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Aviation

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Aviation

In these highly uncertain times, companies with exposure to Indian aviation need access to trusted, reliable and accurate research and insights. 

Our India aviation outlook predicts a very positive decade ahead  despite the underlying drivers of industry issues at present and taking into account the impact of both the first and the second wave.

Now more than ever, in these times of unprecedented uncertainty, insightful research and an accurate guide to strategic developments is essential.

Our aviation team comprises of experts in flight operations and management, maintenance, policy development and deployment, flight safety and regulatory compliances. Each of them have current active profiles in their respective spheres and hold a minimum of two decades of experience.

Our team has more than 150 years of combined experience in the field of Aviation, in all aspects across the sector including Flight Operations , Maintenance, Commercial Aspects , Management, Audit , Forecasting, Projections, Setup of new Aviation enterprise , Regulatory and Statutory Compliances. We have been offering Advice and consultancy in the following    

Strategy

Review of strategic plans of all Indian airlines

Financial and operating analysis

Data for every carrier e.g. traffic; load factors; market shares; fares; unit revenues and costs; utilisation; P&L and balance sheet analysis

Traffic forecasts

Passenger and cargo projections for domestic and international, both airline and airport-wise

Tourism

Prospects for inbound, outbound and domestic (by air)

Fleets

Induction plans, deferrals, retirements, expected new orders

Funding

Capital raising plans

Policy & regulation

Expected reforms which could impact aviation

Ancillary sectors

Outlook for cargo, ground handling and maintenance

Stay Updated Research & Insights

Meet Our Experts Aviation

Chief Advisor Aviation - Capt Puneet Bakshi is the Director of Aviation Consulting in RavenFlight Consulting. He has 30 years of experience in Military and Civil Aviation , and has functioned as senior Director and Advisor for various assignments for Govt of India , and State Govts in the field of Policy making, Masterplanning and Techno economic feasibility of various Aviation and related infrastructure projects He hold a Commercial Pilots Licence brings with him in depth experience of more than 5000 hrs of incident /accident free flying on all types of aircraft, including propellers, jets and helicopters, both Single Engine and Twins.He was in Kargil Operations of 1999 and was one of the pilots involved in saving thousands of lives in Kedarnath Disaster 2013. He is an Alumni of National Defence Academy

Capt Puneet Bakshi

Chief Advisor Aviation
– Capt Puneet Bakshi is the Director of Aviation Consulting in RavenFlight Consulting. He has 30 years of experience in Military and Civil Aviation , and has functioned as senior Director and Advisor for various assignments for Govt of India , and State Govts in the field of Policy making, Masterplanning and Techno economic feasibility of various Aviation and related infrastructure projects He hold a Commercial Pilots Licence brings with him in depth experience of more than 5000 hrs of incident /accident free flying on all types of aircraft, including propellers, jets and helicopters, both Single Engine and Twins.He was in Kargil Operations of 1999 and was one of the pilots involved in saving thousands of lives in Kedarnath Disaster 2013. He is an Alumni of National Defence Academy
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The forecast for India becoming a global aerospace hub is bright

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Besides creating thousands of jobs, the Airbus-Tata joint venture will encourage micro, small and medium enterprises (MSMEs) to make aircraft parts and spares, helping develop a robust aerospace ecosystem in the subcontinent 

 PRAKASH CHANDRA

 

 

The Indian Air Force (IAF)’s efforts to modernise its transport arm gets a leg-up with the Ministry of Defence (MoD) finalising an agreement with Airbus Defence and Space, Spain, to acquire 56 C-295 MW aircraft to replace the IAF’s fleet of HS-748s.

The air force currently operates 56 HS 748s (or Avros, as they are popularly known), mostly for communication duties, and for carrying freight and mail. Some were customised for training navigators while others doubled as pilot trainers. The Avro was first inducted into the IAF in 1964, and the State-owned Hindustan Aeronautics Limited (HAL) has since built 89 of them; the domestic carrier Indian Airlines used 17 Avros for feeder services, while the remaining were in service with the IAF and paramilitary forces.

The C-295 is a twin-turboprop transport aircraft with a high-wing, rear-loading design and has a flight endurance of up to 11 hours carrying nearly 10 tonnes of cargo and 71 troops (or 50 paratroopers). Its short take-off and landing capability on make-shift runways makes it ideal for tactical airlift operations as it can deliver supplies and troops in difficult operational areas.

Under the Rs 22,000-crore deal, India will buy 16 C-295s off the shelf and build the rest 40 locally in partnership with Tata Advanced Systems Limited (TASL). Of the 40 planes made in India, the contract stipulates that 16 should have ‘30 percent indigenous components’, with the other 24 aircraft having ‘60 percent locally procured and produced items’.

The Airbus-TASL collaboration, which many observers describe as ‘historic’, is exclusive in more ways than one. The TASL is the first private company in India to manufacture a complete aircraft. This burnishes the ‘Make in India’ programme and opens up defence manufacturing — once the prerogative of defence public sector units (PSUs) — to private industry in a big way. As Ratan Tata, Chairman Emeritus of Tata Sons, tweeted: “This will create a domestic supply chain capability to international standards, which has never been undertaken before.”

Besides creating thousands of jobs, the joint venture will encourage micro, small and medium enterprises (MSMEs) to make aircraft parts and spares, helping to develop a robust aerospace ecosystem in the subcontinent. To ensure global production standards, a statement issued by the MoD makes it clear that the TASL and its suppliers will be accredited with the National Aerospace and Defence Contractors Accreditation Program (Nadcap), and develop “specialised infrastructure in the form of hangars, buildings, aprons and taxiways.”

The IAF can heave a sigh of relief at the end of one of the most protracted negotiations in defence acquisition ever undertaken. For years, the air force tried to find a successor to the Avro which was never really suited for military transport. For instance, its original door had to be modified for loading large cargo, and for para-dropping troops and supplies without hitting the empennage. The HS-748’s performance was also questionable at hot and high airfields, and the IAF had to eventually turn to the more powerful and tail-loading Russian An-32 that could handle high altitude operations.

As it happened, in 2009, the MoD was finally convinced of the need to replace the HS-748. It still took another four years before the MoD floated a tender inviting international aerospace firms to identify Indian partners to make an aircraft in India through transfer of technology (ToT). After the initial round of bidding, in 2013, Airbus Military’s C-295 and the Italian Alenia Aermacchi’s C-27J emerged as the only contenders that could meet the ToT conditions.

These two companies then fought a price war for the contract in which Indian industry leaders such as the TASL, Reliance Industries and Larsen & Toubro showed keen interest. Airbus came out the winner, and it partnered with TASL, which has in the past teamed up with aerospace majors such as Boeing and Lockheed Martin.

The Airbus-Tata venture promises to be a game changer in India’s aerospace sector as the competition excluded the State-run Hindustan Aeronautics Limited (HAL), which used to corner big defence deals. The twist in the tale was provided by the IAF which lobbied hard to get the Defence Acquisition Council — which oversees procurement processes in the armed forces — to agree to an open competition.

The idea was to bring India’s private sector into aerospace manufacturing by promoting licensed manufacture in partnership with foreign vendors. HAL could not participate since the tender required international vendors to work exclusively with a private sector Indian company. HAL, in any case, has its hands full with projects like the SU-30MKI production, and upgrades to the Mirage 2000, MiG 29 and Jaguar fighter jets.

This is, therefore, a good opportunity for the industry to junk its poor research and development record, and prove its reliability by timely execution of projects, unlike the PSUs that are known for delays and cost overruns. Considering the C-295 is not just suitable for the air force, but for civilian users as well, these developments augur well for India to become a global aerospace hub sooner rather than later.

Prakash Chandra is former editor of the Indian Defence Review. He writes on aerospace and strategic affairs. 

Views are personal and do not represent the stand of this publication.

PRAKASH CHANDRA is former editor of the Indian Defence Review. He writes on aerospace and strategic affairs. Views are personal.

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Defence and Aerospace

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Defence Public Sector Undertakings (DPSUs) that have not delivered as per expectation have traditionally dominated the Indian defence market. As a result, India imports an estimated 70% of its defence needs. The acquisition cycle has also been long blamed for being inefficient resulting in delayed or cancelled contracts. Consequently, the Indian defence forces suffer from an inventory shortfall and operate legacy equipment. While the call for defence reforms has been a long-stated need, the effect of the faceoff with China and the COVID-19 pandemic’s economic impact have now seen the government change its stance. The Defence Acquisition Procedure 2020, along with Atmanirbhar reforms, aims to increase private sector participation with a view to hold DPSUs to greater accountability.
The Indian Defence market represents accessible cumulative capital and revenue acquisition opportunity of $306.95 billion from 2021 to 2030. India aims to increase its defence production output to $25 billion, including exports of $5 billion. Simultaneously, the FY 2021-2022 defence budget’s capital allocation was hiked by 18.7% to provide for modernisation.
The Indian defence market is at the cusp of a revolution, with the introduction of policy changes that promise to reduce program delays and speed up acquisition. Provisions such as allowing leasing of equipment and waiver of offset requirements in government-to-government deals also hold promise in the upcoming decade. The Ministry of Defence (MoD) has also set a target of doubling defence production and increasing defence exports by 5 times by 2025. To ensure that these goals are achieved, the MoD is pushing for enhancing private-sector participation to create a level-playing field and is also taking other steps such as corporatisation of Ordnance Factory Board. Successful implementation of the envisaged measures will have a long-lasting effect on the defence industry and the competitive landscape.
A great need is felt now of involving Defence Subject Matter Experts who have adequate insight into the complex requirements of this sector and future demands that need to be met. It is this gap that RavenFlight consulting seeks to address, as we have very seasoned and senior experts in the sector of Defence and Aerospace , who understand in depth the industry and can contribute immensely as key advisors for companies that seek to enter this space as manufacturers or service providers.

Link for Article under research and news :

https://www.moneycontrol.com/news/opinion/the-forecast-for-india-becoming-a-global-aerospace-hub-is-bright-7512131.html

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Ticker Tape by TradingView

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Aerospace and Defense

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Aerospace Sector Overview 

Prior to the onset of the global COVID-19 pandemic, India’s civil aviation sector experienced rapid growth and was the world’s third largest and fastest growing market in terms of domestic tickets sold.  According to the International Air Transport Association (IATA), India’s passenger growth was forecast to reach 442 million by 2035, with the aviation industry supporting 19.1 million jobs and contributing $172 billion to the country’s GDP.  Boeing estimated that India would need an additional 2,500 passenger aircraft to meet this rapidly growing demand. 

India’s Vision 2040 strategy document outlines development needs for the sector, including a five-fold increase in the number of airports needed to handle over a billion trips a year.  The Airports Authority of India (AAI), a nodal authority under the Civil Aviation Ministry, is responsible for creating, upgrading, maintaining, and managing civil aviation infrastructure in India, including airports.  AAI owns 125 airports and is one of the largest airport operators in the world.  India currently has 450 airstrips, though only 100 are considered fully operational.  Under its asset monetization through public private partnership (PPP) model, AAI has an ambitious plan to privatize the airports under its purview.  It will soon launch the third stage of its airport privatization process (which will include 6-10 airports) under the new approach of bundling a profitable airport with a loss-making one in the sales process. 

The Ministry of Civil Aviation (MoCA) is the primary aviation regulatory authority and it oversees key government bodies such as AAI, the Directorate General of civil aviation (DGCA), the Bureau of Civil Aviation Security (BCAS).  It also publishes the National Civil Aviation Policy (NCAP). 

The NCAP’s objectives include:  promoting rapid growth of the sector, improving the ease of doing business, advancing regional connectivity, and opening opportunities for additional players in the market to meet India’s largely untapped and growing demand.  In order to address the supply-demand gap in India, a key component of the NCAP is “Ude Desh ka Aam Naagrik” (UDAN), an initiative that includes a Regional Connectivity Scheme (RCS) to add routes and flights throughout the country.  In May 2021, MoCA announced the launch of 347 RCS routes under UDAN.  This includes 28 seaplane routes and 14 water aerodromes in the states and union territories of Gujarat, Assam, Telangana, Andhra Pradesh, the Andaman & Nicobar Islands, and Lakshadweep.   

To strengthen international route development, in 2018, MoCA released a draft International Air Connectivity scheme to promote international connectivity with Asian countries.  Likewise, in discussions held by the U.S. Commercial Service with Indian airlines, the prevailing view is that enough demand exists to expand the number of U.S.-India routes, both direct and indirect.  One airline CEO noted that connections to key hubs like Dallas-Fort Worth, Atlanta, and Boston have potential, and that existing routes like San Francisco, Chicago, and Newark still provide room for growth.  The NCAP also strives to improve code share agreements.  Designated carriers can now enter international and domestic codeshares with foreign carriers if the codeshares are in accordance with existing Air Service Agreement provisions.    

The pandemic halted the positive momentum in both airport infrastructure development and privatization, as well as growth potential for new routes.  Though the civil aviation sector globally has seen dramatic impacts from the pandemic, the situation was even worse in India, which reeled from two major COVID-19 outbreaks that decimated the economy, most recently in the Spring/Summer 2021.  Amid the uncertainty about how long the pandemic will last and fears of future outbreaks, it remains unclear whether Indian Government initiatives will be enough to instill much-needed confidence in the industry.  The Center for Asia Pacific – India (CAPA), in its Advisory Indian Airline Outlook FY2022 report stated, “Airlines are estimated to need closer to $5 billion of recapitalization in FY2022 just to survive, including requirements generated through the course of FY2021.  Of this, it is estimated that around $1.1 billion is in the pipeline in the form of IPOs, Qualified Institutional Placements (QIPs), which are a way for listed companies to raise capital without having to submit legal paperwork to regulators, and other instruments.  The Association of Private Airport Operators has sought the Indian Government’s help, highlighting that the most recent wave of the pandemic reduced passenger traffic around 10 to 25 percent compared to pre-COVID levels, and this has further slowed recovery in the sector.  Referring to commercial aviation as one of the hardest-hit sectors, in a 2020 market report, McKinsey noted that “it may take years to recover from production and supply chain stoppages.”  Further, travel restrictions due to the pandemic may constrain growth and recovery of this sector.  

The other areas of concern are: capacity constraints (including an insufficient number of airports to meet demand), difficulties in attracting greenfield investment in airports due to a lack of profitability, construction delays, procurement process ambiguity, lengthy environmental reviews, and land acquisition issues.  Domestic airlines also continue to struggle due to hyper-competitive pricing, high fuel costs, and volatile currency rates.  These market challenges led to the collapse of Jet Airways in April 2019. 

On the investment side, FDI of up to 100 percent is allowed for civil aviation infrastructure development projects, while any airline stake greater than 49 percent requires government approval.  The most highly publicized recent privatization of an airline concerns the national carrier, Air India.  According to a recent announcement by MoCA, the Indian Government’s privatization of Air India will be completed by December 2021. Two Indian firms have bid – Tata Sons Private Limited (Tata Group) and SpiceJet.  The second wave of the pandemic, which hit India in the summer of 2021, delayed the privatization given the financial blow it has dealt to India’s national carrier. 

India is one of the few countries in the world with an advanced space program.  Headquartered in Bengaluru, the Indian Space Research Organization (ISRO) under the Indian Department of Space executes all space programs.  In May 2020, the Indian government announced access for the Indian private sector to its space activities and programs, reflecting a paradigm shift in policy.  India’s recent initial steps toward privatization may create opportunities for U.S. commercial space companies.  Several Indian start-ups are developing innovative space systems, designing launch vehicles, and manufacturing small satellites to include on future Indian launches.  As the Indian private sector gears up to play a greater role in Indian space programs, its indigenous industry will look toward international technology solution providers to develop and upgrade its capabilities.  This could create opportunities for U.S. suppliers in space-related industry sectors.  

Partner Agencies. 

The U.S. Federal Aviation Administration (FAA) Aircraft Certification Service and the Indian Directorate General of Civil Aviation (DGCA) maintain a “Bilateral Aviation Safety Agreement with Implementation Procedures for Airworthiness” (BASA IPA) to facilitate the exchange of aviation products.  The FAA and India’s civil aviation authorities continue to explore opportunities to expand bilateral cooperation.  After protracted negotiations, the BCAS granted U.S. carriers the right to perform their own ground handling services, in line with the U.S-India Open Skies agreement. 

The U.S.-India Aviation Cooperation Program (ACP) is a public-private partnership between the U.S. and Indian governments, providing a forum to advance aviation cooperation and develop business opportunities for its U.S. member companies.  The ACP was established in 2007 with the support of the FAA, the Transportation Security Administration (TSA), the U.S. Trade and Development Agency (USTDA), the U.S. Department of Commerce, the U.S. State Department, and other U.S. government agencies.  The ACP supports U.S. exporters by working directly with Indian aviation authorities to identify and execute projects that encourage collaboration between U.S. and Indian stakeholders in aerospace technology and best practices.    

The TSA cooperates with MoCA and BCAS through bilateral Aviation Security Working Group meetings.  TSA and BCAS share information related to risk assessments, capacity development, air marshal training, and other security issues through a bilateral Sensitive Security Information (SSI) Memorandum of Agreement signed in 2013.   

Units: $ million  

HS code: 880000   

2018   

2019                 

2020 

 

2021 (estimated) 

Government budget allocation  

645  

541 

555 

442 

Total Exports  

1,716 

1,424 

1,060 

954 

Total Imports  

7,615 

9,971 

4,699 

5,068 

Imports from the United States  

2,587 

1,456 

1,182 

Unavailable 

Number of Passengers (Indian domestic)  

140.33 million 

 141.20 million 

63 million 

75 million 

Data Sources:  Ministry of Civil Aviation, Ministry of Commerce & Industry, Directorate General of Civil Aviation, USDOC, Bureau of the Census – Foreign Trade Division   

Disclaimer:  *Estimated total export and total import figures are based in negative and positive growth trends (Source:  Ministry of Commerce & Industry, estimation by Industry experts and the pandemic situation).   

Leading Sub-Sectors  

Maintenance Repair and Overhaul (MRO)

India’s growing fleet of aircraft will demand an increase in maintenance services and facilities.  Approximately 90 percent of India’s MRO activity occurs outside India, predominantly in Sri Lanka, Singapore, and Malaysia.  India continues its efforts to develop the MRO sector for both domestic needs as well as to serve as a center for MRO services in the region.  Its location between Europe and Southeast Asia and proximity to the Middle East is an advantage.  The Indian government has introduced initiatives like the Goods and Services Tax (GST) Council to re-work the GST structure for aircraft MRO, reducing the tax from 18 percent to five percent, and also providing full tax credit benefits on inputs.  Policy reforms under consideration, such as the inclusion of aviation turbine fuel in the GST, could create opportunities for U.S. companies to address India’s efforts to develop an MRO ecosystem.  The U.S. Commercial Service’s 2021 market intelligence report on the MRO sector provides additional details.

Safety and Security

In connection with India’s efforts to develop greenfield and brownfield airports across the country, airport and aviation safety and security systems are top priorities.  In 2018, the DGCA successfully passed an FAA International Aviation Safety Assessment (IASA) based on achieving International Civil Aviation Organization (ICAO) standards for civil aviation regulatory safety oversight.  With the growth of the civil aviation sector in India, route expansions planned by carriers in the market, the development of MRO facilities, and airport infrastructure development, there are a wide range of opportunities for safety and security equipment and solutions throughout the aviation industry.  

Navigation and Air Traffic Management Systems

Per ICAO’s last safety audit in 2018, AAI meets the requirements of the Global Aviation Safety Plan.  AAI continues to upgrade and modernize air navigation services.  With the launch of the GPS Aided GEO Augmented Navigation (GAGAN) system, India became the fourth country in the world to implement satellite-based navigation systems and began utilizing satellite-based ADS/B services in 2019.  With the growth of greenfield and brownfield airport development across India, radar systems and other air traffic management systems are also in demand.  In particular, India’s international runways have not fully met the ICAO standard of 100 percent compliance for performance-based navigation equipage. 

Human Resource Development: 

Training, skilling, and human resource development is a key government and industry priority.  The supply of skilled labor has not kept pace with the industry’s rapid growth.  There are opportunities for education and training service providers in all aspects of the aviation industry.  In July 2021, AAI announced eight new Flying Training Academies under the liberalized Flying Training Organization (FTO) policy.  India’s existing aviation universities, including the Rajiv Gandhi National Aviation University (RGNAU) and the Indian Institute of Aeronautics  (IIA) are exploring potential opportunities for international collaboration.  India’s National Skill Development Council has a separate entity, the Aerospace and Aviation Sector Skill Council (AASSC), to identify needs and explore collaboration to develop educational curricula.  

Helicopters 

There are approximately 90 helicopter operators in India, including non-scheduled operators, private companies, state governments, and public sector utility companies, comprising a fleet of 280 turbine helicopters—a fraction of the 14,000 helicopters in service in the United States.  These are deployed for the transportation of Indian Government officials and VIPs, corporate travel needs, air ambulance services, chartering, news services, tourism, film shoots, and aerial surveys.  With 42 helicopters in its fleet, Pawan Hans Limited is the largest single operator nationwide.  Despite challenges such as limited infrastructure, high customs duties on spare parts, and the scarcity of helicopter training institutes, this segment holds potential for U.S. companies seeking to enter the market or collaborate with existing firms.  With increased interest in emergency medical evacuation (EMS), disaster management missions, and search and rescue services, opportunities for U.S. firms are set to increase as the segment grows.     

Unmanned Aircraft Systems (UAS): 

Though this segment is still in its infancy in India, and standards for the regulation of the sector were only finalized in August 2021, this sector nonetheless holds growth potential.  The DGCA recently allowed ten consortia to carry out “beyond visual line of sight” (BVLOS) UAS projects in designated airspaces across the country.  In 2018, the DGCA released the first drone regulations enabling visual line-of-sight (VLOS) daytime-only operations under 400 feet.  The Digital Sky Platform is an online system to register pilots, devices, and service providers and implement a “no permission, no takeoff” (NPNT) rule.  It also lists the latest policies on beyond-VLOS operations and the delivery of payloads.  In March 2021, 34 green zone sites for No-Permission-No-Takeoff (NPNT) compliant UAVs were approved.  Health experts in India are testing out UAVs to deliver vaccines to isolated communities to help tackle the country’s COVID-19 crisis.  There are also opportunities linked to the safety and security sector. 

General and Business Aviation

As with its helicopter fleet, India similarly has few small fixed-winged aircraft for civil and commercial use.  Industry experts report that international private and business jet operations have seen an increase in demand during the pandemic.  This may be attributable to a greater need for health precautions, including social distancing.  According to experts, the segment may experience an increase in the number of charter routes from domestic airlines and an increased demand for aircraft. 

Opportunities  

Leading multinational aircraft original equipment manufacturers (OEMs), including Boeing and Airbus, consider India an important market with its high demand for aircraft, parts, and equipment, strategic geographic location, engineering expertise, and competitive labor costs.  Leading OEMs are partnering with Indian suppliers and small and medium sized enterprises to fulfill needs for tier-1 suppliers and to set up an aerospace industry ecosystem within the country. 

As India recovers from the pandemic, there are several areas in which the civil aviation sector is experiencing positive momentum, including airport privatization, greenfield and brownfield airport infrastructure development and related technology needs, expansion of MRO facilities, and pilot and staff training facilities.  These should provide opportunities for U.S. exporters in a wide range of subsegments.  Experts suggest that the post-pandemic rebound will see the Indian civil aviation sector return to pre-2020 levels within several years.  Prior to the pandemic, demand for airlines, aircraft, and airport facilities outstripped supply.  The demographics and sheer scale of the market mean that India cannot be ignored by U.S. suppliers.  However, with the pandemic continuing to take a toll on the Indian market, and the potential and timing for a rebound still uncertain, U.S. exporters are encouraged to reach out to the U.S. Commercial Service for a better understanding of the fast-evolving situation. 

As India builds greenfield and brownfield airports, there will be growing opportunities for U.S. companies in airport planning and development, energy efficient and zero-carbon emissions airports, safety and security products (including cargo and passenger scanners), and innovative technologies like touchless airport and passenger ticketing and baggage management systems.  Some projects worth noting in India’s expansion includes Delhi’s Indira Gandhi International Airport, which is currently undergoing an expansion to increase its cargo and passenger handling capacity.  The Noida International Airport in Jewar, Uttar Pradesh (UP), will serve as a second airport for the National Capital Region (New Delhi).  When completed, this airport will boast five runways and MRO facilities, and will be India’s largest.  The Uttar Pradesh Government also announced the Maryada Purushottam Shriram International Airport project in Ayodhya.  Work is also in progress for greenfield airport developments in Mumbai, including the Navi Mumbai International Airport, and in Goa.  In Northeast India, AAI plans to develop Guwahati, Agartala, Imphal, and Dibrugarh as regional air hubs.  Additional second and third tier airports are planned for South India, including the Orvakal Airport in Kurnool, Andhra Pradesh and the Sabarimala Airport in Kerala.  

The MRO sector also offers opportunities for U.S. exporters in engine spare parts and components; workshop tools; testing equipment; inspection equipment; auxiliary power units (APU); and maintenance training services.  With the projected increase in fleet size in the coming years, engine maintenance needs will grow rapidly.  The Indian Government is trying to finalize essential policy and tax reforms to create an ecosystem for the development of MRO facilities for both civilian and military aircraft.  Major Indian MRO players, including Air India Engineering Services Limited (New Delhi), GMR (Hyderabad), and Air Works India (Hosur), are taking steps to partner with global companies as they move toward upgrading their maintenance capabilities with state-of-the-art equipment.  

For more information, please contact U.S. Commercial Service Industry Specialist Nisha Wadhawan  

Defense Industry Overview 

According to the Stockholm International Peace Research Institute (SIPRI), the five largest military spenders in 2020 were the United States, China, India ($72.9 billion), Russia, and the United Kingdom; together these accounted for 62 percent of global military expenditures.  India has the third largest armed forces in the world and plans to spend billions of dollars on defense acquisitions over the next several years.  Following Russia, the United States is India’s second largest defense supplier.  Though the global pandemic has impacted supply chains in the Indian defense sector and delayed or temporarily halted procurements, the sector has likely felt a lesser impact than other heavy industries in India.  

Though there are efforts to develop India’s indigenous defense sector, the country’s defense manufacturing sector is underdeveloped, and India remains one of the most attractive markets globally for foreign technological collaboration.  This sector is a component of the Indian government’s drive to increase indigenization and curb imports.  Additionally, India recently made changes to its offset guidelines to drop a clause requiring foreign firms to invest 30 percent of the contract value in the Indian manufacturing sector for government-to-government agreements (G2G) or single vendor contracts.  These changes were generally well received by international suppliers. 

The U.S.-India defense trade relationship has been on a positive trajectory following the U.S. designation of India as a Major Defense Partner in 2016.  In 2018, the U.S. Department of Commerce announced Tier 1 Strategic Trade Authorization status (STA-1) for India, enabling a license exception for many U.S. exports to India subject to the Export Administration Regulations (EAR).  The 2018 Communication Compatibility and Security Agreement (COMCASA) between the United States and India facilitated interoperability and enhanced information and intelligence sharing between the countries.  The Indian and U.S. armed forces continue to expand their schedule of bilateral and joint military exercises, further strengthening our bilateral partnership.   

Over the past ten years, U.S. companies have had increasing success in the Indian defense market, and India has procured over $21 billion in equipment.  Examples of recent procurements include Boeing Apache and Chinook helicopters, P-8I maritime surveillance aircraft, C-17 heavy transport aircraft, Lockheed Martin C-130 aircraft, Sikorsky MH-60R multi-mission helicopters, SIG Sauer assault rifles, and BAE M-777 howitzers.  India also sources subsystems, components, and OEM parts from U.S. suppliers.  Major U.S. defense companies, many of which have expanded manufacturing operations in India, are laying the foundation to create additional opportunities for second and third tier suppliers.  

The Indian government has strong ambitions to expand indigenous production in the defense sector, with the goal of achieving manufacturing turnover of $25 billion in the next five years.  In May 2021, India’s Defense Ministry imposed restrictions on the importation of 108 military weapons and systems, including next-generation corvettes, airborne early warning systems, tank engines, and radars.  The restrictions will be progressively phased in between December 2021 and December 2025.  India will procure all restricted items from indigenous sources, according to the Defence Acquisition Procedure (DAP) 2020.  This is the second such defense “negative import list,” to be issued by the Indian government.  The first restricted 101 items.  These import restrictions will likely impact current deals underway between U.S. suppliers and Indian buyers.   

The Indian government’s initiative to expand indigenous defense manufacturing demonstrates the country’s determination to become more self-reliant in the sector.  However, there will remain demand for innovative, next-generation technologies in a wide range of sub-sectors.  It is worth noting that certain types of defense equipment which are not manufactured in India are exempted from basic customs duties.  The Indian Government’s structured approach to develop indigenous manufacturing is outlined in the Defence Production and Export Promotion Policy 2020 (DPEPP).  The DPEPP features key components of the draft Defence Production Policy of 2018, which promotes public and private sector production and encourages medium and small enterprise participation in defense production.  Two Defense Industrial Corridors in the Indian states of Uttar Pradesh and Tamil Nadu were announced in the 2018-2019 Budget, which includes incentives to attract manufacturers and suppliers.  Though foreign manufacturers have not yet shown interest, local leading manufacturers, notably Tata, plan to invest. 

The U.S. Embassy’s Office of Defense Cooperation (ODC), in close cooperation with the U.S. Commercial Service (CS), assists with defense (foreign military sales) and commercial (direct commercial sales) advocacy cases on behalf of U.S. suppliers (for those firms meeting the requisite 51 percent U.S. export content requirement) bidding on Indian government procurements.  Both ODC and CS coordinate with the U.S. Department of Commerce’s Advocacy Center in Washington, DC on these efforts.  CS’s Advocacy program is a government-to-government (G2G) initiative intended to promote fairness in the tendering process.  It is worth noting that the Indian government tendering process offers little flexibility in terms and conditions and product specifications, often awarding tenders to companies with lowest price (L1) quotes. 

India’s 2021 Defense Budget is $66.95 billion, an increase of 1.45 percent from 2020.  However, the budget includes a 10 percent increase in capital procurement, mainly to secure important platforms such as multi-role fighter aircraft, light combat aircraft, future infantry combat vehicles, and unmanned aerial vehicles.  With import restrictions now in place for 209 defense items, orders of approximately $56 billion will be offered to India’s domestic industry in the coming five years.   

In 2016-2017, the MOD made several modifications to institutionalize, streamline, and simplify procurement procedures to promote India’s defense sector.  These procedures were revised in the DAP (DAP 2020), an attempt by the Ministry to refine capital procurement procedures with a focus on self-reliance.  In an effort to attract foreign OEMs to establish manufacturing sites in India, the DAP 2020 increased the FDI limit to 74 percent and encouraged foreign  manufacturers to establish operations in the Defense Industrial Corridors in Uttar Pradesh and Tamil Nadu. DAP 2020 included five procurement categories: (1) Buy; (2) Buy and Make; (3) Make; (4) Leasing; (5) Design and Development/Innovation.  These categories included sub-categories listing details on indigenous content. The Strategic Partnership Model can be pursued separately, in sequence, or in tandem, with any of these five categories. Candidates for this category are selected early in the planning process and are therefore pre-positioned ahead of all other categories.  

The Indian defense sector has traditionally been dominated by state-owned enterprises, known as Defense Public Sector Undertakings (DPSUs) and Ordnance Factories that report to the Ordnance Factory Board (OFB).  These DPSUs and ordnance factories provide roughly 90 percent of total domestic defense manufacturing output, according to industry sources.  While the Indian DPSUs and private sector OEMs produce combat aircraft, naval vessels, heavy trucks, and other military equipment, they invest little in research and development.  As a result, India’s defense industrial base and technologies are underdeveloped, and Indian industry has difficulty meeting the demand for modern and next-generation equipment.  As a result, opportunities remain for international suppliers to provide innovative technologies solutions and platforms.  The government has plans to reduce its shareholding in DPSUs in coming years and slowly transition them toward private entities.  As an example, in June 2021, India announced a major overhaul to the OFB that would transition it to function more as a private entity. 

Leading Sub-Sectors  

Land Systems

In June 2021, the Indian Army issued a Request for Information (RFI) for its long-awaited Future Infantry Combat Vehicle (FICV).  The procurement will be for approximately 1,750 FICVs under the “Make in India” initiative that, in phases, would replace the existing T-72 tank and light tanks.

Maritime Systems

With a coastline of more than 7,800 kilometers, the Indian Navy faces a significant challenge to secure the country’s maritime interests.  As such, the demand for maritime patrol aircraft is expected to grow, and the Indian Navy is planning to build more submarines and begin construction on a second indigenous aircraft carrier.  The Navy has also expanded requirements for fixed and rotary wing aircraft and unmanned aerial systems (UAS). 

Air Systems and Air Defense

There is demand under “Make in India” initiative for indigenous co-production of aircraft.  The MoD also hopes to expand and further develop India’s rotary wing and UAS fleets.  

Maintenance, Repair, and Overhaul (MRO):  With aging platforms and equipment used by all the Indian armed services, as well as planned procurements of new advanced systems and platforms, the demand for robust MRO capabilities located in India is projected to increase.  The leading Indian MRO companies and DPSUs are exploring opportunities to collaborate with international players to acquire state-of-the art technologies to maintain the latest platforms.  

Defense Electronics

The Indian defense electronics sector will grow to an estimated $70 billion in the next 15 years, according to Indian Infrastructure magazine.   

Opportunities  

Notwithstanding the COVID-19 pandemic and aggressive inclination towards indigenous manufacturing, India’s defense market continues to be promising for U.S. suppliers.  The shared interest of the U.S. and India, which include issues such as counter-terrorism cooperation, maritime security, and weapons proliferation monitoring, makes India an important partner in the Indo-Pacific region.  Bilateral defense cooperation has been elevated with the United States designating India as a “Major Defense Partner,” opening opportunities for India to procure sensitive defense technologies.  As noted in the September 2021 KPMG report, “The Road Ahead,” the U.S. share in India’s total defense imports increased to 14 percent over 2015-2019 as compared to 1960-2005, during which it was negligible.

Considering the push towards “self-reliance” in the defense sector, the Indian government is promoting joint ventures in hopes of driving more international OEMs into the market.  For example, Tata and Mahindra have both entered into joint ventures with U.S. defense firms.  Lockheed Martin and Tata Advanced Systems (TASL) announced an agreement in 2018 to produce F-16 wings in India for export, and Lockheed Martin is working with Tata as a strategic partner to offer the F-21 fighter aircraft to the Indian Air Force.  In 2020, Lockheed signed a memorandum of understanding (MoU) with Bharat Electronics Limited (BEL) to explore industrial opportunities in the F-21.  In 2018, Boeing announced a partnership with Hindustan Aeronautics Limited (HAL) and Mahindra Defense Systems (MDS) to offer the F-18 Super Hornet.  Major Indian OEMs and tier-two companies seek U.S. suppliers and partners.  These companies include Reliance Group, Adani Group, Larsen and Toubro, and Kalyani Group.

While the Indian defense market offers substantial potential, India is a challenging market that requires patience and persistence.  U.S. suppliers must be cognizant of the Indian propensity to drive pricing down.  As mentioned previously, many procurements are driven by lowest cost, L1 bids.  Defense procurement timeframes are long, have limited transparency, and are faced with challenging regulations.  Substantial payment delays are also not uncommon.  It is strongly advisable to find reliable partners on the ground who can help mitigate these issues and facilitate deals.   

For more information, please contact U.S. Commercial Service Industry Specialist Nisha Wadhawan.

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Indian aviation faces massive disruption on the road out of COVID

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Recovery will not be easy and will require critical strategic decisions to be taken by the industry and government

Indian aviation is expected to confront a series of challenges in the coming weeks and months, each of which could have a serious structural impact. The risks and implications are arguably under-estimated at a policy level.

Grounding operations was relatively straightforward, but the road out of the lockdown is far more complex. The financial and operational challenges associated with the resumption of services are potentially so significant, that some carriers may choose to remain grounded, whilst others may not survive.

Assuming that air services resume from 01-Jun-2020, the industry will by that stage have been grounded for over two months, after having already experienced a sharp decline in traffic in March. The four months from June to September will be a critical phase. This includes the weakest period of the year for air travel in India even at the best of times, let alone in the aftermath of a once-in-a-century crisis.

To compound the situation, the economy will be in a battered state, and several challenges that are not visible during the lockdown will only become apparent once the services resume. While the industry has been in shutdown and the economy in a state of suspense, it may have been possible to defer certain obligations. But once business starts up again, airlines will once again be confronted with reality.

As our analysis in this document shows, some carriers may even struggle to cover their variable costs up until the end of 2QFY2021 due to market conditions and the constraints imposed by possible social distancing requirements. If that is the case, airlines will have experienced more or less six months with little or no contribution to fixed costs. That will be crippling for many carriers and other aviation businesses.

The government and industry will need to collaborate to rethink and redesign the aviation to emerge from the crisis and move towards a sustainable future

The current COVID crisis must be used to initiate structural changes for the long-term viability of the sector. The industry will need to make some hard choices. Despite carriers being pushed to the limit, most airline promoters have shown themselves to be either unable or unwilling to recapitalise their businesses.

Perhaps this is due to uncertainty about the way out, or the possibility of another major shock down the road. Will it be a case of throwing good money after bad?

Now is the time for promoters to decide whether they wish to remain in the business. And if so, they need to commit, and business models need to change. Most airlines in India are over-reliant on sale-and-leaseback margins and advance sales to generate cash. The pursuit of aggressive growth without the balance sheet to support such a strategy will inevitably come undone whenever the next shock hits.

Airlines will need to restructure their businesses to become leaner and reduce costs, whilst also increasing the strategic deployment of technology and analytics to enhance revenue and improve efficiency. Airports will also need to become less top-heavy, reduce manpower, focus on training, invest in technology and better understand the passenger.

The government must adopt a fresh perspective on the appropriate policy and regulatory framework, as well as institutional infrastructure. There is a need for NCAP 2.0.

The original National Civil Aviation Policy (NCAP) released in 2016 was designed for an environment of growth. Post-COVID there is a need for NCAP 2.0 – possibly as an interim measure – to support sectoral emergence from the crisis through the stages of survival, stabilisation, recovery and eventually expansion. Key issues that will need to be considered in framing this policy include:

  • Why do airlines fail in India?
  • How can corporate governance be strengthened?
  • How is it that airlines with weak balance sheets are able to pursue aggressive growth? Can we regulate minimum cash reserves?
  • Why do we celebrate profitless growth rather than sustainability?
  • How can the fiscal environment be made less punitive?
  • Was it necessary to change the model of economic regulation of airports to a per passenger fee, just when the till framework was stabilising?
  • How can we ensure that bids for airport operator concessions are rational and do not compromise the returns of the entire downward value chain? Excessive revenue share ultimately only serves to subsidise the AAI’s losses rather than benefit the exchequer.
  • What needs to be done to unleash the strengths of the Airports Authority of India? If allowed, it has the ability to become a truly independent airport infrastructure and management group even without revenue share from private airports.
  • How can the Bureau of Civil Aviation Security be recast for today’s environment, by making it more technology-focused rather than people-focused?
  • What measures will enhance the competitiveness of the MRO sector to be able to reduce costs for Indian airlines and to generate employment in-country?
  • How can the ground handling sector be streamlined?
  • What can be done to position air cargo and express as strategic components of a modern and globally-integrated Indian economy?
  • Why have air navigation services not yet been corporatised?
  • How can training and education infrastructure be incentivised?
  • How can we strengthen the DGCA to become an independent, professional regulator along the lines of the UK Civil Aviation Authority?
  • What is required to build policy-making capacity?

Since 2014 the Ministry has initiated several major initiatives in the sector such as NCAP, UDAN, and relaxation of the 5 year/20 aircraft rule. And it has demonstrated a strategic determination to privatise Air India and non-metro airports.

In continuation of this positive approach, COVID represents the best opportunity to implement step changes to remove all barriers to growth and viability.

And, in addition to the steps that the government takes with respect to the Indian market, it must encourage the adoption of a global, coordinated strategy to ensure a harmonisation of COVID-related measures across all countries. If the aviation industry has to navigate a patchwork of regulations for international operations, the costs and complexity will further damage any recovery.

If the imminent Supreme Court ruling on passenger refunds goes against the airlines – as is likely – it could trigger the need to fund USD300 million of domestic refunds. This will be the next big test for the sector.

After domestic and international air services in India were grounded from 25-Mar-2020, Indian carriers informed passengers that payment received for travel on flights that had been cancelled as a result of the lockdown, would be held in credit for a period of 12 months rather than being refunded.  CAPA has consistently taken the position that this is unfair for consumers.

In fact, the airlines’ stance is in contravention of the Civil Aviation Requirement (CAR) on the refund of airline tickets (dated 22-May-2008), as well as the Passenger Charter of 2019. The CAR states that refunds must be processed within the following timeframes:

  • immediate (when the ticket is paid for by cash);
  • 7 days (when paid by credit card);
  • and 30 working days (when purchased through a travel agent).

The CAR & the Passenger Charter further clearly state that “the option of holding the refund amount in credit shell by the airlines shall be the prerogative of the passenger and not a default practice”.

The DGCA has not issued a formal notification stating that these rights have been suspended due to the emergency conditions prevailing. It did however release a circular instructing airlines to issue cash refunds for reservations made on/after 25-Mar-2020, once the lockdown had commenced. But this did not address the concerns of the majority of affected passengers who had made bookings prior to the lockdown. A plea has correspondingly been filed with the Supreme Court.

If the Supreme Court rules in favour of passengers – as is likely – the value of refunds that airlines will be liable for are estimated at over USD500 million, which includes around USD300 million for domestic bookings and over USD200 million for international travel and other refunds. Furthermore, airlines may be ordered to process refunds within a relatively short period of time.

Passenger refunds have become a contentious issue globally. In the US and the EU airlines have been asked to make cash refunds, to which IATA has expressed “deep disappointment” arguing that this is not feasible given force majeure conditions.

This week, 12 EU member states issued a statement requesting the European Commission to temporarily amend the passenger rights regulation, as it was conceived “at a time when the current global crisis and its impact on air travel could not have been foreseen”. They propose that airlines instead be permitted to issue credit vouchers offering maximum flexibility and retaining the option of being reimbursed in full at some point in the future. The proposal notes that a mechanism to protect the holder of a voucher in the event of airline bankruptcy would be required.

Others have suggested that airlines should offer passengers the option of either a cash refund or a voucher for future travel, but only if they meaningfully incentivise the latter e.g. offer value over and above that which the passenger paid.

Social distancing and inspection protocols issued by the Bureau of Civil Aviation Security will seriously impact the ability of airlines to even recover their variable costs. Some carriers may lose less money by remaining grounded.

In order to maintain social distancing on board aircraft, the Bureau of Civil Aviation Security has proposed that when airlines resume services they must not sell the middle seat, and the last three rows should be kept vacant in the event that a passenger needs to be quarantined mid-flight.

The implication of this is that on a 180-seat narrowbody aircraft, an airline can sell at maximum 108 seats, representing a 60% load factor. Even if social distancing is not in place, demand conditions are expected to be so weak that passenger loads are in any case unlikely to be any higher than that. This will naturally increase the average break-even fare.

There are other considerations that will place further upward pressure on the break-even fare. Turnaround times may increase as a result of increased sanitation requirements and revisions to passenger facilitation processes to maintain social distancing. In such a scenario aircraft utilisation would decline and unit costs would rise.

Furthermore, if the fixed costs associated with the sizeable proportion of the fleet that is initially likely to remain on the ground due to weak demand, are allocated to the operational aircraft, the break-even fare will increase further. We have not taken this into account in the analysis below, and even without this element average break-even fares would increase by 40-100%.

Estimated average fares (INR) required to meet variable costs on selected routes upon resumption of domestic operations
SectorApprox. average fare required to meet variable cost based on regular operationsApprox. average fare required to meet variable cost based on social distancingApprox. average fare required to meet variable cost based on social distancing and reduced utilisation
Delhi-Mumbai2,7003,9005,300
Delhi-Bangalore3,2004,5006,100
Delhi-Jammu1,7002,4003,300

Notes: 1) Brent crude assumed at USD40/barrel 2) Regular average daily aircraft utilisation assumed as 11 hours, reduced utilisation assumed as 8 hours 3) assumed 85% load factor under regular operations and 60% under social distancing 4) fixed costs associated with grounded aircraft have not been allocated to operational aircraft 5) average fares have been grossed up to include taxes and charges.

Estimated average fares (INR) required to meet total costs on selected routes upon resumption of domestic operations
SectorApprox. average fare required to meet total cost based on normal operationsApprox. average fare required to meet total cost based on social distancingApprox. average fare required to meet total cost based on social distancing and reduced utilisation
Delhi-Mumbai5,0007,0009,700
Delhi-Bangalore5,7008,10011,200
Delhi-Jammu3,1004,3005,900

Notes: 1) Brent crude assumed at USD40/barrel 2) Regular average daily aircraft utilisation assumed as 11 hours, reduced utilisation assumed as 8 hours 3) assumed 85% load factor under regular operations and 60% under social distancing 4) fixed costs associated with grounded aircraft have not been allocated to operational aircraft 5) average fares have been grossed up to include taxes and charges.

Furthermore, with limited seats available to sell, managing inventory to achieve the above average fares will be incredibly challenging. The yield that will have to be generated from bookings within the last seven days before departure may be far higher than can reasonably be achieved in the market, especially in a weakened economic environment.

As an example, the indicative profile of LCC bookings on the Delhi-Mumbai route is as follows:

  • 30% of seats are sold more than 15 days prior to departure, with demand resistance noticeable at fares above INR3,500;
  • 40% of seats are sold between 7 and 15 days prior to departure, with demand resistance noticeable at fares above INR4,500;
  • 30% of seats are sold less than 7 days prior to departure, at an average fare of around INR7,000. This is an average and can even increase up to INR 10,000 for last minute passengers.

If a similar profile is applied with social distancing in place, where 30% of seats are sold at an average of INR3,500, and 40% at INR4,500, the average fare that will be required from the remaining passengers will be significantly higher. If there are only 108 seats available for sale, the 30% last minute bookings would need to be made at an average fare of INR13,900 to break-even. If daily aircraft utilisation declines from 11 hours to 8 hours, this will increase further to INR22,700.

Even achieving an average last minute fare of INR7,000 will be extremely difficult in Q2 given the weakened state of demand, while INR13,900 or higher will be impossible.

The second quarter is always an acid test for the sector, with the most difficult trading conditions. This year it will be a make-or-break period.

Underlying demand conditions in Q2 will be particularly weak, while social distancing will push up airfares to a level that will further choke-off demand. And even if airlines are permitted to operate without any social distancing requirements, subject to passengers wearing masks (or even PPE suits), this is unlikely to have any significant impact on traffic in Q2, given that demand is expected to very low.

By the end of Q2 most carriers will have had little or no contribution to their fixed costs for more or less six months. This level of financial pressure is likely to break the resistance of the industry and the failure of some operators is inevitable in the absence of recapitalisation. As a result, the second half of the year is expected to see a reduction in capacity due to market exit.

However, these estimates are presented with the caveat that we are in highly uncertain times, and projecting the direction of the market is fraught with difficulty. We expect to continue to revise our estimates over time.

Consumer interest in air travel and forward bookings have collapsed, with green shoots currently not visible until September

Online search activity for travel to/from and within India has all but dried up over the last few weeks. Skyscanner data shows that whilst searches for travel related to India were up 20-30% year-on-year in Jan/Feb-2020, this has since evaporated. In the week commencing 20-Apr-2020, searches were down by 90.9%.

Year-on-year change in travel searches related to India since 13-Jan-2020
Source: Skyscanner

 

 

 

 

 

 

 

 

As of last week, searches for travel over the next four months are down by more than 90% year-on-year. In fact, for travel in May-2020, the decline is 98.5%. It is only once we look ahead to Sep-2020 that we see a lesser decline.

Travel agents report virtually no forward booking activity. This is in part due to uncertainty about travel restrictions, but also because the airline practice of not refunding passengers for cancelled travel has damaged consumer trust.

Year-on-year change in redirects on Skyscanner during the week commencing 20-Apr-2020 for travel related to India during May-2020 to Sep-2020
Source: Skyscanner

 

 
 
 
 
 
 
 
 
 
 
CAPA has revised downward its traffic estimates for FY2021 to 55-70 million domestic and 20-27 million international passengers

We have assumed that there will be little to no traffic in the months of April and May. Assuming a gradual resumption of services from the month of June, the industry will soon thereafter be heading into the second quarter, historically the weakest period for travel demand in India.

The combination of the monsoon quarter, fragile economic conditions and lingering passenger fears about the safety of travel, could prove to be a devastating cocktail for airlines.

Weak underlying demand may be further exacerbated by potential processes and protocols that could negatively impact the passenger experience, such as:

  • the need to check-in much earlier due to increased passenger facilitation requirements;
  • health screenings at airports and onboard aircraft;
  • reduced facilities at airports;
  • limited inflight service;
  • and possibly even a requirement to wear personal protective equipment.

International travel in particular is likely to remain very subdued until a vaccine or a cure for COVID-19 is found due to a combination of border restrictions; inability to obtain insurance cover; fear of infection or of travel disruption; and likely higher fares due to social distancing. Given that there are a number of moving parts, estimating traffic is very challenging.

In such circumstances, the demand for air transport is likely to be limited to essential reasons, with passengers choosing to postpone any discretionary travel. The downward revision in traffic projections is in part driven by the increasingly negative consumer sentiment.

CAPA revised projections for FY2021 passenger traffic in India
Passenger category1HFY20212HFY2021FY2021
Domestic airline passengers15-20 million (likely towards the lower end of the range)40-50 million55-70 million
International airline passengers5-7 million15-20 million (likely towards the lower end of the range)20-27 million

Source: CAPA India research and analysis

Note: Projections assume that social distancing protocols do not apply from 2HFY2021

Airlines will need to quickly adjust their operations to the new traffic estimates

Based on our revised traffic projections, if the competitive structure of the industry was to remain unchanged, CAPA estimates that Indian carriers would operate around 265-300 aircraft in the domestic market in 2HFY2021 and 80-95 on international routes.

AirlineEstimated fleet for domestic operationsEstimated fleet for international operations
IndiGo135 – 15025-30
SpiceJet40 – 5010-15
Air India3035-40
GoAir305
AirAsia India15 – 20–
Vistara15 – 205
TOTAL265-30080-95

The total estimated operational fleet of 345-395 aircraft compares with a pre-COVID fleet of around 650 aircraft, resulting in a surplus of 255-305 aircraft. In the event that there are some airline failures, the fleet size is unlikely to be dissimilar in absolute terms, however, the distribution by carrier will obviously differ.

Indian carriers (excluding IndiGo) may need to raise a minimum of USD2.5 billion of capital. Even IndiGo, which is relatively better-placed, may need to enhance liquidity in the event of a prolonged crisis.

The estimate of USD2.5 billion (of which Air India accounts for USD1.5 billion) may even prove to be highly conservative as the extent of the structural damage to the industry is yet to be understood.

This amount may only be sufficient to be able to survive until the market starts to turnaround, and additional funds could be required for recovery. Much will depend upon factors such as the state of the economy and the timing of any vaccine or cure.

IndiGo is well-placed in terms of cash reserves (USD1.13 billion of free cash and USD1.33 billion of restricted cash) compared with other Indian carriers. However, it too is not immune to risks in the event of a prolonged crisis. If it is only able to recover variable costs up until the end of Q2, IndiGo’s free cash may approach exhaustion and it could eventually need to dip into its restricted cash in the second half. The timing of this could be extended by a few months by negotiating deferrals on some payments to ride out the storm. But if risks remain elevated, IndiGo may consider enhancing its liquidity, such is the nature of the crisis.

Regional aviation operators may remain grounded as social distancing will severely impact viability

Based on the expected social distancing regulations, airlines would be able to operate an ATR or Q400 with a maximum load factor of around 42%. It will simply not be possible to achieve viable operations under such constraints.

Even if the protocols permit all seats to be sold – provided that passenger wear masks (or even PPE suits) – travellers may be reluctant to be in close proximity to others in small turboprop cabins.

Either way, regional services will be severely impacted until at least the second half of FY2021. As a result, some carriers may decide to keep their turboprop fleets grounded until conditions improve.

The privatisation of Air India continues to be high on the government’s agenda

In Feb-2020 the government had initiated the process for divesting 100% of its holding in Air India. The original date for submission of expressions of interest (EOI) was 15-Mar-2020. However, due to the impact of COVID the deadline has been extended to 30-Jun-2020.

Given that both investors and the government would want to see what the post-COVID environment looks like, prior to establishing a valuation for the national carrier, it is highly likely that the EOI deadline will be further extended to at least October, and possibly even December.

Despite the fact that divestment has stalled the government remains very keen to privatise Air India. It may even seek to fast-track the process once it resumes, as it will otherwise need to commit several billion dollars of capital.

With the government looking unlikely to offer any specific relief to the aviation sector, at least at this stage, the industry needs a Plan B

To date, the Government of India has not extended sector-specific relief packages to any industry along the lines of that which has been announced in several other global markets.

With multiple competing claims on the exchequer at this time, there may be limitations to what can be expected. And indeed, the government’s calibrated approach of not rushing to bail out the industry may be sensible. Given that at this stage it is impossible to determine how deep the damage will ultimately be, the government may be better advised not to use up its ammunition now, but rather to assist during the recovery phase.

The industry must not rely on the government coming to its aid – at least initially – in the manner in which it is seeking. Instead it must urgently find new ways and means to recapitalise. That is the only Plan B.

Conclusion
  • The first major test for the industry will be the Supreme Court decision on cash refunds, as some carriers may need to organise funds to comply should the court rule in favour of passengers.
  • Social distancing protocols will constrain airline capacity. However, demand in Q2 is expected to be so weak in any case that it is unlikely that traffic would be much higher if there were no restrictions.
  • CAPA has revised its traffic projections downwards for FY2021 from our 06-Apr-2020 update (the estimate for domestic traffic has declined from 80-90 million, to 55-70 million, while international estimates are down from 35-40 million to 20-27 million) as the structural damage and weakness of customer sentiment become more visible. Forward bookings are currently frozen.
  • Indian carriers will need to re-align their fleet deployment plans with the expected levels of demand.

In order to successfully emerge from this crisis and transition to a sustainable industry, the entire value chain and the government will need to rethink aviation in the country. This will require a National Civil Aviation Policy 2.0 to be designed to support sectoral recovery.

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Key Trends in Indian Aviation in FY2022: Impact of Second Wave

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The 2nd COVID wave could precipitate a collapse of the sector, without intervention. The extent of the challenge is reflected in airline under-recovery of almost USD70 per pax.

 

  • In early Jan-2021, CAPA Advisory had released a report on ‘Key Trends in Indian Aviation in FY2022’. At that time, a steady recovery in traffic was visible, particularly in the domestic sector. For the next couple of months these encouraging trends continued, while the number of new daily COVID cases declined.
  • But since late Mar-2021, there has been a tragic turn of events, with cases and fatalities from the virus surging. The reimposition of formal lockdowns, as well as passenger fear, has seen traffic numbers halve in a matter of a couple of weeks, with the likelihood that subdued demand will continue for several months to come. This will deal a body blow to the industry, crushing the optimism that had been emerging in recent months.
  • Most Indian airlines were already very vulnerable prior to COVID, with weak balance sheets and poor liquidity. COVID inflicted massive losses and an increasing debt burden on carriers that were structurally ill-equipped to absorb this impact. The extent of the challenge is reflected in the fact that Indian carriers under-recovered almost USD70 per passenger in FY21.
  • The twin shocks of the first and second waves, occurring in the space of a little of over 12 months, will leave a long-term structural impact. Supply-side risks have increased markedly, and were they to eventuate they would likely result in an imbalance in the competitive structure of the industry, possibly creating policy and regulatory challenges.
  • In light of the second wave, we have prepared this note to provide an update on the ‘Key Trends in Indian Aviation in FY2022’ report. These will be explored in more detail in the ‘CAPA Advisory India Aviation Outlook Report FY2022’, to be released on 31-May-2021, which will provide critical insights on issues across the sector.
  • In the meantime, CAPA India – once again – urges the Ministry of Civil Aviation to create a new policy framework. The original National Civil Aviation Policy (NCAP) released in 2016 was designed for an environment of growth. Post-COVID there is a need for NCAP 2.0 – possibly as an interim measure – to support sectoral emergence from the crisis through the stages of survival, stabilisation, recovery and eventually expansion. In line with the Honourable Prime Minister’s vision, this is the time to take decisions and pursue reforms that will deliver a quantum leap for the sector and the national economy.
Impact of the second wave on key trends for Indian aviation in FY2022
  KEY TRENDS FOR FY2022 RELEASED IN JAN-2021 UPDATE AS OF MAY-2021
1

Consolidation is inevitable (as CAPA India has stated since May-2020) and will be strategic in nature. It could result in a 2-3 airline system in the near to medium term.

The second wave is likely to accelerate the process of consolidation, and to an even greater strategic level.
2 After almost 30 years of deregulation a largely market-driven sector will finally emerge from 2021, with long term strategic implications for consumers, competition and industry structure. The Government of India’s commitment to privatisation remains.
The government’s commitment to the privatisation of Air India and airports is laudable. However, the chances of a successful divestment of Air India may be less certain. The Government would need to at least have a Plan B ready.
3 The structure of competition may change in the near to medium term, possibly resulting in a two-horse race in both the airline and airport sectors. We continue to believe that the structure of the industry will change.

Supply-side risks have increased sharply as a result of the second wave. If realised, this will create a strategic dilemma for policy markers and regulators.
4 Demand recovery remains uncertain, especially international traffic. Long haul traffic in particular is likely to take some time to repair.

Demand uncertainty has been exacerbated by the second wave. Despite a likely washout for much of 1HFY2022, domestic airline traffic for the full year will nevertheless be higher than the approximately 53 million passengers in FY2021.
However, the impact will be more pronounced in the international sector which will be seriously impaired by travel bans and advisories announced by several countries on outbound Indian travellers. And it will take significant time to restore the confidence of inbound tourist and business travellers in India as a destination. Pre-COVID traffic is only expected to be restored by FY2024.
In FY2021, of the approximately 700 aircraft in the Indian airline fleet, around 300-350 aircraft (200-250 domestic and 100 international) were surplus to requirements.
In 1HFY2022 there will continue to be the equivalent of at least 250-300 aircraft grounded.
5 FY22 is expected to be another year of large losses for the entire industry, but especially airlines The entire industry will report serious losses in FY2022, similar in scale to FY2021, with a serious downside risk in the event of a protracted second wave, or the emergence of a third wave.
Many operators will struggle to recover from two consecutive years of such massive losses.
6 Lenders and investors will remain wary of the sector (especially airlines) unless the government intervenes in the form of sector-specific policy measures The severity and impact of the second wave will virtually close the door for most aviation businesses in terms of access to lenders, in the absence of government intervention, which is unlikely.
7 The government may be tempted to maintain price floors and caps, at least for the first half of 2021 There is no scope for lifting fare caps and floors in the current environment. They will almost certainly persist for at least the first half of the year, and possibly for most of FY2022.
Most of the industry may not be prepared to face market pricing and would likely prefer price regulation to continue.
8 A protectionist bilateral regime is expected to persist as a near-term policy The current ‘bubble arrangements’ are likely to continue for at least the next six months and well into the second half.
As and when regular scheduled operations resume, it appears more likely that the government may seek to renegotiate bilateral air service agreements to limit the share and growth of sixth freedom carriers. This may lead to a new international aviation strategy.
9 Air cargo has performed well in FY2021 but designing new businesses on the expectation that this will continue may be risky The strength of cargo volumes has cushioned some of the impact for the industry.
The second wave will limit domestic and international passenger belly capacity, which will be positive for cargo yields and freighter operators.
IndiGo will induct freighter aircraft into its fleet, and possibly form an alliance with a global integrator.
SpiceJet may hive-off its cargo division and use this as a vehicle to raise capital.
10 IndiGo will emerge from COVID significantly stronger relative to the competition, largely due to its very strong balance sheet In light of the second wave the likelihood of IndiGo emerging significantly stronger than its competitors has increased.
Nevertheless, despite being better placed to withstand the latest downturn in traffic, IndiGo will also feel a very significant impact.
Capt. Sven Magnus Lie

Capt. Sven Magnus Lie

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Chief Advisor, Technology He graduated as a Technician and served thereafter for the Royal Norwegian Air Force from 2000-2001 as Crew Chief Assistant on the F-16 fighter jets.

Sven Magnus Lie

Chief Advisor, Technology
He graduated as a Technician and served thereafter for the Royal Norwegian Air Force from 2000-2001 as Crew Chief Assistant on the F-16 fighter jets.

Capt Sven Magnus Lie is a 40 year old Pilot from Norway with more than 20 years of aviation experience, especially in Aerial work projects as a Pilot and Project head.He has also devices numerous technical tools and procedures in the field of Helicopter assisted Powerline construction and other related industrial work.

He graduated as a Technician and served thereafter for the Royal Norwegian Air Force from 2000-2001 as Crew Chief Assistant on the F-16 fighter jets.He has had a very successful career as a specialist Aerial work pilot having flown a total of 6000 hrs of accident-free flying, having flown specialized operations in many countries, including Greenland, Iceland, and Sweden. He also has project experience of Long Line Survey Work in India for 02 years with the Atomic Mineral Division..

S Bordoloi AVSM

S Bordoloi AVSM

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Chief advisor, Defense and Aero Space

Air Vice Marshal S Bordoloi AVSM

Chief advisor, Defense and Aero Space
He is a fighter pilot from the Indian Air Force with an experience of more than 5000 hrs of accident/incident free flying.

AVM Bordoloi is the Head of Consulting in in Aerocpace and Defence Sector. He has 40 years of experience and has been Advisor to Govt on numerous projects. He is a fighter pilot from the Indian Air Force with an experience of more than 5000 hrs of accident/incident free flying on flown various Military aircraft including Hunter, Sukhoi-7, MiG-21, MiG-23, Avro and Chetak/Cheetah. Apart from being a Category A-2 flying instructor he was also an Air Force Examiner. He was awarded the Ati Vishistha Sewa Medal in 2006 for his contribution during the conduct of Disaster Relief Operations in Kashmir.After a meritorious stint with the IAF, AVM Bordoloi has flown extensively in the civil, with TATA and AIR INDIA. He is experienced on Cessna 152- A, P-68C, Boeing 737 NG Hawker HS 25B, Hawker 800/900 and King Air C-90A

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