Dinodia Capital Advisors September 2012

Will FDI Take-off in Aviation?

2

Executive Summary

1

While the present situation of the Indian Aviation Industry is already in blues, the Government has allowed 49% Foreign Direct Investment (FDI) to fund the dwindling aviation industry. The hopes are high, the industry, market and lobbies at the international level have given thumbs up and cheers. But for the past few years, the industry is loosing its sheen, with last financial year showing a loss of Rs.12,000 crores across the industry. Let us unveil the true opportunity that exists and analyze the challenges one has to face in entering the Indian Aviation Industry.

3

The industry currently has a cash crunch, low credibility / ratings and most players already

have an overleveraged balance sheet, which discourages banks from giving any further

funding to the private carriers Air India and Indian Airlines – the 2 state owned carriers have been able to sustain

themselves only due into generous bail-out packages offered by the Government at

regular levels The newly implemented policies however have opened the doors for the much needed

equity infusions / relaxation of norms

Where are we today?

In the past two decades, the Indian Aviation

Industry has seen several ups and downs, but has

recently started seeing some private players do

well Most Airlines are still struggling due to heavy

statutory requirements, huge airport tariffs, binding

approval requirements & ever rising fuel prices. Along with other reforms that the Government Of

India recently announced, 49% FDI in the aviation

sector (Scheduled & Non-Scheduled Airlines) has

also been permitted

4

The Aviation industry is one of the major

economic drivers for prosperity, development and

employment in a country. It handles ~2.5bn

passengers across the world in a year and

moves 45mm tones (MT) of cargo through 920

airlines, using 4,200 airports and deploying

27,000 aircraft

India is the 9th largest civil aviation market in the

world. Today, 87 foreign airlines fly to and from

India and 5 Indian carriers fly to and from 40

countries

Where are we today?Continued…

“India is an exciting market for us. We expect India’s contribution to our global (cargo)

revenues to increase from 3.5% to 5% this fiscal and 10% in the next three to four years,”

as per Nick Rhodes, Director Cargo of Cathay Pacific

India will be the 4th biggest market in terms of value for all new aircraft deliveries during the

next 20 years, according to aircraft maker Airbus

“The fleet of the Indian Commercial Airlines is expected to touch ~ 1,000 aircrafts by 2020” - Mr. Ajit Singh, Union Minister for Civil

Aviation, Government of India

5

Evolution of the Industry…….

Nine Airlines existed including Indian Airlines & Air India

>1953

1953Nationalization of all private airlines through Air Corporations Act

1995

Jet, Sahara, Modiluft, Damania, East West granted scheduled carrier status

1997

4 out of 6 operators shut down; Jet & Sahara continue

2005

Kingfisher, Spice Jet, Indigo, Go Air, Paramount start operations

2007Industry consolidates; Jet acquired Sahara; Kingfisher acquired Air Deccan

2012

Government allows direct ATF imports, FDI proposal for allowing foreign carriers to pick up to 49% stake under consideration

6

Earlier Now

The following have been revised now :Permission to invest (by FII & FDI together)

49% in equity of:

- Scheduled and

- Non-scheduled air transport services Will have to comply with relevant

- SEBI* regulations,

- FIPB**

- and other regulatory clearances A scheduled operator’s permit can be

granted only to a company with:

- The chairman and at least two-third

of its directors have to be Indian

citizens

- Substantial ownership and effective

control is vested with Indian nationals

- Registration and principle place of

business is in India

No Foreign Airlines were allowed to invest

in the equity of an aviation company in

India They were only allowed to invest in the

equity of Cargo airlines, helicopter and

seaplane services The following was allowed:

- 46% FDI (100% for NRIs) in

Scheduled Air Transport Services

through the automatic route

- 74% FDI (100% for NRIs) in Non-

Scheduled Air Transport Services

through the automatic route (up to

49%) and government route

(beyond 49% and up to 74%)

- 100% in Helicopter Services

requiring DGCA approval through

automatic route

*SEBI – Securities & Exchange Board of India**FIPB – Foreign Investment Promotion Board

What’s new to it???Government Policies

7

S No. Name of the Airlines Market Capitalization

Enterprise Value

Turnover Net Profit

1 Air China Ltd. $12.2 $23.6 $6.7 $1.10

2 Singapore Airlines 10.2 7.1 2.8 0.10

3 Ryan Air 8.1 8.8 1.1 0.00

4 Delta Airlines 7.9 18.0 8.4 0.40

5 China Southern Airlines 7.0 14.7 6.3 0.60

6 China Eastern Airlines 6.3 15.2 6.1 0.50

7 Korean Airlines 3.6 14.6 10.7 (0.3)

8 Jet Airways 0.6 3.1 3.2 (0.0)

9 Kingfisher Airlines 0.2 1.7 1.4 (0.2)

10 Spice Jet 0.2 0.2 0.6 0.00

* Bloomberg and DCA Research

Who dominates the skies today?($ in Billion)

8

Market Share Analysis of Domestic Players

IndiGo Airlines, the leading low cost airlines operates in all major cities of India although now at par with peers. It was awarded the “Best Domestic low Cost Carrier” in the year 2008. The company’s market share stood at 27.6% in 2012

Jet Airways, the second largest airlines based on its market share (25.2%), is most likely be the first local carrier to receive foreign investment after the announcement of the changes in the FDI policy

Spice Jet, India's second-biggest budget airline is the least leveraged airlines amongst its competitors which may attract the foreign investors to invest in it. Currently, the airlines holds the market share of 18.5%

Air India, the national carrier of India is slightly below spice jet by market size (18.2%) and is exempted from Foreign Direct Investment

Kingfisher Airlines, once a pride & joy of the nation, is the smallest in terms of market share (3.2%) today. The company is saddled with a high debt burden of $1.4bn. Its worsening credit status has disabled the company from securing further funds

Go-Air, another profitable airlines which is capable of attracting foreign players to invest in it has about 7.4% of the market share

9

SWOT Analysis

THREATS

STRENGTHS

WEAKNESSES

FDI move will infuse funds in the industry India has world class airports Trend of enhanced quality of in-flight

service Indian carriers now also include a range

of Boeing 747s and Airbus 340s

Excess capacity of carriers as compared to demand

Negatively impacting current tax regime in place

High fuel costs Profitability issue unaddressed High price competition acting as a

downward spiral

Scope of increasing connectivity Government is committed to revive the

Industry Reforms to relax complicated

compliances

Globally the industry is considered to be a laggard and unprofitable

Current carriers require heavy recapitalization

New government might not support current changes in 2014

OPPORTUNITIES

"How do you become a millionaire?" asked Warren Buffett, who then answered his own question: "Make a billion dollars and then buy an airline."

10

Pull of the Future

AirlineNo. of aircrafts

expected by 2017Estimated value

(Rs. Crores)

Air India 40 18,000

Go Air 22 8,100

Jet Airways 79 32,000

Jet Lite 20 7,600

Kingfisher 78 29,700

Spice Jet 68 26,100

Indigo 69 26,100

Total 376 147,600

Source: Report of Working Group on Civil Aviation for formulation of Twelfth Five Year Plan (2012-17)

“ India is light years ahead in terms of the market potential and the potential for the company (Boeing) to come together as an enterprise and grow

Q R ThomasPresidentBoeing India

“

11

Will foreign airlines be convinced…..

The aviation industry all over the world is facing the music

The ones who are successful are the ones who are state run

A ‘wait and watch’ policy is being followed, deals are being discussed behind the veils

Except for Abu-Dhabi based Etihad Airways, many foreign airlines are shying away from

openly announcing anything

Center for Asia Pacific Aviation (CAPA) has given a mixed review but have called these

policy change to be positive in the long term

The Aviation Industry’s current problem is

profitability and not investment

The Government is now committed towards

reviving the sector and reviewing the present

Tax Structure, but will that address the inherent

challenges that the industry faces?

12

Opportunities !!!

India is a land of 1.2 billion people, a growing middle class with high disposable income

and a desire to travel the world

The rail and road connectivity in India is decent, but the condition of the Indian railways

and the safety concerns of the roads provides a huge opportunity for the airlines industry

Indigo airlines which has the semblance of the very profitable US based Southwest Airlines,

is paving the way for other carriers to learn from the best and implement some of the key

strategies around low pricing, on-time arrival, high quality food which can be bought at

reasonable prices (keeps base fares low), all economy seating, good connectivity /

frequency, quick turn-around time (~20mins) and word-of-mouth advertising

If we look at the passenger traffic of the country, it has grown at a compounded annual

growth rate (CAGR) of 16% over a period of 10 years

There is a huge opportunity for foreign carriers to tap into this growing market and bring

their best practices and global expertise in running a successful airline business in India

Given India’s importance on the business map of the world and its location, it can serve as

a hub for connectivity between the US/Europe and Asian Countries as well

India is too large a market and too important an economy for the global giants to ignore,

the key question is who will land here first and take advantage of being the first mover

13

Dinodia Capital Advisors

Dinodia Capital Advisors Corporate Profile

Dinodia Capital Advisors is a Financial Consulting firm based in New Delhi, India. It assists clients across all industries grow, both organically and inorganically. The firm helps clients Raise Capital. Execute Merger & Acquisition opportunities. Restructure, Transform and Turnaround businesses. Resolve challenging problems. Take advantage of financial and strategic opportunities. Balance investor expectations. DELIVER VALUE

14

Dinodia Capital Advisors Service Offerings

Dinodia Capital Advisors Advice Clients on :

Mergers and AcquisitionWe help in conducting a robust scan of the market and selecting the most suitable buyer or seller

Capital RaisingWe advice clients on their capital needs and find them the right partner who brings more than just capital

RestructuringWe advise on business restructurings to help achieve financial, strategic and operational efficiency

India Entry StrategyWe help set up and incubate businesses in India, acting as a trusted advisors to facilitate the India entry strategy

Organizational TransformationWe work with companies to put systems, processes and people in place to help take advantage of both organic and inorganic synergies

TurnaroundsWe work closely with companies to help devise and implement a turnaround strategy by plugging the deficiencies of management, technology, capital or partnerships

Dinodia Capital Advisors Private Limited C-37, Connaught Place , New-Delhi 110001, Website - www.dinodiacapital.comTel No: +91 11 2341 7692, 2341 5272, Fax No: +91 11 4151 3666Email: dinodiacapital@dinodiacapital.com

“We at Dinodia Capital Advisors believe in building long-term relationships based on trust with our clients, providing the highest quality and timely advice, creating an environment of teamwork, developing deep expertise in our areas of operations, hand-holding clients from start to finish and caring deeply for every match that we make”