1 India Airlines The Next India – Aviation:11/26/2017 June 20, 2017 MARKETING PACK India Airlines M O R G A N S T A N L E Y R E S E A R C H Asia/Pacific Morgan Stanley Asia Limited+ Binay Singh Equity Analyst Morgan Stanley India Company Private Limited+ The Next India – Aviation: A Flight from Cyclical to Secular Growth Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

2 World's Third-largest and Fastest-growing Aviation Market11/26/2017 World's Third-largest and Fastest-growing Aviation Market Air travel penetration in India: Now vs the Future India is the fastest growing air travel market globally

3 Drivers of Air Travel Growth in India11/26/2017 Drivers of Air Travel Growth in India Several factors driving air travel growth in India India’s mid-income households to grow fastest in Asia Strong economic growth Expansion in the middle-income segment Strong tourism growth Low air travel penetration rates Aviation infrastructure expansion Increasingly favorable regulatory environment such as UDAN scheme to stimulate regional connectivity A migration from rail to air

4 11/26/2017 Regional Connectivity (UDAN) Scheme Could Help Keep Demand Growth Higher for Longer UDAN Explained Traffic has an inverse correlation with Airline Yields UDAN need not be margin-dilutive for Airlines

5 Sustained Travel Share Gains from Railways Possible11/26/2017 Sustained Travel Share Gains from Railways Possible Rail traffic has stagnated as rail fare growth picked up Air travel has caught up with AC rail travel on pax Air-Rail fare parity for 2AC; Tatkal 3AC close as well Share gain from railways in the modal mix to continue

6 Case Study #1: China Aviation11/26/2017 Case Study #1: China Aviation Inflection in domestic pax growth as wealth per capita crossed a threshold India already showing a higher propensity to fly than China did at the same income level Lower airfares in India mean air travel growth vs GDP growth steeper in India Higher LCC Penetration Helping India as Well

7 Case Study #1: US Aviation11/26/2017 Case Study #1: US Aviation Inflection in domestic pax growth as wealth per capita crossed a threshold PLFs have been rising in the industry since early 1990s Improving efficiency: Rising RPMs per gallon Operating profit margins: Lower lows in each cycle since 2002

8 Strained Capacity at Key Airports11/26/2017 Strained Capacity at Key Airports Strong growth in passenger traffic … … and sharp rise in movements at key private airports … … are leading to high capacity utilization at key airports More airport capacity needed in India

9 Airports’ Profitability Needs to Improve11/26/2017 Airports’ Profitability Needs to Improve Scale drives profitability Identifying AAI's underperforming airports Top 20 airports: All passengers Top 20 airports: International passengers

10 Airport Capex: A Necessity and an Opportunity11/26/2017 Airport Capex: A Necessity and an Opportunity Airport sector: Sizing capex opportunity Huge jump in capex expected over the next decade Greenfield airports: In-principle approval Greenfield airports: Site clearance approval

11 11/26/2017 Key Risks Any sharp move up in crude prices leading to a meaningful rise in airfares Tardy government execution Funding outlook for major capex plans Potential rise in protectionism

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