Trends in Aviation report

8/7/2019 Trends in Aviation report

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TRENDS

IN

INDIAS

AVIATION INDUSTRY

Submitted By

KOYELI SAHA (2010070)

LINTA JOE (2010076)

MIDHUN MADHAV (2010079)

(PGDM 2010-12)

1 | T r e n d s i n A i r l i n e s I n d u s t r y , I n d i a


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NIILM-CMS

CONTENTS

Sl.no.

TOPICS PAGE NO.

1. An overview of the Indian Airlines Industry 3 - 4

2. Growth in Airlines Industry 5

3. Challenges for the Airlines Industry 6 - 8

4. SWOT Analysis 9

5. Current Trends 10 - 11

6. Conclusion 12 - 13



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7. Bibliography 14

AIRLINES INDUSTRY IN INDIA AN OVERVIEW

India is one of the fastest growing aviation markets in the world - the 9th largest aviation

market in the world. The Airport Authority of India (AAI) manages a total of 127 airports in

the country, which include 13 international airports, 7 custom airports, 80 domestic airports

and 28 civil enclaves. There are over 450 airports and 1091 registered aircrafts in the country.

The genesis of civil aviation in India goes back to December 1912 when the first domestic air

route between Karachi and Delhi became operational. 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 continued for the next forty years.

With the liberalization of the Indian aviation sector, aviation industry in India has undergone a

rapid transformation. From being primarily a government-owned industry, the Indian aviation

industry is now dominated by privately owned full service airlines and low cost carriers.

Private airlines account for around 75% share of the domestic aviation market. Earlier air



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travel was a privilege only a few could afford, but today air travel has become much cheaper

and can be afforded by a large number of people.

Exhibit 1

The Directorate General of Civil Aviation(DGCA) controlled every aspect of aviation,including granting flying licenses, pilots, certifying aircrafts for flight and issuing all rules and

procedures governing Indian airports and airspace. Finally, the Airports Authority of India

(AAI) was assigned the responsibility of managing all national and international airports and

administering every aspect of air transport operation through the Air Traffic Control.

Taking the help of the statistics from the Ministry of Civil Aviation, approximately 29.8

million passengers travelled to/from India in 2008, showing a surge of 30% from 2007. The

prediction stated that international passengers will touch 50 million by 2015. More

opportunities in the aviation industry in India are likely to make way for about 69 foreign

airlines from 49 countries.

MAJORAIRLINES

COMMENCED

FLEET SIZE FLEET AGE

KINGFISHER 2005 74 4.6 yrsJET AIRWAYS 1993 99 (+3) 5.6 yrs

AIR INDIA 1932 77 (+30) 5.6 yrs

AIR INDIA EXP 2005 21 3.2 yrsSPICE JET 2005 26 4.4 yrs

INDIGO 2005 37 (+5) 2.2 yrsGO AIR 2005 10 2.1 yrs

PARAMOUNT 2005 0 (+18)

Exhibit 2: Cost Structure of the Indian Aviation Industry



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GROWTH IN INDIAN AIRLINES INDUSTRY

It is a phase of rapid growth in the industry with estimated growth of domestic passenger

segment at 50% per annum. This has led to intense price competition due to which full service

carriers like Jet Airways, Indian Airlines and Air Sahara are giving discounts of up to 60-70%

for certain routes to match the new entrants' ticket prices. The customer has thus gained

enormously as a result of liberalization of the sector.

The Indian Civil Aviation market grew at a CAGR of 18%, being valued round US$ 5.6

billion in 2008. Further statistics revealed that the air traffic in August 2009 was a double digit

figure. The domestic airliners flew 3.67 million passengers in August 2009, as against 2.92

million in the corresponding period of 2007, up by 26%. The Centre for Asia Pacific Aviation

(CAPA) has estimated that the domestic traffic will go up by 25% to 30% till 2010 along with

a surge in the international traffic by 15%. There would be more than 100 million passengers

by 2010. Then again by 2020, Indian airports will in all probability handle over 100 million

passengers every year. The investment plans to the tune of US$ 9 billion has been made by

the Aviation Ministry for modernizing the existing airports by 2010.

In terms of domestic passengers' volume, US have always been the leader with followers in

the league like China, Japan and India. The number of domestic flights went up by 69% from

2005 to 2008, with the domestic aviation sector growing at 9-10%.

Exhibit 3

CHALLENGES FOR AIRLINES INDUSTRY

After a period of drastic growth, Indian Airlines is now gripped with challenges on several

fronts that are also impacting the industry across the globe. These include shortage of workers

and professionals, safety concerns, declining returns, excess capacity and the lack of

accompanying infrastructure. Moreover, huge debt burden, stiff competition and rising



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Aviation Turbine Fuel (ATF) costs are also negatively impacting the industry.

1. Employee shortage:There is clearly a shortage of trained and skilled manpower in the aviation sector as a

consequence of which there is cut-throat competition for employees, which in turn, is

driving wage levels to unsustainable levels. Moreover, the industry is unable to retain

talented employees.

2. High Aviation Turbine Fuel (ATF) Prices:

ATF prices now form around 80% of the total operating costs of Airline Industry. The

industry across the world continues to be plagued with high ATF prices which have

demonstrated the inverse relationship between airline stock prices and fuel prices.

ATF prices have almost doubled over the last year. Almost all Indian carriers are also

feeling the heat and are desperately resorting to measures like cutting routes,

increasing fuel surcharge, promoting the use of e-tickets and charging for food items

to reduce their losses. Skyrocketing ATF prices, depreciating rupee coupled with

global recession has directly impacted the Indian Airline Industry. The industry

reported a $10.4 billion loss in the last year. Increasing air fares have worked against

the logic of increasing profits, as it has resulted in decreased air traffic. Besides

focusing on designing fuel efficient engines, aircraft manufacturers like Boeing and

Airbus, along with OEMs are developing sustainable bio-fuels which will give them

some relief from the vulnerability of profits due to consistently rising fuel prices.

3. Excess Capacity

Driven by the drastically increasing passenger traffic over the last 3 years, almost allIndian airlines build their capacity assuming the growth would continue over the next

few years. Several new aircrafts were bought within a short span of time which

resulted in excess capacity of around 15% to 20%. Aircrafts ordered during good times

are being delivered during recession. According to industry experts, around 17% of the

current fleet (around 4,000 aircraft) are scheduled for delivery during the next 3 years.

Even though the industry grew above 40%, almost half of the growth was primarily



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stimulated due to low fares. Maintaining such low levels of fares has become difficult

due to excess capacity, especially during the ongoing global slowdown. Consolidation

therefore seems to be the next logical step to get rid of this excess capacity problem.

Exhibit 4

4. Huge Debt Burden

Healthy profits and increasing passenger traffic saw airlines raising significant amount

of capital from Financial Institutions and Banks to fund their aggressive expansion

plans. Banks also were liberal in lending airlines. The top three airlines including Air

India, Kingfisher Airlines and Jet Airways are now carrying a cumulative debt burden

of approximately $8 billion. Incidentally, this is almost equivalent to the losses of $8.5

billion posted by all global carriers. Restructuring this huge amount of leverage will be

a challenge as resorting to equity capital will also be equally difficult during economic

slowdown.

5. Gaps in infrastructure :

Infrastructure continues to be a major constraint for Indian Airline Industry today,

which has been aggravated further due to excess capacity created during good times.

Maintenance and Air Traffic Control (ATC) infrastructure are grossly inadequate to

support growth. While steps are being taken on this front to upgrade major airports in

Mumbai, Delhi and Hyderabad, security concerns still remain to be addressed. Results

will be visible only after 2-3 years. Attracting investments from private sector will go

a long way to develop and maintain the infrastructure which is crumbing due to the

built-up excess capacity.

6. Regional Connectivity:



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Even though the industry is weighed down with excess capacity, regional connectivity

continues to be poor, primarily due to the lack of infrastructure and airports. Industry

experts suggest that increasing regional connectivity instead of concentrating in metros

and redeploying current fleet to routes where there is demand will help airlines in

managing their excess capacity.

7. Declining yields:

LCCs and other entrants together now command a market share of around 46%.

Legacy carriers are being forced to match LCC fares, during a time of escalating costs.

Increasing growth prospects have attracted & are likely to attract more players, whichwill lead to more competition. All this has resulted in lower returns for all operators.

8. Trunk routes:

It is also a matter of concern that the trunk routes, at present, are not fully exploited.

One of the reasons for inability to realize the full potential of the trunk routes is the

lack of genuine competition. The entry of new players would ensure that air fares are

brought to realistic levels, as it will lead to better cost and revenue management,

increased productivity and better services. This in turn would stimulate demand and

lead to growth.

SWOT ANALYSIS OF THE AIRLINES INDUSTRY

STRENGTHS WEAKNESSES

1. Growing tourism

(The estimated growth of domesticpassenger segment is at 50% per annum

and international passenger segment is

at 25% per annum)

2. Rising income levels

(Due to the rise in income levels, the

disposable income is also higher

1. Under penetrated market

(The total passenger traffic was only 50million as on 31st Dec 2005 amounting

to only 0.05 trips per annum as

compared to developed nations like

United States have 2.02 trips per

annum)

2. Untapped air cargo market



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3. Infrastructural constraints

(The infrastructure development has notkept pace with the growth in aviation

services sector leading to a bottleneck.

Huge investment requirement for

physical infrastructure for airports)

OPPORTUNITIES THREATS

1. Expected investments

(investment of about US $30 billion

will be made)

2. Expected market size

(Average growth of aviation sector is

about 25%-30% and the expected

market size is projected to grow

upto100 million by 2010)

1. Shortage of trained pilots

2. Shortage of airports

3. High prices

(Though enough number of low cost

carriers are already existing in the

industry, majority of the population is

still not able to fly to other destinations)

Exhibit 5

CURRENT TRENDS IN THE AIRLINES INDUSTRY

1. Development of new airports and modernisation of existing ones:

The AAI is set to spend over US$ 1.02 billion in 2010, towards modernisation of non-

metro airports. AAI is planning the city-side development of 24 airports, including

those at Ahmedabad and Amritsar. Additionally, 11 new greenfield airports have been

identified to reduce passenger load on existing airports, according to Praveen Seth,member-operations, AAI. AAI also plans to spend around US$ 3.07 billion in the next

five years for developing, upgrading and modernising metro and non-metro airports.

2. Consolidation in aviation sector:

The rise in the number of alliances in aviation industry will help in further growth of

aviation sector in India. The Jet-Sahara merger is probably just the beginning. The



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recent 26% stake acquisition by the Dr. Vijay Mallya (United Breweries group) in the

low-cost carrier Deccan Aviation is further confirmation that the Indian aviation

industry is looking forward to more consolidations.

3. The number of passengers t ravelling by air is on the rise :

With passenger boarding expected to double by 2025, and aircraft operations expected

to triple by the same time, the number of passengers travelling by air is on rise.

Exhibit 6

4. For the travelling public, price is paramount in choosing a carrier :

Due to the Internet and round-the-clock search capability, airfares are fully transparent

to the public and travellers are choosing the lowest price option. Air travel is now a

commodity business, and legacy carriers will have to adapt further to a low-cost/low-

fare environment in order to survive. Even business travellers, who have been less

price-sensitive, are resisting fare increases. The only premiums that travellers arewilling to pay for are time-of-day and direct flights, not the brand.

5. Capacity is growing without much constraint :

Indian carriers are placing orders for new aircraft for delivery in the coming period,

without clear plans to retire older planes. They are also adding significant numbers of

regional jets. The air taxi fleet is also expanding rapidly. Kingfisher Airlines has

already ordered 5 Airbus A380 aircrafts that will operate on international routes.

6. Cost structures will continue to handicap legacy carriers as they compete with newer

airlines, as well as with overseas carriers :

Low cost carriers are posing great threats to legacy carriers, as a result of which they

are restructuring their pricing policies. Apart from this, they are also facing

competition from overseas players.



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7. Oil prices are not expected to fall :

The public sector oil marketing companies (OMCs) have raised the prices of AviationTurbine Fuel (ATF) by 3.5 per cent, in line with the rise in international oil prices.

This is likely to trigger a marginal increase in airfares.

8. Outsourcing:

Private airlines are known to hire foreign pilots, get expatriates or retired personnel

from the Air Force or PSU airlines, in senior management positions. Further, they

outsource such functions as ground handling, check-in, reservation, aircraft

maintenance, catering, training, revenue accounting, IT infrastructure, loyalty and

programme management. Airlines are known to take on contract employees such as

cabin crew, ticketing and check-in agents.

CONCLUSION

India is one of the fastest growing aviation markets in the

world. With the liberalization of the Indian aviation sector,

the industry had witnessed a transformation with the entry of

the privately owned full service airlines and low cost carriers.

As of May 2006, private carriers accounted for around 75%

share of the domestic aviation market. The sector has also

seen a significant increase in number of domestic air travel passengers. Some of the factorsthat have resulted in higher demand for air transport in India include the growing middle class

and its purchasing power, low airfares offered by low cost carriers, the growth of the tourism

industry in India, increasing outbound travel from India, and the overall economic growth of

India.

Exhibit 7


PROFIT/ LOSS ($bn)

YEAR PROFIT1998 8.21999 8.52000 3.72001 -132002 -11.32003 -7.52004 -5.62005 -4.12006 -0.52007 5.62008 -4.2


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In addition to these factors, the emphasis on modernization of non-metro airports, fleet

expansion by airlines, service expansion by state owned carriers, development of the

maintenance, repair and overhaul (MRO) industry in India, opening up of new international

routes by the Indian government, establishment of new airports and renovation and

restructuring of the existing airports have added to the growth of the industry.

However, in mid-2006, many airline operators announced large losses. Analysts opined that a

combination of factors such as high aviation turbine fuel (ATF) prices, rising labor costs and

shortage of skilled labor, rapid fleet expansion, and intense price competition among the

players were responsible for the losses in this sector. The problem was also compounded by

new players entering the industry even before the existing players could stabilize their

operations. It was estimated that the industry as a whole could face losses of over Rs. 22

billion in 2006-07. Some experts expect the industry to consolidate in the near future. The

government also was keen to restrict the losses in this sector by closer scrutiny of the business

plans of new entrants, conducting quarterly financial audits, etc.



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BIBLIOGRAPHY

http://avindia.blogspot.com/

http://www.india-server.com/magazine/airlines-3.html

http://avindia.blogspot.com/http://avindia.blogspot.com/http://www.india-server.com/magazine/airlines-3.htmlhttp://www.india-server.com/magazine/airlines-3.htmlhttp://www.india-server.com/magazine/airlines-3.htmlhttp://avindia.blogspot.com/


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http://www.aviationweek.com/aw/generic/channel_.jsp?channel=businessweekly

http://indiaaviation.aero/news/blogAirline/257/Air+India+Express

The Economist (March 10, 2011)

The Economic Times

(17 March, 2011, PTI)

(15 March, 2011, PTI)

(14 march, 2011, PTI/ANS)

(Sunny Verma & G Ganapathy Subramaniam, TNN, March 12, 2007)

Business Line

(Monday, June 14, 2010)(A. Ranganathan, Monday, Aug 03, 2009)

(Our bureau, Thursday, Dec 20, 2007)

Indian Express (march 17, 2011)

http://www.aviationweek.com/aw/generic/channel_.jsp?channel=businessweeklyhttp://www.aviationweek.com/aw/generic/channel_.jsp?channel=businessweeklyhttp://indiaaviation.aero/news/blogAirline/257/Air+India+Expresshttp://indiaaviation.aero/news/blogAirline/257/Air+India+Expresshttp://www.aviationweek.com/aw/generic/channel_.jsp?channel=businessweeklyhttp://indiaaviation.aero/news/blogAirline/257/Air+India+Express

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