Aerospace Gist

7/29/2019 Aerospace Gist

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PWC Dec 2008

Global aerospace industry in 2007: $97 bnIndias MRO segment is estimated to grow at 10 percent and reach USD1.17 billion by 2010 and USD2.6 billion

by 2020.Globalization of MRO services, manpower cost competitiveness, the availability of talent, locational advantagesand the presence of specialist capabilities combine to make India a potential global/regional MRO hub. IndiasMRO segment is estimated to grow at 10 percent and reach USD1.17 billion by 2010 and USD2.6 billion by2020. The main challenge in positioning India as an MRO hub comes from the indirect tax structure, specificallycustoms duties and service tax.Boeing expects a demand of between 900 to 1,000 commercial aircraft worth USD100 billion approximatelyin the next 20 years.The total spending in thenext 5 years is expected to be between USD25 billion (assuming uniformdemand) for commercial aircrafts and USD100 billion as defense expenditure.Out of the defense expenditure, approximately 15-20 percent (USD15-20billion) is expected to be spent on military aircrafts. Assuming an offset of 30percent for the civil sector too, the total offset opportunity for the aerospace

sector is valued to be at least USD10-15 billion.Airline revenues in 2009 will decline byUSD36 billion year-over-year to USD500 billion, according to IATA.Commercial airplane market is expected to represent USD3.2 trillion by 2027 withthe Asia-Pacific market accounting for almost 37 percent of this. Boeing predictsthat Asia-Pacific will be the largest air transport market with 45 percent of air travelbeing to, from or within the region. Overall, the commercial airplane market will growat a rate of 3.2 percent with the air cargo segment growing faster than passengertraffic.Annual business jet production will reach 1,400 units in 2008and exceed 1,600 units in 2009. The study projects that the annual production ofbusiness jets will decline for three years dropping to 1,515 units by 2012. Growth isexpected to resume in 2013, with yearly production exceeding 1,700 units by 2017.Forecast International projects that 15,936 business jets worth USD223 billion will be

produced from 2008 to 2017. This total includes 5,600 Very Light Jets.HoneywellsTurbine-Powered Civil Helicopter Purchase Outlook projects deliveries ofapproximately 4,450 new civil use helicopters during 2008 to 2012, driven bystrong demand for light single and intermediate twin-engine models offeringnewer technology. Corporate, emergency medical services and law enforcementhelicopters combined are expected to account for over 65 percent of all new civilrotorcraft sales during the five-year forecast period.Since 2001, US military spending increased by 59 percent in real terms, duemostly to spending on military operations in Afghanistan and Iraq, and also toincreases in the base defence budget. World military expenditure in 2007 was an estimated USD1339 billion, a real-termincrease of 6.0 percent since 2006. From 1998 to 2007, world military spending increased by 45 percent in real terms.

Military spending in 2007 was 2.5 percent of world Gross Domestic Product(GDP) and USD202 per capita. The top five countries with the highest military expenditure in 2007, according tomarket exchange rate terms and purchasing power parity terms, were the US, theUK, China, France and Japan. India was in tenth place with a military budget ofUSD24.2 billion. Indias military expenditure, which accounts for 80 percent of South Asias total,increased by 3 percent in real terms in 2007. The average annual growth ratefrom 1998 to 2007 was 6 percent.


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The worlds largest 100 manufacturers grew their business in 2007; revenuesincreased by 13 percent and profits by 26 percent (after restatements andincluding acquisitions). Average operating margins of almost 9.5 percent in 2007 were the highest sincethe previous peak in 2000, just before the World Trade Center attacks. By 2003,operating margins had decreased to 6.9 percent. The reasons for expanding order books include the high demand experienced by OEMs for widebody and narrowbody airlines. Capacity issues, difficulties in hiring skilled staff and challenges in addingproduction facilities are major constraints.


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Aerospace&Defence OEMs are moving from vertically-integrated

manufacturing to design and systems integration.

Transformation of the Aerospace Supply ChainIncreasing outsourcingto low cost manufacturing locations.

In deciding whether or not to outsource, aerospace majors evaluate several criteria.These include ExpertiseSupplier expertise to reduce costs and improve quality GrowthTo be accelerated through buying capabilities rather than buildinginternal capabilities ScaleLeverage supplier scale to reduce airline costs Labour costsAccess suppliers that face lower labour rates InvestmentsLeverage supplier investments in hardware and expertise to reduceairline investments

The MRO sector is typically divided into four major segmentswhich include Airframe heavy and modification Engine maintenance Line maintenance Component maintenance


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In 2001, the Government allowed 100 percent domestic private investment in thedefence sector upon obtaining an Industrial Licence (IL) and FDI of up to 26 percentwith conditions.In 2007 and 2008, India assumed the ninth position in the worldscivil aviation market, an increase from twelfth place in 2006. Indias air passengertravel has been growing at almost 25 percent a yearMilitary aviationSecondary research indicates that India will spend aboutUSD35 billion on military aviation over the next 20 yearsThe Ministry of Civil Aviation had announced that the Indian aerospaceindustry needs investment of between USD200 to 300 billion over 2009-2034.

The Government recognizes the need to begin creating, modernizing and upgradingIndian airports. Over the next f ive years, the Airports Authority of India (AAI) hasplanned a USD3.07 billion investment towards this endeavor.In terms of the availability of aircraft, Boeing estimates that India needs 856 airplanes,worth USD72.6 billion in the next 20 years, to meet air travel demand.the country is developing intoan aerospace-IT hub.The Government of Indias offset programme is also expectedto allow new opportunities for IT vendors since for every defence contract worthINR300 crore or more, foreign vendors will need to source components or systemsfrom Indian companies through joint ventures or direct purchase of a minimum of 30percent of the deal value.The Tamil Nadu Government plans to establish an aero park for global aerospaceand aeronautics industry in the areas of design, manufacture and maintenance of

aircrafts. The park will be similar to those in Dubai, China and Singapore. The Andhra Pradesh Government unveiled plans for two aerospace and precisionengineering Special Economic Zones (SEZ) in the state. The Tata Group and 50local industries propose to establish their units in first of the two SEZ. The Karnataka Government has not taken any initiatives so far. Currently, onlyprivate sector SEZ has been set up by Quest Global in Belgaum. BangaloreInternational Airport Ltd. (BIAL) is also coming up with an Aerospace SEZ (1000acres) near Bangalore but without any Goverment support.

Some important issues affecting participants in Indias aviation sector include


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High aerospace turbine fuel (ATF) prices-India is one of the most expensiveplaces in the world to buy aerospace turbine fuel. Excise duties, throughputfees charged by airport operators and state taxes of up to 30 percent fordomestic flights result in a cost structure that cannot support a competitiveindustry. According to market estimates, ATF contributes to over 40 percent ofairlines operating costs.Shortage of trained pilots - IATA had projected that the industry will need 17,000

new pilots annuallyFurther regulatory easing and improvements in infrastructure - FDI in transportand passenger airlines continues to be restricted and given the poor profitabilityof the domestic carriers,Indias flight penetration, at 0.2 per capita, is lower than the 2.2 in the US and 1.2in China. There are only 40 busy airports serving a population of more than a billion. The Investment Commission of India projects that passenger traffic will grow at aCAGR of over 15 percent in the next 5 years. The Vision 2020 statement announced by the Ministry of Civil Aerospaceenvisages creating infrastructure to handle 280 million passengers by 2020. Investment opportunities of USD110 billion envisaged up to 2020 with USD80billion in new aircraft and USD30 billion in development of airport infrastructure. Associated areas, such as MRO, offer high investment potential.

Air cargo traffic to grow at over 11.4 percent per annum over the next 5 yearsto exceed 2.8 million tonnes by 2010.

Indias Value Proposition as a Manufacturing HubTop Five Growth Drivers for the IndianAerospace Industry1 High domestic demand2 Offset policy3 Cost advantages4 Talent base5 Leveraging IT competitiveness

defence offset policy requires a minimum 30 percent could translate into an opportunityof between USD40 to 50 billion for the Indian market over the next 20 years.e.g.the purchase of 126 medium multi-role combat aircrafts by the Indian AirForce will result in a potential offset opportunity in excess of USD5 billion.

Cost Advantagessavings are highest for IT and systemsimplementation activities in the value chain. Cost savings could range between 15 to25 percent in manufacturing, depending on the type of component. These savingsare expected in labour intensive processes with import of raw materials. In fact, insome cases local sourcing of raw materials / parts can increase the cost savings byan additional 10 to 20 percent.Airbus has been assessing ways to use India for component manufacturing andR&D. It had announced that India will be one of the key centers for design anddevelopment of their new A350 aircraft. Airbus Engineering Centre India is thecompanys high-tech aircraft component manufacturing facility in Bangalore.The facility works on the development of tools to design the aircraft, software foranalyzing the stress and strain on airplanes and structural analysis of the aircraft,among other things.Snecma, a leading global aerospace company, established its R&D center inIndia in 2002. This center is engaged in carrying out studies and developingengine components, aircraft equipment and onboard software.In 2008, Boeing had entered into agreements with Indian Institute of Science,Wipro and HCL to develop wireless and other network technologies foraerospace related applications.In 2007, Mahindra and Mahindra had signed an agreement for the designand development of a new general aviation aircraft with National Aerospace


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Laboratories (NAL), CSIR and the Government of India. This is the first publicprivateJV in the aircraft design sector in India.

The Council of Scientific & Industrial Research (CSIR) is one of the worldslargest publicly funded industrial R&D organizations. CSIR maintains 38 laboratories in India and its R&D portfolio embracesdiverse areas, including Aerospace, Biotechnology, and Chemicals etc. National Aerospace Laboratories (NAL), a constituent Institutionunder CSIR, is a high technology oriented institution concentratingon advanced topics in the aerospace and related disciplines. It isIndias only civilian aerospace laboratory and has made significant contributions to a large number of aerospace programmes like aircraft(civil and military), space, engine development, defense and strategicprogrammes. NAL is an acknowledged centre of excellence in fields likecomposite structures, high speed wind tunnel testing, aircraft fatigueand aerospace acoustics, failure analysis and accident investigation.It has also successfully executed some innovative research projects inadvanced topics like smart materials, parallel processing, advanced flowdiagnostics, airport instrumentation etc. NAL has been instrumental inthe development of HANSA and SARAS aircrafts.

Global spending on engineering services was USD750 billion in 2004, with aerospaceaccounting for 8 percent; this could rise to USD1.1 trillion by 2020, according toNASSCOM. The total offshore engineering spend is expected to grow to betweenUSD150 to 225 billion by 2020 and India, with its talent pool and experience inengineering services, could assume 25 percent of this market

The activities in engineering services that could be outsourced range from concept,detailed design, testing, production and support stages. Some of the activities inthese stages include industrial / mechanical/electrical design and analysis, reverseengineering, system engineering, CAD work, embedded software, derivative products,auxiliary functions (piping, cabling, controls), component testing, test equipmentdesign, prototyping, technical manuals, manufacturing engineering, tooling designand build and value/ cost engineering.

Rank Company1 Satyam2 QuEST3 eServ Perot4 Ranal5 Plexion6 Wipro7 EASi8 NeilSoft9 Eicher10 GeometricSource: Top 10 ESO companiesin India, Black Book ofOutsourcing, 2007

Software companies like Wipro, Infosys, Infotech, HCLand Tata Consultancy Services have been active in theaerospace industry for several years. The softwareengineering services provided by most of these players offer complete solutionsranging from Product Design and Development, Embedded Systems and Avionicsto Product Lifecycle Management services. Because of Indias IT capabilities, Indiancompanies are naturally well equipped for Avionics. Indias capabilities are groundcontrol stations and operational management systems. IT applications have beendeveloped for flight data management systems, in-flight entertainment, Internetservice, power distribution inside the aircraft, software for crew signaling and cabin


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illumination, Global Positioning System (GPS), etc.

Defence Research & Development Organization (DRDO) was establishedin 1958 and is an eminent defence R&D organization under Ministryof Defence (MoD). Today it is a network of more than 50 laboratories,nearly 800 industry partners (including more than 50 for aeronauticsand materials), over 5000 scientists and about 25,000 other scientific,technical and supporting personnel.DRDO has also constituted four research boards - AeronauticsResearch and Development Board (AR&DB), Armament Research Board(ARMREB), Naval Research Board (NRB) and Life Sciences ResearchBoard (LSRB) - to nurture and harness talent in academic institutions,R&D Centres and Industries.


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NADCAP NADCAP (National Aerospace and Defence Contractors Accreditation Program) is aglobal cooperative standards-setting program for aerospace engineering, defenceand related industries. Nadcap program gives accreditation for special processesin aerospace and military industry such as heat treatment, chemical processing etc.This accreditation is required and accepted by several leading players like Boeing,GE, Honeywell etc.

AS9100AS9100 is a widely adopted quality management system standard for the aerospaceindustry. Most major aerospace manufacturers and suppliers worldwide requirecompliance and/or registration to AS9100 as a condition of doing business with them

India could become the MRO global hub by capitalizing upon:Manpower cost arbitrageLocational advantagesCurrently, there are no MROs within a five-hour flyzone of India.Untapped opportunity


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Graded development

Air Works India Engineering Pvt. Ltd. plans to invest approximately USD120million over the next three years to establish a maintenance center for planes.According to Fredrik Groth, Chief Executive. We will need another USD100million and a strategic partner about a year-and-a-half down the line (fromDecember 2009) as we get into sophisticated engineering. In its second phase,

Air Works plans to overhaul engines and parts, such as landing gears. European Aeronautic Defence & Space Co NV (EADS) signed a joint ventureagreement with the National Aerospace Co. of India Ltd (NACIL), which operatesAir India, to build an aircraft MRO center. The value of the joint venture isestimated at USD40 million, over five years. The joint venture will initially maintainand repair airframes of Nacils Airbus planes and later also offer services to otherairlines, including for non-Airbus aircraft. The MRO facility, to be established inDelhi, will service more than 100 single-aisle and about 10 wide-body planes ayear by 2013.

The Air India-Boeing MRO is a joint venture between Air India and Boeing and athird party whose name is yet to be announced. The project, which was announcedin 2006, would commence with an initial investment of USD100 million. Indian Airlines has signed an agreement with Airbus and Bangalore-based Jupiter

Aerospace to form a MRO joint venture. The joint venture is for MRO and lifecycle support of commercial aircraft. According to the tripartite term sheet, the MRO venture will begin its activities inDelhi with two A320 hangars with a third hangar being added in due course. ThePhase II expansion will cater to wide-body and other aircraft types. By the thirdyear, the joint venture will have facilities to cater to over 200 aircraft of single aisleand wide-body aircraft belonging to various customers from India and abroad. Taneja Aerospace & Aviation entered into a MRO facility agreement with Air WorksCommercial MRO Services (AWACS). The company will be licensing seven acresof land and upto five hanger spaces on a long term basis.

ChallengesTax & Regulatory Environment Customs duty is exempt on parts imported for maintenance, repair and overhaul ofaircraft subject to specified conditions. In case these conditions are not satisfied, thecustoms duty would be up to 27 percent on the parts imported. Services in the nature of maintenance, repair and overhaul (MRO) are coveredunder the taxable category of management, maintenance or repair servicesunder service tax legislation. In addition, in terms of the Export of ServiceRules, 2005, as amended to date, there are specified parameters (in addition tothe location of performance of the activity) which need to be fulfilled for suchservices to qualify as export of services and hence be not charged to service tax. There are presently high rates of indirect taxes which disincentivize MRO activities Imported spares are charged to customs duties up to 27 percent plus ValueAdded Tax of 4 percent or 12.5 percent on intra State sale thereof and EntryTax / Octroi in specified States / Municipalities. Servicing an aircraft in India entails a service tax of 12.36 percent. This burdenis reduced to the extent of service tax credit admissible to MRO customers.

Land Allotment ProcessesA challenge for MRO players is the absence or shortage of land at Indias majorairports. The lack of clarity behind land allotment and its unpredictability are issuesthat deter potential MRO players. However, with the Governments decision toprivatize the Mumbai and Delhi airports, MRO players are confident that there will bemore transparency into the land allotment process.


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Corporate Income Tax Foreign companies can have business presence in India either through Project/Branch Office (foreign company) or by forming a subsidiary/joint venture company(domestic company). The effective tax rate is 42.23 percent (including surcharge and education cess (S&C))for foreign companies and 33.99 percent (including S&C) for domestic companies. Companies are liable to Minimum Alternate Tax (MAT) at 10 percent (plus S&C)of book profits, whereas tax liability under normal Income tax provisions is lower.MAT credit is allowed against tax liability in subsequent 7 years under normalincome tax provisions. A domestic company is liable to pay Dividend Distribution Tax (DDT) at 16.995percent (including S&C) on its dividends. However, dividend income is exempt in

the hands of shareholders. An additional tax Fringe Benefit tax is also levied at 30 percent (plus S&C) onthe employer company on value of prescribed fringe benefits including ESOPprovided to the employees other than perquisites on which tax is paid/payable bythe employee. Accelerated depreciation of 40 percent is available for Aeroplanes-Aeroengines.Tax Holiday 100 percent tax holiday is available for 10 years forSpecial Economic Zone (SEZ)Developers, Co-developers. 100 percent tax holiday from profits on exports for five years and 50 percent taxholiday for next 10 years for units set up in a SEZ (during last five years subject toadditional conditions). Export Oriented Units (EOU) or Electronic Hardware Technology Parks (EHTP)or Software Technology Parks (STP) are eligible for deduction of 100 percent of

export profits for 10 years up to 31 March 2010. 100 percent tax holiday is available for 10 years on profits of an undertaking whichbegins manufacturing/producing eligible goods or undertakes substantial expansionfrom 1 April 2007 and 31 March 2017 in any of the North Eastern States. 100 percent tax holiday is available on profits of an undertaking which beginsmanufacturing/producing eligible goods in the State of Himachal Pradesh orUttaranchal (up to 31 March 2012) for 5 years and 30 percent thereafter. 100 percent tax holiday is available for the profits derived by a new undertakingwhich develops, maintains and operates any new infrastructure facility such asroads, highway, bridges, airports, ports, etc. The tax holiday is available for 10


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consecutive years out of 15 years beginning from the year in which the undertakingor enterprise develops and begins to operate any infrastructure facility. 100 percent tax exemption is available on any income of venture capital companyor venture capital fund from an investment in venture capital undertaking,which, inter-alia, engaged in developing, maintaining and operating any newinfrastructure facility (as mentioned above).

Scientific Research & Development (R&D): If certain conditions are met, deductionis available of one and one half times of scientific research expenditure incurredby a company on in-house R&D facility where it is engaged in business of biotechnologyor in manufacture/production of electronic equipments, computers,telecom equipments, chemicals or other specified articles, like aircraft,helicopters, computer software, etc (up to 31 March 2012). Further, if certainconditions are met, deduction is available of one and one fourth times in respectof payments made for research activities to an approved Indian company havingscientific R&D as its main object. Royalty/fees for technical services received by a foreign company under anagreement with Government for providing services in or outside India in projectsconnected with the security of India, is exempt, if such foreign company isnotified by Central Government in the Official Gazette. In other cases, in absenceof permanent establishment of the foreign company in India, royalty/fees for

technical services would be taxable at 10 percent (plus S&C) for agreementsentered into after 1 June 2005, subject to fulfillment of certain other conditions. Exemption from payment of withholding tax on lease rental incomes on aircraftsand engines earned by a non-resident lessor from an Indian company is currentlyapplicable only for lease agreements which have been signed prior to 31 March2007 (subject to respective agreements being approved by the Indian Government.

Indirect Tax Customs Duties: Effective customs duty rate on import of goods is 26.85 percentbased on peak rate of customs. Exemption from customs duty is availablefor majority of goods imported in relation to defence subject to fulfilment ofprescribed conditions. Excise Duty: Effective excise duty rate is 10.3 percent (inclusive of educationcess) on manufacturing activity. Exemption from excise duty is available for

specified goods imported in relation to specified defence projects. Further, goodssupplied against international competitive bidding (ICB) are exempt from exciseduty subject to fulfillment of prescribed conditions. The challenge on the ground isto ensure that these benefits actually accrue. Value Added Tax (VAT) / Central Sales Tax (CST): While inter-State sales of goodsis subject to levy of CST, intra-State sale of goods are subject to levy of VAT. TheCST rate is 2 percent if the prescribed statutory form is issued by the purchaser,whereas if no forms are provided, the VAT rate applicable in the originating Stateof the Seller will be applicable. For most goods, the VAT rate is either 4 percentor 12.5 percent depending on the nature of goods. No general exemptions/concessions are available on sale of goods to defence. Accordingly, therelevant State VAT legislation should be examined and the possibility of specialdispensation if required from State Government can be explored. Service Tax: specified services are subject to service tax and the liability to pay

service tax is on the service provider. However, for few specified services includingimported services, liability to pay service tax shifts on service recipient. Service taxrate is 12.36 percent (inclusive of education cess). At present, there are no specificexemptions available for services rendered to defence related activities, accordingly,the option of minimising the levy of service tax should be explored.

Research & Development Cess is applicable on import of technology into India byan industrial concern under a foreign collaboration. Presently, Cess is applicableat the rate of 5 percent. However, the Cess paid can be adjusted against servicetax liability accruing under certain service categories.


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Indirect tax incentives available to SEZ units for its authorised operations.

In view of the above, it is apparent that the current tax and duty regime makes theIndian manufacturer uncompetitive as the incidence of tax is higher vis--vis foreignvendors directly supplying to MoD.Like defence supplies, the civil aerospace industry too bears numerous taxes and

duties. While there are tax incentives available for R&D and Special Economic Zones(SEZs), the indirect tax structure, such as central excise, VAT, service tax still tends todisincentivize final assembly in India. Similarly, servicing an aircraft in India involves ahuge tax cost, such as service tax, custom duty, VAT. Thus, there is an urgent need forrationalizing taxes and duties imposed on this sector by the Government.

Foreign Investment Regulations SummaryCivil Aviation and AirportsFDI up to 49 percent is permitted for scheduled air transport services/domesticscheduled passenger airlines under the automatic route. NRI investment ispermitted up to 100 percent under the automatic route. However, no direct orindirect equity participation by foreign airlines is allowed. For non-scheduled air transport services/non-scheduled airlines, chartered

airlines and cargo airlines, FDI up to 74 percent is permitted under the automaticroute. NRI investment is permitted up to 100 percent under the automatic route. 100 percent FDI permitted under the automatic route for MRO, flying traininginstitutes and technical training institutions. FDI up to 74 percent and NRI investment up to 100 percent under the automaticroute is permitted for ground handling services subject to regulations in thesector and security clearances. FDI up to 100 percent is permitted under the automatic route for helicopterservices / sea plane services requiring DGCA approval. 100 percent FDI under the automatic route is permitted in setting up ofGreenfield airport projects (existing projects would require FIPB approval for FDIbeyond 74 percent).

Initiatives in Establishing Aerospace Ecosystems in IndiaAerospace Park, CII, ChennaiThe Confederation of Indian 1. Industry (CII) hasproposed to establish an aerospace park in Chennai. The proposed park willattract an investment of USD10 billion and will create over 100,000 jobs.2. SEZ, Quest, Belgaum, KarnatakaQuEST Global is establishing an


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industry-specific precision engineering SEZ in Belgaum, Karnataka.QuEST Global SEZ has already signed three clients, namely QuESTGlobal Engineering, QuEST Global Manufacturing and AerospaceProcessing India (API) for the SEZ.3. SEZ, APIIC, HyderabadThis SEZ will focus on avionics systems repair,precision component fabrication, airframe and engine components,mechanical, electrical and electronic components. A group of

approximately 35 companies, under the aegis of Samuha EngineeringIndustries, will be developing units to supply equipment and services todefence establishments in the country.4. Lepakshi Aerospace Park, Chilamattur, Anantapur District, AndhraPradesh The SEZ will have an integrated ecosystem for research,design, manufacture and maintenance of aircrafts, both civil and defense.The 2,500 acre SEZ, in close proximity to the Bangalore InternationalAirport, has received in-principal approval from the Board of Approvals on15th January, 2009.5. SEZ, KIADB, Devanahalli, KarnatakaThe Karnataka Industrial AreasDevelopment Board (KIADB) proposal has received in-principle clearanceby the Karnataka government for establishing an aerospace SEZ inDevanahalli.6. SEZ, TAAL, BangaloreTaneja Aerospace & Aviation Ltd (TAAL) receivedin-principle approval from the government to set up a SEZ dedicated to

aviation in Bangalore.Source: Secondary research

Deloitte 2011

Signs of growth due to the commercial aerospace rebound Global aerospace and defense (A&D) Industry revenues grewoverall by 2.3 percent in 20111, driven largely by increased production levels of large commercial aircraft. The commercialaircraft segment in 2011 set an annual production record of 1,011 deliveries by Boeing and Airbus 2. Indeed, commercialaircraft segment revenues increased by 10.1 percent in 20113.

Defense is shrinking overall, with selected regional increases Global defense revenues decreased by 3.3 percent in 2011 5,primarily due to affordability, competing domestic priorities, weak economies in the western world, and the drawdown of

forces in Iraq and AfghanistanIndustry financial performance generally fell in 2011 Even with the increasing fortunes in the commercial aircraft segment,many financial performance metrics for the global Industry as a whole generally decreased in 2011, likely because of thepredominant weighting of the defense sub-segment. Reported operating earnings, a key financial metric, decreased 3.1percent. In addition, reported operating margins decreased 5.3 percent, free cash flow (FCF) decreased 13.3 percent, andreported operating earnings per employee decreased 5.2 percent8. However, on the positive side, the book to bill (BTB)ratio, an indicator of future revenue growth, increased 17.4 percent 9Europe continues to lag the U.S. Financial performance differences between A&D companies based in the U.S. and Europecontinue to diverge,Suppliers performed better than original equipment manufacturers (OEMs) Tier one, two, three suppliers, many of which havesignificant participation in the commercial aerospace segment had reported revenue increases of 5.1, 11 .1 and 29.1 percentrespectively16.

The global A&D Industry as a whole grew to US$681 billion in 2011, posting a revenue gain of 2.3percent, compared to revenue growth of 2.5 percent in 2010 and 4.5 percent in 200918.


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Services focused companiesServices companies revenue grew by 3.7 percent to US$62.7 billion (see Figures 19 and 21), exceeding total Industrygrowth of 2.3 percent, driven by the contribution of larger services companies such as Babcock International, AAR, andCACI. In particular, government services companies tend to be a people focused business, charging labor hours, which ishighly competitive, and results in lower margins typically. Similar to last year, services companies registered lower reportedoperating earnings growth performance than the reported Industry average, -20.9 percent versus -5.3 percent (see Figure


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19), likely due to commoditization and labor-intensive dynamics. Overall, 68.0 percent of services companies reportedpositive operating earnings growth in 2011.

CAPA India Outlook 2012/13Critical Uncertainty PrevailsIndian aviation is facing its most uncertain phase in more than a decade. After reporting an

estimated record loss of just over US$2 billion1 in the 12 months ended 31 March 2012, Indias airlines are facing an equally challenging year ahead. Weak balance sheets, increasing costs,

regulatory uncertainty, a sluggish Indian economy and a difficult global environment will continue to

pile the pressure on airlines, especially the poorer performing carriers.

expects domestic capacity growth of 7-8% in FY2012/13In FY2012/13 Indian carriers are expected to add approximately 24 aircraft during the year, which

includes 8 Q400s to be inducted by SpiceJet. This corresponds to the equivalent of 20 narrowbody

aircraft on domestic routes.

projects domestic traffic growth of 8-10% in FY2012/13

Indias airlines expected to post a combined loss of US$1.3-1.4 billionIn the 12 months ending 31 March 2013, Air India is once again expected to be the worst performerin the industry and to report a loss of INR70 billion (USD1.3 billion). Kingfisher Airlines is projected to

lose INR1214 billion (USD220260 million). However, the remaining four private carriers combined

could post a modest profit of approximately INR11 billion (USD200 million).

Jet Airways to be primary beneficiary of market dynamicsAlthough the troubles facing Air India and Kingfisher Airlines have been positive for all of the other

carriers, Jet Airways has been, and will continue to be, the largest beneficiary. Kingfishers dramatic

contraction from 66 to 16 operational aircraft, of which half are regional ATR aircraft, has left the

domestic business market open for Jet Airways. Similarly the temporary industrial action on Air

Indias longhaul international routes has driven North American and UK traffic to Jet Airways.

for bold and pragmatic leadership by theGovernment of India

Ad hoc intervention may have been workable ten years ago when the sector was a fraction of its

current size but it is no longer acceptable for an industry that handles 160 million passengers per

annum and in which its core constituents, the airlines, have a total debt burden of US$1617 billion,

which could increase to US$20 billion within the next 1218 months. Airports have additional debt of

US$2.53 billion while Indian banks and financial institutions have a massive exposure of US$910

billion to the aviation sector.

expects international traffic growth of 8-10% in FY2012/13International passenger traffic is projected to grow by 810% in FY2012/13 to reach over 44 million.

much will depend upon developments at Air India, which has the largest share of

international capacity to/from India at 14.4%.

Shorthaul international traffic growth to South and Southeast Asia, as well as the Gulf and Central

Asia is expected to be above 10% as IndiGo and SpiceJet ramp up their overseas operations. GoAir

has also applied for permission to launch international services, despite the fact that it has not yet

met the qualification threshold of having a fleet of at least 20 aircraft (it has just twelve).


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In the last few months a number of carriers have either suspended services to India (including

AirAsiaX, American Airlines and Qantas) or reduced frequencies on certain routes (Air France,

Austrian and Lufthansa).

But for every airline that has faced challenges, there are several incumbent carriers that see growth

opportunities, primarily those from emerging regions such as Asia, Africa and the Middle East, with

examples including:

Dragonair has announced plans to launch services to Kolkata from Nov12;

Etihad will launch an Abu DhabiAhmedabad services effective Nov12;

Virgin Atlantic will be resuming LondonMumbai services from Oct12;

9

Extracts from CAPA India Aviation Outlook FY2012/13INDIA

Kenya Airways commenced a nonstop NairobiDelhi service in May12;

Air China launched a ChengduMumbai service in May12;Iraqi Airways launched routes from Baghdad to Delhi and Mumbai in Q1;

bmi commenced a LondonAmritsar service in Oct11;

SilkAir launched a new SingaporeKolkata route in Aug11;

Singapore Airlines has launched five additional frequencies to Mumbai in the last year.

Virgin Atlantic will benefit from the suspension of Kingfishers MumbaiLondon operation, and is

planning to schedule the service so as to facilitate convenient onward connections to at least four US

destinations. The airline is expected to emerge as an important player on MumbaiUK and Mumbai

US routes.

Several airlines that do not currently operate to India are understood to be evaluating the possibilityof entering the market in the next 1224 months, these include:

Europe: Alitalia and Czech Airlines;

Asia: Garuda Indonesia, Jetstar Asia, Lion Air, Myanmar Airways and Vietnam Airlines;

Africa: Air Austral.

But it is carriers such as Emirates, Qatar Airways and Turkish Airlines that have the most aggressive

expansion plans and are pushing for additional bilaterals as their current entitlements are

exhausted. Emirates, the largest foreign carrier in India, already operates 184 weekly services to ten

cities across India, not including its low cost subsidiary, flyDubai. Turkish Airlines, which has daily

service to Mumbai and Delhi, is seeking to increase these to double daily and wishes to operate toan additional six destinations. Singapore Airlines and Cathay Pacific are also expected to seek

increased rights.

Air India crisis may trigger liberalizationForeign airline investment and liberalisation, the perfect storm for Gulf carriersStar Alliance likely to gain its first Indian member....Jet AirwaysIf Jet Airways was to join Star Alliance the other global alliances will have to reevaluate their


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options. Oneworld has a memberelect in Kingfisher but given its uncertain future (and the

possibility of acquisition by an airline either from a competing alliance or opposed to alliances) this is

not the ideal strategic platform in such an important market.

SkyTeam is understood to have shown some interest in IndiGo, which would provide very strong and

complementary domestic and regional feed, without threatening the longhaul services of the

incumbent SkyTeam members. In many ways an ideal partner, but IndiGos low cost business and

operating model might not permit the linkages and complexities that would be required to

participate in a global alliance.

A380 may finally make its debut in India

With a view to protecting Air India the government has to date rejected applications by foreign

carriers seeking to deploy the A380 on services to India. However, this approach becomes

increasingly untenable as the market runs short of capacity, especially at slot constrained airports

such as Mumbai. The A380, starting with Emirates, may therefore finally make its scheduled debut in

Indian skies this year. As and when an Indian carrier is inducted into the Star Alliance, permission is

also expected to be granted to Lufthansa and Singapore Airlines to commence A380 operations.

But airports are becoming increasingly expensiveWith Delhi Airport having been given permission by the economic regulator to increase airport

charges and passengers fees by 334%, and Mumbai expected to be allowed an increase of 500%,

airlines will become increasingly vocal in their opposition.

And the European Union ETS adds further to costsIndia led a group of more than 20 countries that strongly opposed the introduction of the European

Unions Emissions Trading Scheme. However, as of May12 it appears as though only the Chinese

and Indian carriers are refusing to comply with the requirement to submit emissions data.

Transparency and viability, and not protection, are in Indias national interestsIndia will come under continued pressure from foreign airlines and their governments to increase

market access, with bilaterals being linked to broader trade and strategic geopolitical issues.

At present India does not have a clear strategy with respect to bilaterals. They are national assets

and should be handled in a manner that maximises Indias economic and strategic interests.

Deloitte

2012 Global aerospace and defenseindustry outlook:

A tale of two industries


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What is the future for advancements in air traffic control (ATC), as a way to reduce aircraft fuel burn?Global air transportation system (ATS) transformation initiatives, including the U.S. Federal Aviation Administrations (FAA) NextGen program, as well as Europes public-private Single European Sky ATM Research Programme (SESAR), areexpected to be implemented by 202512. When fully implemented, satellite-based navigation and the transformationalprograms are expected to save an estimated three billion gallons of fuel, four million flight hours in delays, and 29 millionmetric tons of carbon emissions globally each year13. With the expectation of increased demand for travel in the next 20years14, the new technology associated with satellite positioning, navigation, and timing systems is expected to increase fuelsavings per flight by orders of magnitude, while reducing congestion and weather-related delays.

Altogether, it is expected that the net benefit of implementing global transformation initiatives could result in significantfinancial value15. Specifically, the projected net present value of global transformation programs through to 2035 is US$897billion16. The estimated regional breakdown is as follows17: U.S. NextGen program, US$281 billion Europes SESAR program, US$266 billion Rest of world, US$350 billionGlobally, the estimated savings accrued by different beneficiaries include: Airlines, 31 percent Overall economy, 30 percent Passengers, 34 percent Air navigation service providers/airports/ATC organizations, 5 percent of the total benefits

Where is global defense spending going in 2012?Global defense spending is expected to be flat to declining in 2012, mostly made up of reductions in the U.S., UnitedKingdom (UK), and the rest of Europe, offset with increases, principally in China, India, Kingdom of Saudi Arabia, the United

Arab Emirates (UAE), Japan, and Brazil.


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