limit hourly
movements to under 40. Unless this can be
increased to close to 50, the airport will not be
able to maximise use of its terminal capacity.
Our commercial capital is being choked by ATC
constraints.
LGW: Scheduled Hourly Movements 19 October 2011
Source: CAPA, Innovata
BOM: Scheduled Hourly Movements 19 October 2011
DEL: Scheduled Hourly Movements 19 October 2011
A New Model - Corporatisation
The challenges ahead are significant and will require two key elements to be addressed:
Huge capital requirements to invest in technology, people and training;
Need for a completely new culture which will require a focused approach.

This is an appropriate time for change, to develop a new model rather than ad hoc revisions to the
existing structure. It is a situation which has been faced in several countries before.
The most common response has been corporatisation (or commercialisation) of ANSPs.
Corporatisation was recommended by the Justice Lahoti Committee in 1996 and again by the
Naresh Chandra Committee in 2003.
Both ATM and ANS activities should be corporatised if it is to be effective.
Corporatised entity must sit independently of the AAI establishment as a subsidiary will not
facilitate the necessary restructuring of the AAI. AAI restructuring is critical.
Airlines will demand performance targets in terms of lower costs, increase in overall capacity
and efficiency. Effective and decisive corporatization is essential.

Benefits of Corporatisation
A US government survey of five commercialised ANSPs Australia, Canada, Germany, New Zealand
and the UK found the following characteristics:
Operate as a business and carry out their own strategic, operational and financial decisions;
Generate and manage their own revenue to cover its costs (including raising debt if required);
Retain safety as the primary goal and and in no cases have safety incidents increased, and in
fact in 2 out of the 5 examples they have decreased;
Invest in new technologies and equipment;
Lower costs through modernisation and efficiency some have reduced prices to airlines;
Consult in a structured manner with their stakeholders.

The success achieved in markets such as the UK - where NATS has improved on virtually all
operational and financial indicators since its partial privatisation is leading to discussion about
whether to proceed to an IPO or a trade sale.
1. National Agenda: A long term, structured national plan
2. Regulator: A modern, unified, professional regulator
3. Public Sector: Decisions on the future role of PSUs are critical
4. HR & Training: World class education & training infrastructure is essential
5. Safety: Implementation of safety systems and culture
6. Liberalisation: Liberal access but level playing field for Indian operators.
7. Taxation: A less punitive fiscal regime which recognises that airlines must be viable
8. Investment: Private sector capital should be encouraged in airport development.
9. Profile: Enhanced profile and recognition of aviation within central and state government.
10. Vision: Ministry to concentrate on policy and providing strategic leadership.


10 Key Success Factors for the Next Decade
Everything that we do should be guided by what Indian aviation has the potential to be.
Aviation can play a critical role in ensuring our economic competitiveness, enabling trade and
tourism, generating millions of jobs and thereby contribute to our larger socio-economic objectives.
Indias full service airlines could become global mega-carriers serving not only the Indian market,
but as sixth freedom carriers of choice, recognised as the best in the world, hubbing passengers
over world class airports.
A vibrant aerospace sector could be established in-country, not only providing outsourcing
capabilities for international manufacturers, but also developing an indigenous aircraft.
India could provide competitive and high quality services such as MRO and education/training to
the global industry, based on our lower cost base.
All this is possible, but it will not happen automatically
It certainly will not happen if we continue with an ad hoc approach which lacks direction.
We need a transformational mindset, to have a vision and a stable policy and regulatory regime
which is consistent with achieving the long term objectives.
We must at all times maintain a national perspective which is independent of the leadership.
We cannot open the sector( 92-95), control ( 95-03), open ( 03-08) and control( 08-11). Such
frequent changes have damaged the sector significantly.
A Vision for the Future
Thank You
www.capaindia.com