Indian Aviation Industry
Indian Aviation Industry
Indian Aviation Industry 2013-15NEHA SARAOGIRAJDEEP
HIRASHREYANSH JAINSHUBHAM BANERJEE
The Indian Aviation IndustryOverview of Indian AviationIndia is
one of the growing economies of the world with an average GDP
growth of over 6 percent in the last five years. For India to
sustain its economic growth story it has to strengthen its
infrastructure sector and in particular, critically improve its
transportation infrastructure. Aviation is an important part of
national infrastructure and one of the prime movers for economic
growth and an important strategic element of employment generation.
Aviation sector in India has been transformed from an over
regulated and under managed sector since 2004. Adoption of global
standards has made aviation a safer way to travel.Air Traffic: The
AAI manages total 126 airports in the country, which include 16
international airports, 89 domestic airports and 26 civil enclaves.
Top 5 airports in the country handle 70% of the passenger traffic
of which Delhi and Mumbai together account for 50%. Passenger and
cargo traffic has growth at an average of about 9% over the last 10
years.Passenger Growth: Airports in India carried 13.9 million
passengers in June 2013 vis-a-vis 13.6 million passengers handled
in June 2012. Passenger traffic at Indian airports rose by modest
2.4% in June 2013.Privatization: Privatization of international
airports is in offing through Joint Venture Route. Three
Greenfields airports are getting developed at Kochi, Hyderabad and
Bangalore with major shareholding of private sector. Few selected
non-metro airports are likely to be privatized. 100% foreign equity
has also been allowed in construction and maintenance of airports
with selective approval from Foreign Investment Promotion Board.Air
Movements: The total aircraft movements has decreased by 7.1%
during February 2013 over traffic handled during February 2012.(The
Annual total traffic of Indian carriers for the last two years is
as depicted in Exhibit 1).
Cargo Traffic: India already has an open sky policy for air
cargo.The ministry also plans to build dedicated cargo airports
across the country to cater to increasing demand in air cargo
traffic.The first two months of 2013 showed World Freight traffic
increased slightly by 0.6 per cent during February 2013. Domestic
freight traffic increased by 3.3 per cent whereas international
freight traffic decreased by 0.7 per cent. Total freight handled
worldwide during the year ending February 2013 was flat compared to
the year ending February 2012. Domestic freight traffic has
increased marginally by 0.8 per cent whereas international freight
traffic has decreased by 0.8 per cent for the same period. (The
trends in the air cargo segment are depicted in Exhibit 2).
HistoryThe first commercial flight in India was made on February
18, 1911, when a French pilot Monseigneur Piguet flew airmails from
Allahabad to Naini, covering a distance of about 10km in as many
minutes.Tata Services became Tata Airlines and then Air-India
International. The domestic aviation scene, however, was chaotic.
When the American Tenth Air force in India disposed of its planes
at throwaway prices, 11 domestic airlines sprang up, scrambling for
traffic that could sustain only two or three. In 1953, the
government nationalized the airlines, merged them, and created
Indian Airlines. For the next 25 years JRD Tata remained the
chairman of Air-India and a director on board of Indian Airlines.
After JRD Tata left, voracious unions mushroomed, spawned on the
pork barrel jobs created by politicians. In 1999, AI had 700
employees per plane; today it has 474 whereas other airlines have
350. For many years in India air travel was perceived to be an
elastic activity. This view arose from the Maharaja syndrome where,
due to prohibitive cost of air travel, the only people who could
afford it were the rich and powerful.In recent times, however, this
image of Civil Aviation has undergone a change and aviation is now
viewed in a different light as an essential link not only for
international travel and trade but also for providing connectivity
to different parts of the country. Aviation is, by its very nature,
a critical part of the infrastructure of the country and has
important ramifications for the development of tourism and trade,
the opening up of inaccessible areas of the country and for
providing stimulus to business activity and economic growth. Until
less than a decade ago, all aspects of aviation were firmly
controlled by the Government. In the early fifties, all airlines
operating in the country were merged into either Indian Airlines or
Air India and, by virtue of the Air Corporations Act, 1953; this
monopoly was perpetuated for the next forty years. The DGCA
controlled every aspect of flying including granting flying
licenses, pilots, certifying aircrafts for flight and issuing all
rules and procedures governing Indian airports and airspace.
Finally, the AAI was entrusted with the responsibility of managing
al national and international airports and administering every
aspect of air transport operation through the ATC. With the opening
of the Indian economy in the early 90s, aviation saw some important
changes. Most importantly, the Air Corporation Act was repealed to
end the monopoly of the public sector and private airlines were
reintroduced.Market Structure and ImplicationsThe aviation industry
in India, especially with regard to passenger airlines, follows a
strictly oligopoly-type structure with the characteristics-
Industry dominated by a small number of large firms. Firms sell
identical products, only differentiation is in the form of service
quality and frills offered. Significant entry barriers w.r.t
regulations and huge capital investment requirements. Firm is the
price setter. MR=MC P>MC Long run profit >= 0 Strategic
dependence on individual rival firm`s behaviour.Market share
concentration:According to the figures on market share of various
scheduled airlines till 2013, IndiGo topped with 29.5%, followed by
Spicejet with 19.8%, Air India with 19.1%, Jet Airways 17.1%, Go
Air 9.0%, JetLite 5.4%.(A detailed pie-chart statistics of the
market share provided by DGCA is shown in Exhibit 3.)
Indian Aviation Market A differentiated Oligopoly:
Each seller in an imperfectly competitive market faces a
negatively sloped demand curve for the product permitting him some
control of the price of his product. In an oligopoly, a few firms
produce the same product, while in monopolistic competition, many
firms produce differentiated but similar products. In a
differentiated oligopoly, a few firms produce products different
enough for each firm to have its own downward sloping demand curve.
As with a perfectly competitive firm or monopoly, the
differentiated oligopoly firm produces at a profit maximizing level
of output where marginal costs equals marginal revenues. The firm
finds the price it will charge customers at the profit maximizing
level of output Qm, from the demand curve, and sets price to Pm. As
we can see, the firm is earning economic profits since price
exceeds average total cost at the profit maximizing level of
output.
Pricing Mechanisms:
Price and quantity are determined by the interaction of demand
and supply in the market. However, given the large number of
buyers, firms can decide prices at which they will sell tickets. In
fact, in the airlines sector, firms go in for third degree price
discrimination and segment the market, charging a higher price to
the market with a relatively inelastic demand (such as fares
between business and economy class travellers, or between emergency
travel and leisure travel by providing apex fares). The low cost
airlines follow this different pricing strategy. Customers booking
early with carriers such as Air Deccan will normally find much
lower prices if they are prepared to commit themselves to a flight
by booking early, on the justification that consumer`s demand for a
particular flight becomes more inelastic the nearer to the time of
the service.The term revenue management is commonly used to
describe most aspects of airlines` pricing and seat-inventory
control decisions; but in reality, revenue managers primarily
practice seat-inventory control. Formally, revenue management
describes a process of setting fares for each route (origin and
destination pair) and each set of restrictions (nonstop,
time-of-day, day-of-week, refundable, advance purchase, first class
or coach, and Saturday-night stay over) and limiting the number of
seats available at each fare. In language of economics, revenue
management increases airlines` profits in three ways-
Implements peak-load pricing. Implements third-degree price
discrimination. That is, fare restrictions screen customers and
segment them by their sensitivity to price and potentially by their
demand uncertainty. For instance, Indian Airlines apex fares (for
booking one week or three weeks advance). Implements an inventory
control system for coping with uncertain demand.
Limited entry:Virgin Group founder Richard Branson once famously
said, The safest way to become a millionaire is to start as a
billionaire and invest in the airline industry.The mortality rate
in the airline business is very high. That`s equally true for any
low-cost airline model. It requires adequate staying power to buy
aircraft and take losses in the initial years. Experts say it takes
nearly $60 million-$70 million (Rs 270 cr -315 cr) to float a
full-service airline.Entry costs are not recoverable and incumbents
have the ability to respond quickly to entry of a new competitor.
Capacity constraints, absence of freedoms to compete on a new
route, investment constraints, and restrictions on code sharing can
be all important barriers to entry.Market Equilibrium through the
Cournot Model:
The Cournot model assumes that each firm takes the output of the
other firm as given. If Indian Airlines output is assumed to say
the same, Jet will maximize profits by setting MR=MC. The result is
shown. In the Cournot framework the equilibrium is at the
intersection of the two reaction functions. These are just the
profit-maximizing conditions rearranged.The revenue of both a
competitive firm and of a monopolist depends only on the firm`s own
output: for a competitive firm we assume that the firm`s output
does not affect the price, and for a monopolist there are no other
firms in the market. For a duopolistic, however, revenue depends on
both its own output and the other firm`s output.We conclude that
the firm`s outputs and the price are different in Cournot-Nash
equilibrium than they are in a competitive equilibrium. As the
demand curve slopes down, price exceeds marginal cost, so that, as
for a monopoly, the total output produced by the firms is less than
the competitive output. An implication is that, as for a monopoly,
the Nash equilibrium outcome in a Cournot duopoly is not Pareto
efficient.Passenger Airlines The Players
Jet Airways: Jet Airways is the second largest Indian airline
based in Mumbai, Maharashtra. It operates over 400 flights daily to
76 destinations worldwide. Its main hub is Mumbai, with secondary
hubs at Delhi, Kolkata, Chennai, Cochin, Ahmadabad and Bangalore.
It has an international hub at Brussels airport, Belgium. Jet
Airways is owned by Naresh Goyal. Jet Airways was incorporated as
an air taxi operator on 1 April 1992. It started commercial
operations on 5 May 1993 with a fleet of four leased Boeing 737-300
aircraft. In January 1994, a change in the law enabled Jet Airways
to apply for scheduled airline status, which was granted on 4
January 1995. Naresh Goyal, who already owned Jetair Pvt. Ltd.,
which provided sales and marketing for foreign airlines in India,
set up Jet Airways as a full-service scheduled airline to compete
against state owned Indian Airlines. Indian Airlines had enjoyed a
monopoly in the domestic market between 1953, when all major Indian
air transport providers were nationalised under the Air
Corporations Act (1953), and January 1994, when the Air
Corporations Act was repealed, following which Jet Airways received
scheduled airline status. On 12 April 2007, Jet Airways bought out
Air Sahara for INR14.5 billion. Air Sahara was renamed JetLite, and
was marketed between a low-cost carrier and a full-service airline.
In August 2008, Jet Airways announced its plans to completely
integrate JetLite into Jet Airways. Jet Konnect is the low-cost
brand of Jet Airways. It was launched on 8 May 2009, and shares the
same airline designation as Jet Airways. It operates a mixed fleet
of ATR 72-500s and Boeing 737-800s. Jet Airways finally merged
JetLite brand into Jet Konnect on 25 March 2012. Jet serves 52
domestic destinations and 24 international destinations across
Asia, Europe, North America, etc. Short haul destinations are also
served only on domestic regional routes. It has a total of 98 fleet
size credited to Jet Airways and 19 for JetLite. GoAir:GoAir is an
Indian low-fare airline based in Mumbai, India. It operates
domestic passenger services to 22 cities with 92 daily flights and
approximately 638 weekly flights. Its main base is Chhatrapati
Shivaji International Airport, Mumbai. It is the aviation foray of
the Wadia Group and launched commercial operations in November
2005. Since January 2007, Go Air has been recording an average load
factor of 86%. As part of its future outlook, Go Air will continue
to purchase more aircraft and expand its route work. It operates to
21 destinations in India, with 156 daily flights and approximately
1092 weekly flights, with a fleet size of 12 aircrafts. Being a
no-frills airline, Go Air does not offer a comp-meal service, food
and beverages are available on-board as buy-on-board. It provides a
premium service known as Go Business with services of seat
availability in first two rows, more leg space, free meals and
luggage allowance.
SpiceJet: SpiceJet is a low-cost airline headquartered in
Chennai, India. It began service in May 2005 and by 2008, it was
India`s second-largest low-cost airline in terms of market share.
The origin of SpiceJet track back to February 1993 when ModiLuft,
one of India`s first post-deregulation airlines that was launched
by the Indian industrialist s K modi, in technical partnership with
the German flag carrier Lufthansa. After operations being ceased
for once and renaming it to Royal Airways in 1996; in 2004, the
airlines was renamed, funds were raised and operations
re-started.The pricing policy of Spicejet is usually very dynamic,
with discounts and tickets in promotion. Like other carriers, even
if the advertised price may be very low, it often does not include
charges & taxes. As many as ten percent of the seats on any
flight are offered at the lowest price, and are the first to sell.
The prices steadily rise thereafter to a point where they can be
comparable or more expensive than a flight on a full-service
carrier. Typically fares increase as the plane fills up, which
rewards early reservations. Often, Spicejet flies to smaller, less
congested secondary airports and/or fly to airports in off-peak
hours to avoid air traffic delays and taking advantage of lower
landing fees. Spicejet tends to offload, service and re-load the
aircraft (turnaround) in shorter time periods, allowing maximum
utilisation of aircraft. Along with passenger services, in a fleet
size of 42, Spicejet also offers cargo services on the same flight
between 2 to 3.5 tons of cargo is ferried on each flight ensuring
maximum utilisation of the aircraft. Indigo Airlines:IndiGo, the
largest airline in India is a private, low-cost airline based in
Gurgaon, Haryana, India. Since commencing operations in August
2006, it has established itself as one of India`s leading airlines
using its model of efficient, low cost operations and by attracting
customers with low fares. It is the largest low cost carrier in
India and India`s largest carrier by market share as of August
2012. As of March 2012, it is the only airline in India making
profits. Indigo operates to 32 destinations in India and abroad
with 355 flights each day. Unlike most low carriers, indigo uses a
hub and spoke model used by full service airlines where the airline
flights to different destinations are routed through this hub. It
operates on a fleet size of 57 and the average fleet age is 2.3
years. Being a low-cost carrier, all of Indigos flights have no
business or first class sections. It offers only Economy class
seating and buy-on-board in-flight meal programme. Kingfisher
Airlines:Kingfisher Airlines Ltd. is an airline group based in
India, with head office at Mumbai and registered office at
Bangalore. Kingfisher Airlines, through its parent company United
Breweries Group, has a 50% stake in low-cost carrier Kingfisher
Red. The airline has been facing financial issues for many years.
Until December 2011, Kingfisher Airlines had the second largest
share in India`s domestic air travel market. However due to a
severe financial crisis faced by the airline at the beginning of
2012, it has the lowest market share since April 2012. Ever since
it commenced operations in 2005, it has been reporting losses.
After acquiring Air Deccan, Kingfisher suffered a loss of over 1000
crores for three consecutive years. By early 2012, the airline
accumulated losses of over 7000 crore with half of its fleet
grounded and many staff on strike. Due to financial problems of
Kingfisher Airlines, the fleet was drastically reduced from 63 to
16 and all international operations suspended.Air India:Air India,
formerly known as Indian Airlines Limited was a major Indian
airline based in New Delhi and focussed primarily on domestic
routes, along with several international services to neighbouring
countries in Asia. It was state-owned, and was administered by the
Ministry of Civil Aviation. It was one of the two flag carriers of
India, the other being Air India. The airline officially merged
into Air India on 27 February 2011. On 7 December 2005, the airline
was rebranded as Indian for advertising purposes as a part of a
program to revamp its image in preparation for an IPO. The airline
operated closely with Air India, India`s national carrier. Alliance
Air, a fully owned subsidiary of Indian, was renamed Air India
Regional. In 2007, the Government of India announced that Indian
would be merged into Air India. As part of the merger process, a
new company called the National Aviation Company of India Ltd. (now
called Air India Ltd.) was established, into which both Air India,
along with Air India express, and Indian, along with Alliance Air,
would be merged. Once merger was completed, the airline called Air
India would continue to be headquartered in Mumbai and would have a
fleet of over 130 aircraft. The Airline was set up under the Air
Corporations Act, 1953 with an initial capital of 32 million and
started operations on 1 August 1953. It was established after
legislation came into force to nationalise the entire airline
industry in India. Two new national airlines were to be formed
along the same lines as happened in the UK with British Overseas
Airways Corporation and British European Airways. Air India took
over international routes and Indian Airline Corporation took over
the domestic and regional routes. It is one of the largest regional
airline systems in Asia with a fleet of 98 aircrafts. It has many
firsts to its credit, introducing of the wide-bodied A300 aircraft
on the domestic network, the fly-by-wire A320, Domestic Shuttle
Service, walk-in-flights and Flexi-fares.
POSITIONING IN TERMS OF SERVICE -1.Jet Airways:Jet Airways has
retained its leadership position in India. With its first flight in
1993, Jet Airways has come a long way to becoming the fastest
growing airlines in the world- now all set to change the way you
fly- for the better! Connecting 24 international destinations and
operating flights to and from51 destinations in India, Jet Airways
offers the best air deals.
2. Indigo Airlines:Owned by InterGlobe Enterprises, Indigois a
budget airlinewhich wont deprive you of your creature comforts.
This airline only undertakes domestic flights all over India. It
took off its inaugural flight in 2006
3.SpiceJet:This Domestic Airlines has an on-time performance of
82.7 per cent. The Ground staff and the cabin crew are courteous
and the interiors of the planes are clean and well-maintained. The
Airline receives 3.5 complaints per 10,000 passengers
4.Kingfisher Airlines:This is an airline that claims to offer
the ultimate comfort in air travel. Owned by Vijay Mallya, the head
of the Bangalore-based United Breweries Group, Kingfisher Airlines
was established in 2003. His aim was to make air travel in India an
experience to remember and not merely a journey from a place to
another place. Stylish and comfortable this airline boasts of
having highly trained personnel. It wouldnt be wrong to say that
the airlines provides safe, value based and comfortable air travel
to travelers.
5.GoAir:Established in June 2004 by the Wadia Group, Go Air is a
low-fare carrier. The airline currently operates across 16
destinations with 120 daily flights and approximately 847 weekly
flights. On an average it receives 1.8 complaints per 10,000
passengers
6.Air India:The first major domestic airline ofIndia, Air India
started its operations in 1953 as the oldest airline company in
India. Indian Airlines was renamed Indian in December 2005, and in
2007, both Air India, the national carrier of India in the
international arena and Indian Airlines were amalgamated into
National Aviation Company of India Limited (NACIL). The name Air
India has been adopted for the air services.Even though the airline
is facing internal turmoil at present, it is still operating with
its loyal base of frequent flyers.
.
DEMAND IN THE DOMESTIC AIRLINE INDUSTRYCAPACITY VS DEMAND
RegulationsOPEN SKY POLICIESNeed for Open Skies PolicyA
recurring demand often voiced by interested parties is that, in
order to promoteTravel&Tourism,Indiashould adopt an Open Skies
policy. It is argued that the current policy restricts the access
of foreign airlines. As a result potential tourists are not offered
a choice of airlines or seats when travelling toIndia. This problem
is exacerbated during the holiday season when it is difficult, if
not impossible, to get a seat either into the country or out of it.
It is argued, therefore, thatIndiashould adopt an Open Skies
approach to any foreign carrier wanting to fly intoIndia, which
literally means allowing them unlimited service, capacity and
points of call.Meaning of Open SkiesAt the outset we must point out
that the concept of 'Open Skies' is much misunderstood in its
meaning and implications. Strictly speaking Open Skies means
unrestricted access by any carrier into the sovereign territory of
a country without any written agreement specifying capacity, ports
of call or schedule of services. In other words an Open Skies
policy would allow the foreign airline of any country or ownership
to land at any port on any number of occasions and with unlimited
seat capacity. There would be no restriction on the type of
aircraft used, no demand for certification, no regularity of
service and no need to specify at which airports they would land.
Defined in this manner, it is not surprising that Open Skies
policies are adopted only by a handful of countries, most commonly
those that have no national carriers of their own and that have
only one or two airports. No sovereign country of any eminence
practices Open Skies least of all the European Union, UK, USA,
Japan, Australia or countries in South East Asia.Bilateral
TreatiesHowever, almost 99 per cent of Members of the
InternationalCivil AviationOrganization (ICAO) follow the system of
negotiated bilateral treaties determining theaviationrelations
between two sovereign Contracting parties. In fact, the
bilateralaviationregime is considered the fundamental basis for a
disciplined and regulatedaviationsystem between the nations of the
world. It provides not only regularity of operations through
scheduled services but also stipulates the basis of ownership,
number of seats to be utilized, type and certification of aircraft
and visiting ports of call. The Bilateral Agreements also protect
the different kinds ofaviationFreedoms granted to contracting
parties by specifying the reciprocal rights to be enjoyed by
each.Indian Bilateral TreatiesIndiahas signed over 180 Bilateral
Agreements with different countries. In 2002 the total number of
seats available was 38.09 million. Of this, the capacity operated
was approximately 19.174 million seats. Since the average size of
traffic to and from the country is slightly in excess of
approximately 14 million passengers, normally the contracted rights
should suffice the traffic demand.Utilization of Bilateral Treaty
ContractsIt is in the actual utilization of the contracted seats
that the problem arises. Of the contracted amount, 50 per cent are
to be utilized by the national carrier and 50 per cent by the
airline owned by the contracting country. However, whilst the
foreign carriers are in a position to use over 70 per cent of their
entitlement, the national carrier is only able to utilize 29.4 per
cent of their share. It is this shortfall that creates pressure on
seats, particularly during peak tourism national carriers do not
have sufficient aircrafts to be able to utilize the bilateral
rights available to the country and enter into commercial and code
sharing arrangements to maximize revenue. Whilst this does improve
their profitability in the short run, it has a long-term adverse
effect in that it deprives the country of much needed air bridges
to bring in tourists and carry trade.Under the present bilateral
system, the utilization of the traffic rights on international
routes to and fromIndia, as negotiated by the Government ofIndia,
is restricted to the two Government owned 'national' carriers -
namely AirIndia and Indian Airlines and either or both these
carriers are the Indian designated carriers under the various Air
services Agreements. The Operating Permits restrict the privately
owned carriers, such as Jet Airways and Air Sahara, to operate only
domestic routes withinIndia.
Civil Aviation Policy inIndiaIn the context of a multiplicity of
airlines, airport operators (including private sector), and the
possibility of oligopolistic practices, there is a need for an
autonomous regulatory authority which could work as a watchdog,
aswell as a facilitator for the sector, prescribe and enforce
minimum standards for all agencies, settle disputes with regard to
abuse of monopoly and ensure level playing field for all agencies.
The CAA was commissioned to maintain a competitive civil aviation
environment which ensures safety and security in accordance with
international standards, promotes efficient, cost-effective and
orderly growth of air transport and contributes to social and
economic development of the country.Objectives of Civil Aviation
Ministry To ensure aviation safety, security Effective regulation
of air transport in the country in the liberalized environment
Safe, efficient, reliable and widespread quality air transport
services are providedat reasonable prices Flexibility to adapt to
changing needs and circumstances To provide all players a
level-playing field Encourage Private participation Encourage
Trade, tourism and overall economic activity and growth Security of
civil aviation operations is ensured through appropriate systems,
policies, and practicesPrivate Sector Participation and the Civil
Aviation PolicyPrivate sector participation will be a major thrust
area in the civil aviation sector for promoting investment,
improving quality and efficiency and increasing competition.
Competitive regulatory framework with minimal controls encourages
entry and operation of private airlines/ airports. Encouragement of
private sector investment in the construction, up gradation and
operation of new and existing airports including cargo related
infrastructure. Rationalization of various charges and price of
ATF/Avgas will be undertaken to render operation of smaller
aircraft viable so as to encourage major investment in feeder and
regional air services by the private sector. Training Institutes
for pilots, flight engineers, maintenance personnel, air-traffic
controller, and security will be encouraged in private sector.
Private sector investment in non-aeronautical activities like
shopping complex, golf course, Entertainment Park, aero-sports etc.
near airports will be encouraged to increase revenue, improve
viability of airports and to promote tourism.CAA will ensure that
this is not at the cost of primary aeronautical functions, and is
consistent with the security requirements. Government will
gradually reduce its equity in PSUs in the sector. Government will
encourage employee participation through issue of shares and
ESOP
SecurityStrict national civil aviation security programs to
safeguard civil aviation operations against acts of unlawful
interference have to be established through regulations, practices
and procedures, which take account of the safety, regularity and
efficiency of flights.A good safety record is a judgment of past
performance but does not guarantee the future, although it is a
useful indicator. While pilot error is said to be on the decline,
factors of fatigue, weather, congestion and automated systems have
complicated safety. Airline operators, pilots, mechanics, flight
attendants, government regulators and makers all have a stake in
making aviation as safe as possible. The International Air
Transport Association (IATA), the International Civil Aviation
Organization (ICAO), manufacturers and others bodies cooperate in
this aim. As world air traffic is expected to double or more by
2020, the accident rate must be reduced in order to avoid major
accidents occurring more frequently around the
globe.MaintenancePrivate sector participation is encouraged in
existing maintenance infrastructure of Indian Airlines and
AirIndialike Jet Engine Overhaul Complex (JEOC) and new maintenance
facilities including engine overhaul and repairs with up to 100 %
foreign equity.Indian Airlines has major maintenance facilities for
all the types of aircraft in IAL fleet i.e. Airbus-300, Airbus-320,
Boeing-737 and Dornier-228. The Engineering Department is
responsible for maintenance of aircraft and is answerable to
Director General of CivilAviation (DGCA) in maintaining the Quality
Control. The Maintenance of the aircraft is carried out at four
major bases located atDelhi, Mumbai,CalcuttaandHyderabad.Saharaalso
has its own NDT Shops, wheels and brake assembly shop, battery
charging shop, avionics shop and seat repair shop. It is the only
private domestic airline to have its own hangar for aircraft
maintenance. It is also the only private domestic airline to have
self maintenance capability.AirDeccan, Bangalore-based airline, has
decided to set up its engineering and maintenance facility for
Airbus-320 operations, basing two of a fleet of 11 Airbus jets
here.They have also sought land from the Airports Authority of
India to build an exclusive hangar to carry out 300 and 500-hour
checks, apart from C-Checks and line maintenance.
Current Trends (this is old data)The Indian Aviation Industry
has been going through a turbulent phase over the past several
years facing multiple headwinds high oil prices and limited pricing
power contributed by industry wide over capacity and periods of
subdued demand growth. Over the near term the challenges facing the
airline operators are related to high debt burden and liquidity
constraints - most operators need significant equity infusion to
effect a meaningful improvement in balance sheet. Improved
financial profile would also allow these players to focus on steps
to improve long term viability and brand building through
differentiated customer service. Over the long term the operators
need to focus on improving cost structure, through rationalization
at all levels including mix of fleet and routes, aimed at cost
efficiency. At the industry level, long term viability also
requires return of pricing power through better alignment of
capacity to the underlying demand growth. While in the beginning of
2008-09, the sector was impacted by sharp rise in crude oil prices,
it was the decline in passenger traffic growth which led to severe
underperformance during H2, 2008-09 to H1 2009-10. The operating
environment improved for a brief period in 2010-11 on back of
recovery in passenger traffic, industry-wide capacity discipline
and relatively stable fuel prices. However, elevated fuel prices
over the last three quarters coupled with intense competition and
unfavourable foreign exchange environment has again deteriorated
the financial performance of airlines. During this period, while
the passenger traffic growth has been steady,intense competition
has impacted yields and forced airlines back into losses in an
inflated cost base scenario. To address the concerns surrounding
the operating viability of Indian carriers, the Government on its
part has recently initiated a series of measures including,
proposal to allow foreign carriers to make strategic investments
(up to 49% stake) in Indian Carriers proposal to allow airlines to
directly import ATF Lifting the freeze on international expansions
of private airlines. Financial assistance to the national carrier.
However, these steps alone may not be adequate to address the
fundamental problems affecting the industry. While the domestic
airlines have not been able to attract foreign investors (up to 49%
FDI is allowed, though foreign airlines are currently not allowed
any stake), foreign airlines may be interested in taking strategic
stakes due to their deeper business understanding, longer
investment horizons and overall longer term commitment towards the
global aviation industry. Healthy passenger traffic growth on
account of favourable demographics, rising disposable incomes and
low air travel penetration could attract long-term strategic
investments in the sector. However, in our opinion, there are two
key challenges: Aviation economics is currently not favourable in
India resulting in weak financial Performance of airlines.
Internationally, too airlines are going through period of stress
which could possibly dissuade their investment plans in newer
markets. Besides, foreign carriers already enjoy significant market
share of profitable international routes and have wide access to
Indian market through code-sharing arrangements with domestic
players. Given these considerations, we believe, foreign airlines
are likely to be more cautious in their investment decisions and
strategies are likely to be long drawn rather than focused on
short-term valuations. On the proposal to allow import of ATF, we
feel that the duty differential between sales tax (averaging around
22-26% for domestic fuel uplifts) being currently paid by airlines
on domestic routes and import duty (8.5%- 10.0%) is an attractive
proposition for airlines. However the challenges in importing,
storing and transporting jet fuel will be a considerable roadblock
for airlines due to OMCs monopoly on infrastructure at most Indian
airports. From the working capital standpoint too, airlines will
need to deploy significant amount of resources in sourcing fuel
which may not be easy given the stretched balance sheets and tight
liquidity profile of most airlines.
Strong passenger traffic growth:Rising disposable incomes and
low penetration levels India aviation industry promises huge growth
potential due to large and growing middle class population,
favourable demographics, rapid economic growth, higher disposable
incomes, rising aspirations of the middle class, and overall low
penetration levels (less than 3%). The industry has grown at a 16%
CAGR in passenger traffic terms over the past decade. With advent
of LCCs and resultant decline in yields, passenger traffic growth
which averaged 13% in the first half has increased substantially to
19% CAGR during 2006-2011. Despite strong growth, air travel
penetration in India remains among the lowest in the world. In
fact, air travel penetration in India is less than half of that in
China where people take 0.2 trips per person per year; indicating
strong long term growth potential. A comparative statistic in
United States, the worlds largest domestic aviation market stands
at 2 trips per person per year. We expect passenger demand to
remain stable and grow between 12-15% in the medium term, assuming
a no major weakness in GDP growth going forward.
Rising ATF Prices & Steep Rupee Depreciation: The airlines
industry had been severely impacted by the significant increase in
ATF prices (up 57% in last 18 months) as Indian Carriers do not
hedge fuel prices and have exhibited limited ability to charge fuel
surcharges due to irrational and undisciplined pricing dictated by
competition rather than costs / demand. Besides, the steep rupee
depreciation (18.7% depreciation in CY11) acts double whammy as
apart from fuel costs, substantial portion of other operating costs
like lease rentals, maintenance, expat salaries and a portion of
sales commissions are USD-linked or US denominated. (Exhibit 8
shows the rise in ATF price and rupee depreciation). Profit
Margins: With combined impact of 1) moderating pax growth 2) lower
yields due to excessive competitive 3) rising ATF prices 4) steep
rupee depreciation and 5) rising debt levels and interest costs,
the profitability margins of the airlines industry have been
severely impacted. As per Centre for Asia Pacific Aviation (CAPA),
Indian carriers could be posting staggering losses of $2.5 billion
(Rs 12,500 crores) in 2011-12, worse than the losses of 2008-09
when traffic was declining and crude oil prices spiked to $150 per
barrel.Overall, the industry has been marred by cost inefficiencies
and is bearing the brunt of aggressive price cuts, rising costs,
expensive jet fuel, a weaker rupee, high interest payments and
hence mounting losses. The government support required to bailout
the loss making Air India has increased substantially; while the
leading private players like Kingfisher Airlines, Jet Airways and
Spice Jet are making significant losses. With Banks unwilling to
enhance their exposure to the industry, recast their loans or pick
up equity stakes without viable business plans, industry needs to
come out with strong equity infusion plans. Hence, the government
is mulling allowing foreign carriers to pick strategic stakes in
domestic airlines to help them stay afloat in these difficult
times, besides bringing global expertise and best industry
practices over the medium term. (Exhibit 8 shows the percentage of
fuel cost on gross sale).
FDI Proposal: The Civil Aviation Ministry is expected to soon
circulate a proposal before the union cabinet to consider allowing
up to 49% equity investment by foreign carriers in domestic
airlines. In case of listed airlines, if the proposal does not get
a waiver from SEBIs Takeover Code, foreign carriers may have to
first make an open offer of 26% stake to public shareholders and
later acquire up to 23% stake (from promoters or fresh equity),
such that their stake remains within the 49 % cap. Indian Carriers:
The FDI proposal, if approved, would certainly be an important
milestone in the aviation sector and may provide much-needed relief
to the domestic aviation industry reeling under the pressure of
mounting losses and rising debt burden. Besides, the move will help
bring global expertise and best industry practices over the medium
term.Direct ATF Imports: In addition to the proposal on FDI, the
empowered group of Minister has also recently approved the proposal
for airlines to import Aviation Turbine Fuel (ATF) directly, a
demand that the airlines have been lobbying for quite some time
now. While the cabinet approval is yet come by, in our opinion, the
impact of this development is likely to be a mixed bag. Although
the taxation differential (between currently applicable sales tax
rates and likely import duty) certainly suggest a large potential
saving for airlines, the availability of infrastructure is likely
to be a considerable roadblock. Given the monopoly of OMCs at major
airports, airlines would have to resort to a fee-based structure
for utilizing their infrastructure for fuelling, storing and
transporting ATF. At the same time, airlines will also have to
engage a fair bit of working capital in sourcing imported ATF as
against credit period available from OMCs. Given the current
liquidity constraints, managing additional credit lines from banks
is also likely to be a challenge for airlines and overall would
reduce the potential savings being envisaged.At present, airlines
buy ATF from OMCs which is priced on an import parity formula and
is also subject to sales tax varying from 4%-30% depending upon
states. Given the higher tax rates at major airports, airlines pay
on an average 22-26% sales tax on ATF for domestic operations. With
the option to import directly, the effective taxes on ATF would
prima facie reduce as airlines will pay import duties and will be
exempted from paying sales tax thus resulting in large savings for
airlines. While the savings appear to be significant, there are
various practical issues that airlines will have to sort out before
they could start importing ATF directly. At most airports (barring
the private ones), state-run OMCs own and operate the
infrastructure for sourcing, fuelling and storing aviation fuel.
For sourcing fuel directly, airlines will have no other option but
to utilize the existing infrastructure possibly on a fee-based
structure with OMCs. In addition, airlines will also lose out on
volume discounts (ranging between 4-5%) and credit period offered
by OMCs and would need to pay in cash for direct imports, implying
incremental funding requirement. There is also an additional worry
that the states may implement an entry tax (as applicable on crude
oil in some states) to offset the revenue loss from sales tax.
Given these hurdles, the effective savings could be much lower than
what is reflected from tax differential. In absolute terms, the
impact will be higher on airlines with higher share of domestic
operations like Indigo or Spice Jet.Debt levels and mounting
losses: Besides, since the airlines stocks have corrected
significantly over the last two years, fresh equity infusions are
current market capitalizations could lead to considerable stake
dilution for the existing promoters who have built these businesses
over the years. Besides, the amount of fresh equity that could be
raised at current market prices would not be a game-changer
considering the staggering debt levels and quarterly losses posted
by the airline industry. (Debt Outstanding of various companies is
shown in Exhibit 9).
ConclusionCertain interesting economic phenomena in Indian
airlines industries are observed recently.Analyzing the above
phenomena, the following conclusions can be drawn.i) When price
rises, demand falls (load factor declines due to rise of
airfare)ii) When price of one service rises, demand of substitute
services rises (airline and AC trainare substitute services)iii) In
short run, when price is less than average variable cost (AVC),
firms take shut downdecision (Some airline stopped their operation
in certain short route in 2008).iv) In competitive market, firms
are price taker (one airline slashed fare, others slashed too).
Exhibit 1: The Annual total traffic of Indian carriers for the
last two yearsCategoryFEBRUARY2013FEBRUARY2012%Change
Aircraft Movement (in 000)
International25.4024.414.1
Domestic90.85100.70-9.8
Total116.25125.11-7.1
General Aviation27.8827.471.5
Passengers (in million)
International3.653.416.9
Domestic9.7210.09-3.7
Total13.3713.50-1.0
Freight (in 000 tonnes)
International106.05112.80-6.0
Domestic59.9865.91-9.0
Total166.03178.71-7.1
CategoryApr-Feb 2012-13Apr-Feb 2011-12%Change
Aircraft Movements (in 000)
International285.38283.250.8
Domestic1065.491134.24-6.1
Total1350.871417.49-4.7
General Aviation259.67255.481.6
Passengers (in million)
International39.0137.244.8
Domestic106.06111.88-5.2
Total145.07149.12-2.7
Freight (in 000 tonnes)
International1275.601338.68-4.7
Domestic718.32740.79-3.0
Total1993.922079.47-4.1
Source: AAI
Exhibit 2: The growth trends in the air cargo segment
Source : AAI
Exhibit 3: A detailed pie-chart statistics of the market
shareSource: DGCA
Exhibit 4: Positioning on terms of service of Indian Domestic
Airlines
Source: DGCA
Exhibit 5: Passenger travelled for the year 2011 and 2012 (YoY
and MoM)
Source: DGCA
Exhibit 6: Analysis of Capacity (ASKM) and Demand (RPKM)
Source: DGCA
Exhibit 8: Rising ATF Price and Rupee Depreciation
Source: ICRA Research
Exhibit 9: Domestic Airline - Fuel Cost (% Gross Sale)
Source: ICRA Research
Exhibit 9: Domestic Airline Debt Outstanding
Source: ICRA Research
PGDM 2013-15Page 6
