Submitted By:-Jasmeet Kaur Grover(74)Prerna Parija(89)Vasudha Narayanan(104)

Strategic Analysis of Indian Civil Aviation Industry

Indian Civil Aviation Industry

Abstract:The Indian Civil Aviation Industry is the 9th largest in the world with 15 scheduled operators and 118 non scheduled operators. The anticipated CAGR for 2010-2013 is 16% owing to skilled labor and favorable business environment.

The growth of the aviation industry can be attributed to factors such as buoyant economy, higher disposable incomes, increase in corporate travels, growth in spending on leisure tourism-related travels, wider availability of low fares, etc.

However, there are host of factors that hamper the growth of the industry like capacity and infrastructure related constraints, rising fuel cost, taxing the industry, unfair price war between carriers, etc.

A number of measures related to the aviation infrastructure has been taken up:-

1) Development of capital intensive greenfield airports under PPP mode2) Modernization of Delhi and Mumbai as well as non-metro airports, etc to address the

infrastructure issues.3) Consolidation drives in the industry are expected to provide the benefits such as

increased economies of scale, rationalization of resources, and prevent further losses in the coming years.

4) Corrective measures such as rationalization of tax on ATF and rationalization of ticket pricing need to be pursued to put the Indian aviation industry on the path of sustainable growth

Introduction:There are 4 Phases in growth of Aviation Industry:-

1) Phase 1(1912-1986) : Government Regulation of Airlines for stability.This phase is explained by the following diagram .

2) Phase 2(1986-2003): Private Air-Taxi controller come into existence.

3) Phase 3(2003-2006):Low Cost Carries change the air-traffic scene.

4) Phase 4(2006-Till Date): The Era of Mergers & Acquisitions.

Current Scenario:During the last one decade the civil aviation sector has grown at a phenomenal pace and India has emerged as the 9th largest civil aviation market in the world.

The following data shows us the increase in demand for air-travel over the last 10 years:-

2000-2001

2001-2002

2002-2003

2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

2009-2010

0 50 100 150 200 250 300 350 400 450 500

Scheduled Domestic Passengers Carried(in Lakhs)

(Source: Directorate General Civil Aviation)

Analysis of capacity and demand on a year on year basis showed that there is a yoy increase in both .The growth rate of demand has been consistently higher than capacity growth rate in the year 2010.

The Annualized growth rate has been 14.21%.Infact the number of passengers using domestic airlines increased at the rate of 18.7% from 2009 to reach 520.21 lakh in 2010.

Competition in Civil Aviation:In order to maintain the high growth trajectory, it is very important that competitive forces must continue to operate with in this sector.

The various policies shaping competition in our country are:-

1) Open Sky Policy: Open Sky policy of the Government and rapid air traffic growth have resulted in the entry of several new private airlines in the industry in recent years and also increased frequency of flights of international carriers.

2) FDI Limit: For airlines, FDI allowed in the aviation sector is 49 per cent,but foreign airlines are barred from investing on the grounds of national pride and security.Strenuous lobbying is being done in order to increase this limit.

3) Taxation Policy: There is provision of 100% tax exemption for airport projects for a period of 10 years.

As mentioned above there are 15 scheduled airline operators in India today. As per the latest figures, the market share of these airlines is as follows:-

NACIL; 17.60%

IndiGo; 16.30%

Paramount; 0.50%

GoAir; 5.90%Spicejet; 12.90%

Kingfisher; 20.60%

Jetlite; 7.40%

Jet Airways; 18.60%

Others; 0.20%

Market Share of different airlines for the year 2010

(Source: Directorate General of Civil Aviation)

Some observations from the above data :-

1) Kingfisher is the market leader owing to promising on-board services leading to customer delight.

2) NACIL which was formed by the merger of two state-owned airlines Air India and Indian also holds a large amount of market share.

3) Since a large number of players in the low cost segment , it does not contain any single leader.

4) IndiGo has been able to protect its market share because of its ability to capture the most favorable routes.

For identifying the most successful strategies, we have taken the two top player from both the segments (Low Cost: IndiGo & Premium: Kingfisher Airline) and done an extensive research on the strategies followed by them.

The passenger load factor (PLF) of an airline, sometimes simply called the load factor, is a measure of how much of an airline's passenger carrying capacity is used. This factor is used for measuring the ability of airlines to attract customers.

By obtaining the data of all the airlines for the past 3 years we have made the following chart:-

The analysis of the above figures gives us the following two important insights:-

1) High load factors for the low cost airlines.2) During Recession noticeable decrease in demand.

Airline Wise On-time Comparison(2010)

About 56% of the delays in 2010 were reactionary delays and 13% were caused due to weather conditions.

Also as clearly evident the two market leaders Jet Airways & Kingfisher have a high on time performance.

Strategic plan of MOCA (2010-2015)The current situation of our Civil Aviation Industry can be summarized as follows :-

After examining and prioritizing the issues identified through the current state assessment, there are 5 broad themes that are emerging for the current strategy plan :-

1) Connectivity 2) Infrastructure Creation3) Safety & Security4) Revitalization of Air India5) Efficiency Improvement

Weakness:1)Limited infrastructure2)High costs of operation3)Lack of R&D4)Inadequate trained Manpower.5)Slow Growth of Cargo

Threats:1)Global Terrorism2)Cyclical Economic Downturn3)Development of Substitutes4)Congestion of Air Space5)Global Factors

6)LCC’s of foreign countries.

C i v i l A v i a ti o n I n d u s t r y

Connectivity:-In order to improve connectivity of people by air services, MOCA intend to pursue six strategies:

1) Connecting un-served and under-served areas – through increase of airport infrastructure in such areas using the appropriate development model.

2) The ministry shall work with other government agencies to identify opportunities of reducing risks and hurdles for the aviation sector and address issues of taxation, duties and other economic constraints that may impact the economic health of the sector.

3) Develop an approach towards the growth of general aviation in the country: A study shall be conducted through experts to develop a vision and roadmap for the vibrant growth of general aviation in the country, putting it at par with benchmark nations

Infrastructure Creation:-The following steps would be taken to fight the various infrastructural challenges:

1) Corporatization of AAI: Given the increasing complexity of the AAI’s role and the need to enhance organizational capabilities, create flexible decision making, enhance financial viability and thereby respond more efficaciously to emerging market challenges, it is desirable that AAI move towards a corporate structure in the near future.

2) Strengthen marketing capabilities of AAI: Improved development and use of retail opportunities at the airports – as witnessed in several of India’s newer airports. This could act as an attraction for the airport and add another revenue stream to them

3) Develop alternate funding options: This may include different combinations of equity, soft loans and grants

Safety & Security:There are four major thrust areas identified to improve the safety levels within the sector:

1) Establishment of a Civil Aviation Authority 2) Creation of a State Safety Programme (SSP) along with a corresponding Safety

Management System (SMS) 3) A comprehensive Flight Duty Time Limitation program would be adopted to reduce

accident occurrences. 4) Strengthen the Civil Aviation Security Advisory Council (CASAC) to engage experts in

the field to advise the Government on critical issues of safety.

India will develop an appropriate legal framework for effective implementation of its security commitments under Annex 17 of Chicago convention.

Revitalization of Air India:After ruling the skies for nearly half a century, it has suffered an erosion of market share, image and prestige with the advent of new players in mid-90s. Today it has accumulated a loss of 11,000 crores and enjoys a market share of only 18%.

The strategy of the Airlines for the next five years would be to: 1) To reach every nook and corner of the domestic market by embarking on an ambitious 4

tier growth model in the next 5 years. 2) Wipe out the current losses amounting to more than Rs.11,000 crores and make it a

genuinely profit making company both operationally and financially by 2014. 3) Passenger revenue to achieve a target of Rs.35,000 cr. from present level of Rs.11,500

cr.

IndiGo : Strategic Analysis

History IndiGo Air or IndiGo Airlines sports the deep color of IndiGo as its signature color. It is a privately owned low-cost domestic airline based in Gurgaon with Indira Gandhi International Airport as its main base.

IndiGo Airlines started operations on 4th August 2006 and is owned by InterGlobe Enterprises and Mr. Rakesh Gangwal. It took delivery of its first Airbus A320-200 aircraft on 28 July 2006 and received six aircraft during 2006. Nine more aircraft were delivered in 2007 taking the total to 15. Former US Airways Executive vice-President and Marketing and Planning Bruce Ashby joined IndiGo as its Chief Executive Officer. The airline has also acquired three parking spots in Indira Gandhi International Airport and Chhatrapati Shivaji International Airport. Recently IndiGo changed the outfits for their crew members on occasion of its 4th anniversary.

This airline is amongst the best, offering professional services, economical prices with great deals and discounted airfares. It operates to all the major cities of India. IndiGo air tickets can be booked online and the services provided are user friendly while at the same time, extremely comprehensive. IndiGo Airline provides what no other airline can.

It was awarded the title of Best Domestic Low Cost Carrier in India for 2008. The airline has obtained a green signal from the Central Government to commence international operations after it completes five years of domestic service in the country on August 2011. The airline would fly to Singapore, Bangkok, Dubai and Muscat from several Indian cities

The Rise of Indigo Indigo has been one of the fastest growing scheduled airline operators in India. Its market share has been increasing continuously ever since its inception in 2006. It has been able to achieve its break even within two years of its launch and has reported gross revenue of 60 crores this year. Despite the decline in the aviation industry and global economic slowdown, IndiGo has accelerated its growth rate. Also, IndiGo being a new entrant has managed to become a cost leader in its sector

Since 2008, when the company booked its first profit even as high fuel prices and the economic downturn ravaged its competitors, IndiGo's net income has grown more than five times — from a shade under $20 million to more than $120 million.

Year 2006 Year 2007 Year 2008 Year 2009 Year 2010

1.00%

9.60% 10.30%

13.50%

16.30%

IndiGo's Market ShareThe year In-digo broke even.It took Indigo just 2 years to break even.

After the $15.6 billion purchase of 180 passenger jets from Airbus, IndiGo topped state-owned Air India to become the country's second-largest carrier — matching liquor baron Vijay Mallya's full-service Kingfisher Airlines with an 18.6 percent share of the market (figures for December, 2010)

Conclusion from Strategies Adopted by IndiGoIndiGo’s success story has a lot of lessons for those interested in strategy. It is one of the world’s hottest low-cost carriers. A close look at the strategies followed by the company give us the following insights:

1) IndiGo used the promise of India's huge, untapped market to lure partner organizations into offering bargain-basement prices — which was the key to the low-cost airline's initial purchase of 100 A-320 jets from Airbus in 2005.

2) It invested a lot in training its staff.3) IndiGo redefined the low-cost model to compete for business with full-service carriers by

offering more than cheap tickets.

Thus the above three factors showed that it killed whatever difference might have existed between an LCC and a full-service carrier. IndiGo was able to turn regular business travelers into loyal customers because it never acted like a budget airline. Its purchase of all new aircraft helped it avoid maintenance problems, and superior planning helped it to match or exceed the on-time performance record of its full-service competitors — even though rapid turnaround of its planes was the key to the company making money.

4) In a country where other carriers shared passenger-stair vehicles and the top airline still had to have disabled passengers carried up the staircase to plane height by ground crew, for instance, IndiGo brought in larger, handicapped accessible passenger ramps from day one.

5) The company equipped check-in staff with hand-held scanners that allowed passengers without baggage to avoid the dreaded scrum at the counter.

Thus using schemes like the two mentioned above, IndiGo has been able to maintain an image different than the other LCCs in terms of public perception for reliability and reputation.

6) Another important strategy employed by Indigo has been of choosing cities that have been under-served by other carriers and lack connections to other cities. "For instance when IndiGo opened in Bhubaneswar, it connected the city to Delhi, Hyderabad, Bangalore and Kolkata instead of just opting for one route. This gave it access to a larger passenger segment and produced better yields.

Its strategy has been to connect apparently unviable sectors, like the north-east, far in excess of the aviation dispersal route guidelines, which require airlines to ply some unviable routes to qualify to fly to big cities.

The above given strategies are those adopted by IndiGo that lead to an increase in its market share.

References:-

1) http://www.dgca.gov.in/2) http://www.indianchild.com/india_civil_aviation.htm3) http://www.globalpost.com/dispatch/india/110125/indigo-airlines-indian-consumer4) http://goindia.about.com/od/air/tp/india-domestic-airlines.htm5) http://www.rediff.com/money/2008/jan/28air.htm6) http://en.wikipedia.org/wiki/IndiGo7) http://event.arc.nasa.gov/GreenAviation/home/pdf/

R.Rosen.Green_Aviation_Workshop.pdf8) http://rpe.nl.sg/Business/5bcc7b06-d2db-41e8-8e1f-e811facd6036.aspx