While the air traffic growth of the domestic aviation sector is experiencing a slump (from 5.4% CY08 to 5.1% in CY09), the rest of the sector is witnessing high growth. It is seeing emergence of new, high revenue-yielding sources that may lead to the ultimate survival of the aviation sector.
According to a report from consultancy major Ernst and Young, air traffic growth slowed down to single digits (5.1%) in the first quarter this fiscal while international passenger traffic registered a year-on-year increase of around 10.6%. Domestic passenger traffic showed a marginal increase of 3.4%. However, this has not stopped the other areas of the aviation sector from getting more lucrative.
According to the report, airport traffic will continue to increase (both passenger and cargo), forcing the government to build, modernise and expand the country?s airport infrastructure. This has led to the requirement of financing for development and modernisation projects. An investment of approximately 31,100 crore is expected to be generated via PPP mode. Of this, Rs 1,500 crore is earmarked for city-side development. Apart from PPP investments, the prime sources of finance are likely to comprise internal accruals of the AAI, user development fees and external borrowings.
In addition to the capital expenditure worth Rs 6,160 crore on non-metro airports, development plans include capital expenditure of 2,730 crore (during FY07 to FY14) for upgrading and improving communications, navigation and surveillance systems for air traffic management. AAI also plans to invest Rs 100 crore to up grade meteorological equipment at various airports.
Globally, the aviation sector has witnessed more than 650 mergers and acquisitions in the past decade, of which more than 200 took place between 2006 and 2008. ?The M&A activity saw an aggregate deal value of $ 33,696 million, equivalent to a cumulative deal value in five years. M&As in the sector leading to consolidation with weaker airlines being gradually replaced by mega carriers with a massive global presence,? it says.
The aviation sector has witnessed more than 35 private equity transactions from 2006 to 2008 and their investments totalled more than $ 49 billion. A select sample analysis of 5 transactions suggests the average value accretion over an average holding period of just 3.5 years is 175%.
?There is evidence to suggest that funds investing in airlines do make money. It is all about backing the right airline and getting the timing and more importantly the structure right. Any equity investments in the Indian carriers today would be considered as investing in a distressed situation? an analyst from Ernst and Young said.
One major area of growth in the aviation sector is airport retailing. As per the report, airport retail spends grew at a CAGR of more than 45% over the period CY02?07 due to increased passenger numbers and emergence of airports with dedicated space for retailing.
The current slump in the industry has forced airlines to revise their aircraft orders from conventional 180-seater wide-bodied jet liners to long-haul aircraft such as the Boeing 777-200ER in order to service longer routes. Concurrently, most airlines are trying to acquire smaller turbo prop aircraft to service domestic and regional routes. ?Airlines are now deploying smaller jets on short-haul routes, as they are more economical to fly, require lesser fuel, and therefore, arrive at a break-even, at lesser load factors, as opposed to bigger jets,? the analyst said. According to the report, the Indian aviation market is expected to be a key growth driver for global aircraft demand.
The lack of revenues in the airport segment has led to many airports diversifying their business models and looking at non-aeronautical revenues to stay profitable. The core principle behind this model is city-side development around an airport to generate non-aeronautical revenues, providing the airport operator with a cushion to offset costs and funds for future growth and modernisation. The Centre is also invoking the model and has provided the greenfield airports at Bangalore (BIAL) and Hyderabad with large parcels of land for real-estate development, to be used for generating non-aeronautical revenues.
India is expected to emerge as one of the fastest growing maintenance, repair and overhaul (MRO) markets over the next 10 years, with a potential to service a fleet of 1,000 commercial and 500 general aviation aircraft by 2020, the report says. MRO spending is estimated to rise from $440 million in CY07 to $1.2 billion in CY17, exhibiting a CAGR of 11.8%. With International players opting to offshore their global contracts and obligations to India to benefit from low manpower costs, which are nearly 50% lesser than in the US.
However, the MRO segment still faces some key issues that offset any advantages, which India offers. This thereby dwarfs the growth of the segment including taxation issues and global and regional competition. To counter these challenges, MRO providers in the country could consider setting up a combination of domestic and overseas facilities, the report suggests. The overseas facility could aim at procuring MRO work from global airlines to achieve break-even workloads as well as to gain exposure to international benchmarks and requirements. In addition, outsource its labor-intensive jobs to the Indian set up.
Other growth opportunities include cargo airlines, charter aviation, regional aviation, and ground handling. Presently, India?s charter aviation market consists of approximately 32 charter aircraft companies operating a fleet of 1?2 aircraft. The total ground-handling market in India is estimated to be approximately Rs 3,000 crore.