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Bargaining Power of Suppliers and Airline Industry


Effects of Bargaining Power of Suppliers
This document deals with an analysis of the Bargaining Power of Suppliers, one of the five forces of the Porter s Five Forces Model, on the Airline Industry

Prepared by - Priyank Sinha, Purnendu, Rachna Saini, Rahul Jain, Rahul Raj H4G9 Great Lakes Institute of Management

Bargaining Power of Suppliers and Airline Industry

Contents
Overview of Aviation Industry.................................................................................................................. 3 Porters 5 forces ....................................................................................................................................... 4 Bargaining power of Customers ........................................................................................................... 4 Force of Substitutes ............................................................................................................................. 4 Competition Rivalry ............................................................................................................................. 4 Threat from New Entrants ................................................................................................................... 5 Bargaining power of Suppliers.............................................................................................................. 5 Porter s Five forces working on Airline Industry ....................................................................................... 6 Impact of Bargaining Power of Suppliers on Airline Industry .................................................................... 7 High Aviation Turbine Fuel (ATF) Prices ................................................................................................ 7 Monopoly of PSU Oil companies .......................................................................................................... 8 Power of Suppliers of Aircrafts and Spare parts .................................................................................... 8 Factors causing Threat from Suppliers on Airline Industry ........................................................................ 9 Airplane ........................................................................................................................................... 9 Labour ........................................................................................................................................... 10 Aviation fuel .................................................................................................................................. 13 References............................................................................................................................................. 27

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Bargaining Power of Suppliers and Airline Industry

Overview of Aviation Industry


The aviation industry in India is one of those sectors that saw a constant pace of growth among the other industries in the world over the past many years. The open sky policy of the government has helped a lot of overseas players entering the aviation market in India. From then, it has only been growing in terms of players and the number of aircrafts. At present, private airlines account for around 75% portion of the domestic aviation market. The 9th largest aviation market in the world is India. 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.

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Bargaining Power of Suppliers and Airline Industry

Porters 5 forces
Industry analysis is a type of investment research that begins by focusing on the status of an industry or an industrial sector. Porter s 5 forces framework identifies the strength of all five market levers (Suppliers, Customers, Competition Rivalry, Substitutes and New Entrants) of an industry. Understanding each of these market forces allows businesses to make wise decisions which can maximize return in any industry.

Bargaining power of Customers


These are potential buyers. Using Porter s framework a business can determine how much control Customers can have on the business. For example, luxury market customers are fewer in number and more demanding but willing to pay higher prices. In contrast, common market customers may be huge in number, be less demanding but more thrifty. How much can customers afford? What medium they will use to pay? After making a deal with the company what is the probability that they will do business with the same firm. What are the characteristics of an existing customer as well as prospective customers? How important is that characteristic to the success of the industry. Knowing answers to these will help to determine if the market is profitable. Also, additional information for pricing, marketing becomes very useful.

Force of Substitutes
Businesses must understand the difference in price between their own product and substitute product as well as the susceptibility for customers to use available substitutes. People can readily substitute a frozen pizza for a delivered one, however they are less ready to substitute the bus for a used car, or substitute industrial parts due to the reengineering that might be involved.

Competition Rivalry
Businessman must understand the industry itself and the strength of the variables that comprise it. How many competitors exist? Is it a growing industry? Do competitors have strong brands? Are there any barriers to a weak competitor closing its doors? Is there legislation in effect or pending regarding the industry? Highly competitive market might result from:  Many players in the market. No dominant firm  Little differentiation in the product among competitors  Saturated industry with less projected growth Great Lakes Institute of Management Page 4

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Threat from New Entrants


The easier it is for a new company to enter in the market, more competitive is that market. Barriers to entry can decrease the threat of new entrants. Few examples include:  Loyal towards major brands  High fixed costs  Scarce resources  High cost of switching  Government regulations and legislation

Bargaining power of Suppliers


Suppliers provide resources to the business. For example, consider opening a restaurant. Owner will look at suppliers of food noting their reliability, quality, pricing and whether they can offer credit terms whenever asked. He will also find out if there are many suppliers or a single supplier. Multiple suppliers will compete for business and therefore will offer better service on a reasonable price, whereas a single supplier can have an advantage and hold business on hostage. He will also look at real estate resources. There is switching cost if he will try to move the business from one location to another. Some reasons why suppliers might be powerful:  Few suppliers for a product  No substitutes  Switching to another product costly  Product important to the buyers  Suppliers are more profitable than the buyers  Customers are price sensitive

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Bargaining Power of Suppliers and Airline Industry

Porter s Five forces working on Airline Industry

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Supplier power Few aircraft makers, Bulky aircraft purchases, labor unions with negotiation power, threat of bankruptcy, Aviation fuel

Substitutes
Number of close substitutes

Rivalry Price competition is intense, fixed cost is high, low marginal cost, excess capacity

Entry High barrier to entry, High barriers to exit, Minimum efficient scale for profitable entry small, Brand not important

Buyer Power Airlines have pricing power in monopoly and duopoly markets, customers are highly price sensitive and have lot of power.

Impact of Bargaining Power of Suppliers on Airline Industry


High Aviation Turbine Fuel (ATF) Prices
Aviation Turbine Fuel prices constitute around 80% of the total operating costs of Airline Industry. The industry has lately been plagued with high ATF prices which have demonstrated the inverse relationship between airline profitability and fuel prices. In India, ATF prices are priced at 65% more than the world average and have almost doubled over the last year. Almost all Indian carriers reeling under the Great Lakes Institute of Management Page 7

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pressure and are resorting to desperate measures like cutting routes, increasing fuel surcharge, promoting the use of e-tickets and charging for food items to reduce their losses. Rising ATF prices, depreciating rupee added with global recession has directly impacted the Indian Airline Industry. The industry reported a loss of $10.4 billion in 2009-10. Increasing air fares has resulted in decreased air traffic. It is estimated that a reduction in Rs 1000/ KL will save Rs 500 crores for the industry annually.

Monopoly of PSU Oil companies


A major reason for high ATF price even after deregulation is the monopoly of the three state owned Oil companies. Because of limited number of suppliers, there is hardly any alternate choice for the airline industry, with these state owned oil companies fixing the ATF price on a mutually agreed common formula among them. The government has given licenses to some companies in the oil sector like Reliance, Essar, ONGC etc. However, none of these companies could start supplying ATF due to logistic issues till recently. Now Reliance is moving towards setting up Aviation Fuelling stations at some of these airports. It is hoped that healthy competition will bring about a reduction in the unreasonable ATF price levels prevalent in India.

Power of Suppliers of Aircrafts and Spare parts


The airline supply business is mainly dominated by Boeing (US) and Airbus (EU). For this reason, there isn't a lot of competition among suppliers. Also, the likelihood of a supplier integrating vertically isn't very likely. In other words, we are not going to see Boeing and Airbus starting their own airlines in the foreseeable future. Similarly the suppliers of spare parts do have some impact but it is not very significant as compared to the combat aircraft sector where the unavailability of spare parts is affecting the performance to a greater extent. Great Lakes Institute of Management Page 8

Bargaining Power of Suppliers and Airline Industry

Factors causing Threat from Suppliers on Airline Industry


The primary inputs to airline industry are  Airplane  Labour  Fuel Airplane  There are only two major manufacturers for large commercial aircraft. Airbus and Boeing .Both these hold a different view about the future of Aviation industry.  Boeing focuses on medium capacity long haul aircrafts because it expects demand growth for smaller aircrafts which can fly more frequently offering wide number of options.  Airbus is investing in large capacity-long range jumbo as it expects that there will be a high demand for fuel efficient and luxurious aircrafts that can accommodate more number of people.  Also, airlines make relationship specific investment in the form of trained mechanics, existing stock of aircraft etc, which gives aircraft manufacturers some supplier power  One opposing factor for this supplier power is the slow nature of aircraft sales, because the high value order placed by the industry can take several years to be delivered. Boeing and Airbus For decades, Boeing and Airbus based in US and EU respectively have been the major suppliers of Aircrafts to the Airlines over the world. For past few years, both the companies have been going all guns blazing in delivering aircrafts at a relentless pace without pause, notwithstanding the problems with major aircraft programmes and the effects of the global economic slowdown on commercial aviation. The total deliveries in 2009 were close to 1000, with a record 979 aircrafts delivered by the two aircraft majors. Other than a two and a half month strike at Boeing in 2008 which upset production in the fourth quarter of the year, the deliveries have been increasing steadily in the current decade. Although there have been cancellations in the orders of Airbus after the financial crisis in Dubai, the overall scenario looks optimistic. For Boeing alone, there is a 9 year backlog in the order book. The smaller manufacturers have not been exercising the output increase at Airbus and Boeing. The slowdown has hit them harder and they do not enjoy the same luxury of a 6-7 year order backlog. On one hand the Order books are bulging, much to their glee, Airlines, especially the ones which have been planning expansions in the recent future are feeling the pinch. Order books for some airlines like IndiGo Airlines have been stretched to as far as 2025. This supply side crunch is also hurting the fleet renovation plans of many airlines. Production delays are also plaguing the Aircraft majors causing further backlogs. For example, Airbus has delayed the delivery of Malaysian Airlines A380 order by two years, due to delays in aircraft production. Similar delays have happened to the Korean Airlines too and are attributed mainly to the strikes happening in France in which workers stopped access to the A380 sites at many places. Great Lakes Institute of Management Page 9

Bargaining Power of Suppliers and Airline Industry

Labour  Labour unions are suppliers who have significant power  Labour such as pilots, cabin crew, ground personnel, gate agents etc have a bargaining power which is due to the labour agreements at the time of industry regulation that left them with little flexibility.  This force remains a significant factor in successful performance in the industry.

Employee as Supplier of Skill:


The Dearth of skilled employees in Indian Aviation is being exposed increasingly as the industry is growing at a ever increasing pace. Consequently the power of the union representing the employees is also increasing. The aviation Industry Like any other industry has trade union. There are currently 4 union prominent unions, AIEG (Aviation Industry Employee Guild) and NAG (National Aviation Guild), Commercial Pilots Association (ICPA) and the Indian Pilots Guild (IPG).The power of employees would be evident by the below set of reasons

1. Skilled Employees Demand and supply


The way the airline industry grew was too fast for the other peripheral sectors to catch up along with it, lack of infrastructure and proper planning act as a hurdle the smooth flow of new talents in the aviation sector. The stringent and demanding requirement of domestic pilot (According to DGCA norms, 200 hours of flying are required for pilots to qualify.) is making it difficult for the industry to cope with the increasing demand in pilot, crew cabin or Ground Staff. As per a study India currently has about 3,500 pilots and the industry is expecting to grow by another 400 airplane. Each plane will need more than 10 pilots and 20 engineers which come to as many as 4000 pilots and 8000 engineers. Thus giving very strong pull power to its current employee. A study done by Boeing shows the forecasted demand to be 12,000 pilots by the year 2025

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Bargaining Power of Suppliers and Airline Industry

Another factor increasing the employees is that the Aviation industry is walking on a tight rope in terms of budget. The average domestic pilot salary is about $8000 as compared to the $14000 for foreign pilots. Therefore the percentage of Foreign Crew is reducing and consequently relying more and more on its Indian crew What could change in the future? The below set of points could change the equation towards the industry: y y y Infrastructure needs to be developed to train talent at a much faster pace. Relaxing the required norm a little for commercial flying Standard syllabus for preparation for pilot Exam and more clearly from where a student can get his/her license from. Right now it s very distorted and disorganized..

Conclusion: With limited skilled employee and growing demand of the industry, it puts them in
driver s seat as far as the bargaining power

2. Industry Vs Employees relation :Rise of the Unrest unions


The balance in a equation is always lost when there is disharmony among the employer and employee. There are currently two union prominent unions, AIEG (Aviation Industry Employee Guild) and NAG (National Aviation Guild). Aviation industry from the offset has always been Great Lakes Institute of Management Page 11

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perceived as a high paying industry. As trend is changing so is the need of the hour. Airline is no more a luxury and low cost carrier has become a trend setter as the passenger travelling by airline have increased from 25 million to close to 75 million in a decade. As result of which the Industry is trying cope up with all the losses having a tight string budget by measure like by right sizing and restructuring the higher salary. On the other end due to the same measure there has been as increasing unrest between the employee and also the rise of the power of the union like AIEG and NAG. The union has an upper hand as employee replenishment is very tough due to minimal reserve talent pool and the Indian Law is more pro-employer than employee. In the last two year two air carrier Air-India and Jet airways saw mutiny sort of a strike where the employer stopped to work for 10 days in case of Air-India and 5 days in case of Jet airways. Both these incident cumulatively lost ` 800-900 Crore of revenue.

Conclusion: All this only further prove the power the employee and their union hold. So, it all
depends on how airlines handle the employee issues and how they maintain industrial relationship after the national union formation

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The unions have their political agenda or any vested interest. As the union power is increasing there is always a chance of misusing it in favor of political agenda or a vested interest. Although this factor had not emerged out as yet that is because the unions are coming in to the picture now as the unrest among the employees is increasing. Given the political scene in India It is still a possibility as the industry internal rivalry is also intense. If driven by an agenda or any malice intention the union holds string hand to hold the company/industry at ransom as the Indian Labour laws are not very stringent and are very Labour biased. Though this is possible but less probable. The government should proactively tweak some labour law so as to keep the union in check. And also there should be only one national guild which the AIEG is working toward. Conclusion. This Reason as the supplier power is would be weak as its only an assumption

Aviation fuel  Fuel is a commodity and its prices are decided by market forces and existing geopolitical factors  High cost of fuel accounts for about 35% of the total cost and increasing cost is a threat to the company s profits

Aviation Turbine Fuel (ATF)


ATF is a major cost component for the Airlines in India. It is about 40% of the operating cost of the domestic carriers.

ATF rates for domestic operations in India are priced about 70% higher than international benchmarks. It is often used to cushion the subsidies that the government gives for the more commonly used petrol and diesel. The estimated annual fuel bill for domestic airline industry in India is around $2.5 billion based on rates prevailing in August, 2010. ATF prices in India (Aug 2010) Domestic Flights Rs. 44,697 / kilolitre International Flights (ex India) Rs. 35,050 / kilolitre International Price Rs. 32,449 / kilolitre

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Comparison of domestic and international ATF prices (above) Source: Frost & Sullivan

In India the high ATF rates over the years have hurt the financial health of the domestic airlines and are contributing to their accumulated losses. This high ATF cost leads to high air ticket prices, which in turn slows down the passenger market expansion. Also the increasing losses of Indian carriers are steadily making them unattractive and uncompetitive for debt or equity financing. The chart below compares the fuel prices at various airports in the Asia Pacific region. It is based on April 2006 average fuel price data, by 5 international airlines with operations to India, submitted to IATA. The comparison is on the portion excluding the Platts marker (Mean of Platts Singapore or MOPS) referred to as the "differential". For April 2006, the differential at Indian airports is about 7 times higher than that in Singapore. This has contributed to substantial additional costs for the Indian airlines.

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The Indian Aviation Turbine Fuel (ATF) market is highly controlled and one that is the monopoly of State Oil marketing companies. Additionally, across states, the ATF market (otherwise also known as Aviation Jet Fuels), has a high variable tax structure. ATF pricing in India has traditionally been determined by the Government under the Administered Price Mechanism (APM). APM typically meant that the Government fixed the price of the products and ensured that the oil companies achieved a fixed level of profitability subject to their achieving their specified capacity utilization. In April 2001, the Government dismantled the APM and oil companies were given the freedom to price ATF based on input costs and world market prices. However, despite the withdrawal of APM, the price of ATF in India continues to be much higher than the prevailing international prices. There are a host of factors responsible for the high ATF prices in India like irrational tax structure, cartelization of oil PSU's and monopoly of pricing, existing ATF pricing mechanism in India.

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Two major factors are explained below-

1) Monopoly of PSU Oil companies


A prime reason for high price even after deregulation of ATF price, is attributed to the monopoly of the 3 state owned Oil companies viz. Indian Oil Corporation Ltd., Hindustan Petroleum and Bharat Petroleum. Because of very limited number of suppliers there has never been any effective choice for the airline industry, with these three state owned oil companies fixing the ATF price on a mutually agreed common formula between them. The Indian Govt. has granted the marketing rights to some companies in the oil sector-Reliance, ONGC, Essar etc. However none of these companies could start the supply of ATF as they were not allotted space by the Airport Authority of India. Reliance was allotted land at 25 airports in India recently and it is moving towards setting up Aviation Fuelling stations at some of these airports. The resultant competition will bring about a reduction in the excessive ATF price levels prevalent in India.

2) Sales Tax in different states in India


The levels of sales tax on ATF by the states are currently in the region of 20-35 %. The Sales Tax on ATF for Indian airlines flying on international routes has already been withdrawn. However the situation needs to be addressed for the domestic flights as well.

The VAT rates on inputs and final products for the different states have been set at 4 % & Great Lakes Institute of Management Page 16

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12.5%.But the VAT act also allows special rates to be charged for ATF under Schedule-III of the state VAT Acts. This allows states to charge sales tax on ATF at excessively high levels. Comparitive information regarding the sales tax rate on ATF in different states in India has been shown below region wise.

Sales Tax Rate on ATF

Northern States Rajasthan Himachal UP Delhi Punjab

Eastern States

Western States 29% Gujarat 25% Maharashtra 25% Madhya Pradesh 22% Goa 15% 0% 30% 25%

Southern States Andhra Pradesh Tamil Nadu 33% 29% 28% 28.75% 0%

28% Bihar 25% West Bengal 21% Chhattisgarh 20% Assam 20% Nagaland Mizoram

28.75% Karnataka 20% Kerala Andaman

The last 5 year s data for domestic and international prices for ATF are mentioned below (source-Indian Oil Corporation Ltd.).

ATF Domestic Prices


ATF is the fastest growing petroleum product for oil companies. Its sales more than doubled between 2003 and 2006. ATF prices (in Rupees/KL) at 4 Metros including Sales Tax for domestic airlines are mentioned in the table below-

Month September 01, 2010

Delhi 40138.06

Kolkata 48461.83

Mumbai 41388.27

Chennai 44397.44

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August 16, 2010 August 01, 2010 July 16, 2010 July 01, 2010 June 16, 2010 June 01, 2010 May 16, 2010 May 01, 2010 April 16, 2010 April 01, 2010 March 16, 2010 March 01, 2010 February 16, 2010 February 01, 2010 January 16, 2010 January 01, 2010 December 16, 2009 December 01, 2009 November 16, 2009 November 01, 2009 October 16, 2009 October 01, 2009 September 16, 2009 September 01, 2009

41852.58 41177.17 40099.1 41488.9 40191.96 39503.56 42556 42452.01 42179 40841.4 40268.25 39307.07 37982.22 38956.38 41216.43 38696.6 39318.57 39968.01 40422.62 39474.44 36188.27 37084.5 37896.83 39118

50261.32 49584.82 48460.47 49927.12 48574.12 47843.5 51010 50914.81 50634 49294.36 48586.74 47531.4 46164.87 47166.09 49533.84 46908.52 47557.96 48220.93 48680.95 47679.73 44248.25 45235.94 46101.86 47401

43187.76 42484.2 41361.21 42808.92 41469.45 40752.36 43932 43823.67 43540 42159.48 41561.45 40546.7 39166.64 40181.39 42535.61 39910.79 40560.23 41236.73 41710.28 40722.59 37299.5 38246.6 39098.99 40384

46254.51 45542.4 44333.83 45841.83 44459.49 43705.5 46973 46875.09 46548 45151.97 44400.77 43325.63 41901.41 42948.63 45378.18 42683.33 43353.55 44037.74 44526.44 43493.18 39965.52 40956.89 41850.52 43191

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August 16, 2009 August 01, 2009 July 16, 2009 July 01, 2009 June 16, 2009 June 01, 2009 May 16, 2009 May 01, 2009 April 16, 2009 April 01, 2009 March 16, 2009 March 01, 2009 February 16, 2009 February 01, 2009 January 16, 2009 January 01, 2009 December 16, 2008 December 01, 2008 November 16, 2008 November 04, 2008 November 01, 2008 October 01, 2008 September 01, 2008 August 01, 2008

38585.24 36922.67 36338.18 38557.56 36251.51 32302.92 32199.01 31614.51 31926.24 29925.97 27274.95 27106.1 29158.33 30288.35 31496.31 30457.21 32691.28 36899.65 39380.51 44965.7 47017.93 56447.8 59650.07 71028.26

46818.95 45060.05 44410.82 46710.92 44289.05 40230.05 40121.81 39512.96 39800.58 37744.02 34996.08 34847.25 36989 38233.76 39511.15 38469.34 40823.56 45247.87 47805.04 53663.53 55823.33 65677.52 69005.9 80763.47

39829.61 38097.77 37475.39 39789.02 37367.15 33260.8 33139.03 32530.18 32854.9 30784.81 28023.34 27860.98 29985.19 31175.83 32447.65 31378.78 33719.47 38103.19 40687.42 46518.85 48656.59 58479.37 61834.81 73673.56

42604.52 40789.33 40163.82 42523.56 40024.2 35821.34 35723.61 35094.04 35443.11 33306.77 30470.9 30317.31 32524.54 33781.21 35096.32 34007.2 36436.76 40988.67 43641.64 49673.64 51893.76 62050.6 65499.44 77661.18

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July 01, 2008 June 05, 2008 June 01, 2008 May-08 Apr-08 Mar-08 Feb-08 Jan-08 Dec-07 Nov-07 Oct-07 Sep-07 Aug-07 Jul-07 Jun-07 May-07 Apr-07 Mar-07 Feb-07 Jan-07 Dec-06 Nov-06 Oct-06 Sep-06 Aug-06 Jul-06 Jun-06 May-06 Apr-06 Mar-06 Feb-06 Jan-06 Dec-05 Nov-05 Oct-05 Sep-05

69097.19 66226.66 69227.08 58387.92 53309.3 47048.86 44716.49 45495.82 47444.14 41417.33 39767.75 38163.23 39059.45 37799.54 36746.53 37421.94 36149.04 34618.56 33982.95 37746.92 36150.47 37059.02 40303.82 43989.91 42367.51 41303.58 40408.02 39642.24 35826.36 34,995.36 35,228.99 34,099.80 31750.56 35,761.14 36410.1 34748.76

78641.65 73473.19 76625.68 64824.82 59610.15 53087.34 50611.35 51382.56 53371.47 47161.2 45537.6 43886.99 44834.09 43508.15 42263.34 43020.79 41708.38 39916.41 39237.94 43127.99 41492.08 42519.59 45837.72 49609.8 47691.07 46564.46 45616.28 44940.28 40465.16 39,458.84 39,736.88 38,628.24 35978.32 40020.8 40764.4 39085.07

71630.53 68626.89 71759.06 60468.28 55191.58 48655.23 46233.36 47045.16 49061.13 42796.74 41105.49 39441.3 40388.4 39062.46 37973.3 38690.39 37364.45 35740.85 35078.99 39013.31 37363.88 38323.79 41703.79 45529.95 43826.43 42731.31 41784.91 41027.79 36863.63 35,957.79 36,214.67 35,065.47 32564.27 36714.91 37417..95 35687.39

75505.25 72363.58 75602.99 63227.62 57821.62 51090.08 48548.82 49372.63 51425.19 44986.26 43298.75 41595.26 42572.67 41204.3 40068.7 40836.61 39482.19 37743.74 37046.1 41120.27 39418.07 40450.55 43928.37 47821.15 46063.12 44905.05 43940.32 43209.21 39232.71 38,214.16 38,493.22 37,349.10 34664.1 38863.85 39611.81 37867.73

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Aug-05 Jul-05 Jun-05 May-05 Apr-05 Mar-05 Feb-05 Jan-05 32321.65 31750.56 29920.5 33035.51 30608.39 25833.08 25923.94 25859.04 36516.28 35907.87 34000.6 37258.93 34811.8 29929.51 30115.65 29939.9 33145.64 32550.75 30644.44 33889.24 31388.03 26414.03 26535.7 26414.03 35230.69 34602.81 32635.49 35984.12 33458.69 28367.38 28548.76 28381.34

In August 2008 the ATF prices touched an all-time high of Rs71028.26 per kl (in Delhi). This proved to be a major jolt for the aviation industry that was not doing too well in the then prevalent recession hit scenario.

ATF International Prices


Prices (in Dollars/KL) at 4 Metros excluding Sales Tax for international airlines are mentioned belowSales Tax is not applicable to international airlines.

Month August 01, 2010 July 01, 2010 June 01, 2010 May 01, 2010 April 01, 2010 March 01, 2010 February 01, 2010 January 01, 2010 December 01, 2009 November 16, 2009 November 01, 2009 October 01, 2009 September 01, 2009 August 01, 2009 July 01, 2009

Delhi 683.59 689.2 702.07 749.95 694.62 656.32 684.03 659.27 677.13 948.18 637.77 614.32 638 601.78 618.38

Kolkata 720.96 728.14 741.32 788.07 733.61 694.6 722.4 697.45 715.31 1001.22 675.93 651.9 676 642.98 659.79

Mumbai 677.27 684.36 697.23 744.85 689.78 651.48 679.19 654.43 672.29 987.69 632.93 609.48 634 595.8 612.4

Chennai 679.82 687.04 700.33 747.61 692.63 653.25 681.09 656.07 673.93 1033.26 634.54 610.3 634 597.36 614.25

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June 01, 2009 May 01, 2009 April 01, 2009 March 01, 2009 February 01, 2009 January 01, 2009 December 01, 2008 November 04, 2008 November 01, 2008 October 01, 2008 September 01, 2008 August 01, 2008 July 01, 2008 June 05, 2008 June 01, 2008 June 01, 2008 May-08 Apr-08 Mar-08 Feb-08 Jan-08 Dec-07 Nov-07 Oct-07 Sep-07 Aug-07 Jul-07 Jun-07 May-07 Apr-07 Mar-07 Feb-07 Jan-07 Dec-06 Nov-06 Oct-06 Sep-06 Aug-06 524.22 506.33 458.44 460.19 505.52 510.78 622.31 740.59 776 969.3 1085.31 1290.58 1248.9 1193.99 1248.32 1248.32 1121.98 1023.4 911.76 874.05 888.92 918.54 809.79 772.78 712.07 741.59 708 697.89 707.12 643.59 601.24 588.95 648.22 620.62 629.96 675.3 728.69 697.58 565.62 547.35 499.19 501.06 546.72 552 663.12 780.33 816.18 1010.1 1126.57 1331.68 1292.71 1236.29 1291.08 1291.08 1158.14 1023.4 949.64 911.39 925.47 953.99 846.9 811.46 749.59 780 745.67 733.37 743.4 678.02 631.5 618.91 677.37 650.21 660.6 704.48 756.44 721.53 518.31 500.42 452.53 454.28 499.61 504.87 616.33 734.37 769.84 962.95 1078.83 1284.39 1242.46 1187.32 1241.77 1241.77 1115 1016.67 904.68 867.05 881.92 911.36 802.79 766.33 706 735.66 701.91 691.85 701.36 638.16 595.45 583.18 642.73 615.35 624.97 670.39 723.62 692.32 519.89 501.47 453.22 455.05 500.83 506.12 617.28 734.93 770.66 965.01 1082.01 1286.28 1245.32 1189.47 1244.04 1244.04 1104.42 1006.81 894.98 856.49 871.12 900.14 791.97 756.59 696.89 726.39 692.76 682.37 692.42 629.97 586.44 573.96 633.83 606.45 616.83 662.2 714.66 683.42

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Jul-06 Jun-06 May-06 Apr-06 Mar-06 Feb-06 Jan-06 Dec-05 Nov-05 Oct-05 Sep-05 Aug-05 Jul-05 Jun-05 May-05 Apr-05 Mar-05 Feburary 2005 Jan-05 685.41 677.8 675.68 615.79 604.67 611.22 577.73 530.25 609.32 634.59 609.74 569.2 559.07 527.32 580.26 536.45 452.5 454 452.34 709.26 701.66 701.93 645.19 631.88 639.12 606.09 554.94 632.27 659.19 635.39 594.27 583.9 552.18 605.25 562.89 480.39 483.49 479.91 680.32 672.44 670.9 645.19 595.98 602.72 569.88 521.63 600.09 625.6 600.69 559.88 549.75 517.99 570.97 527.63 443.68 445.64 443.07 670.91 663.11 662.22 604.23 591.02 597.97 565.9 516.08 593.1 618.82 594.55 553.48 543.12 511.35 564.36 521.95 438.68 441.56 438.31

Government Intervention

Oil subsidy

Ballooning subsidies has been threatening to bankrupt state-run oil marketing companies versus the need to bring double digit inflation under control. India is forced to import 74% of its burgeoning demand for oil at international prices (an annual price of Rs 270,000 crore), India s approach towards dealing with volatile oil prices has few parallels anywhere in the world. Besides India, only Sri Lanka and Bangladesh have combated volatility by transferring huge subsidy burdens to their national oil companies in an ad hoc manner and that too more as an exercise in end of year accounting and fiscal management.

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India s very high import dependence prevents any free lunches. Study by expert groups says, even at a crude price of $80 the subsidy bill for diesel alone would be Rs 71,000 crore by 2020. Should crude oil touch $150 the bill would swell to Rs 3,38,000 crore. The agricultural sector with a mere 12% share in diesel consumption is protected far more effectively by increasing support prices. As far as the transport sector is concerned, with fuel costs accounting for a mere 1.5% of the total price of goods any hike in diesel prices would have a marginal impact. At the end subsidies eventually deviate scarce resources from development and infrastructure and affect social sector spending by reducing the outlay available for clean water, education, health care and rural employment.

Bail out for Air India


Air India s request for a bailout of Rs. 20,000 crores made the headlines an year ago. A decade ago, when IA approached the Finance Ministry for a couple of hundred crores bailout, we were told that the government would only consider the request if a detailed study by experts is produced, which shows light at the end of the tunnel. We read of heads rolling, retrenchment, downsizing and closures, but do these alone add up to a solution? Does not retention or capture of markets depend also on sound professional management, superior service and maintenance of employee enthusiasm? Indian Airlines registered profits in 2003-04, 2004-5 and 2005-06, (44.17, 65.61 and 49.5 crores respectively). In 2006-07 it suffered a loss of Rs. 234 crores; and in 2007-08 the loss of the merged airline Air India was Rs. 2,226 crores. What is the reason for the almost ten-fold increase in losses? Two major decisions that shook employee morale and therefore may, have been responsible for the losses, are the change of name from Indian Airlines to Indian and the merger of Air India and Indian Airlines. Prime Minister Manmohan Singh has assured Air India that the government would put its entire weight behind it but with a condition that airline should undertake a full restructuring and shape up by becoming leaner and trimmer. Government bailout, said Air India has been asked to give its restructuring plans at the earliest.

Beleaguered carrier Air India has prepared the ground to seek release of the second instalment of the earlier approved Rs 5,000-crore bailout package from the government. The company is set to approach the Centre following its board meeting last month (July, 2010) to seek another Rs 1,200-crore infusion. Airline has stated that without fresh funds, its projected accumulated losses would be around Rs 17,000 crore by 2013, from the present Rs 12,000 crore. Great Lakes Institute of Management Page 24

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The government has already provided Rs 800 crore as equity to the airline in February. It lost about Rs 5,200 crore in the 2009-10 mainly due to weak demand, low yield and under utilisation of resources. The company s board, which is meeting in Mumbai over the weekend, has drawn a grim picture of its financial position, thus preparing the case for immediate relief. Further, since the government has linked further release of funds to the airline s efforts to cut costs, a set of revenue-generating measures has also been prepared.

Allowing Aviation majors to open Supply centres

At present, carriers like Air India, Jet Airways, Spice Jet, Go Air, IndiGo and Kingfisher have to either import spare parts in bulk and stock them or get into lease agreements with various manufacturers.

Depending on the fleet size and its age, airlines buy 30-50 per cent of the components that they need, and take the rest on lease. Expenditure on spares and components is a considerable part of engineering and maintenance, which account for over 9-10 per cent of the total operating expense of an airline.

Leading aviation companies like Boeing subsidiary Aviall, Lufthansa Technik, Singapore-based STAerospace, France-based ATR, and KLM are planning to set up supply centres for aircraft components in the country. Once these supply centres are set up in India, airlines will have a common facility to shop for spares any time. This will decrease the transportation time. The ready availability of components will also decrease the need to stock spares in bulk. The capital spent on this can be used elsewhere. Since most airlines are getting new aircraft now, they will require major overhaul and change of spare parts by 2011, and that is when the spares market in India will start booming.

Low-cost airlines like ours do not import a large chunk of spares and mostly get into agreements with various companies. Since we have to respect the existing agreements, only 5-10 per cent of our total expense on spares and components will be eligible to be converted into agreements with suppliers in India. But this chunk will be enlarged once the market expands.

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Conclusion
From the study, we can see that the effect of the Suppliers and their Bargaining power is quite significant on the Airline Industry today. While the suppliers of aircrafts and spare parts have some effect on the industry, it is not significant when compared to the power which the suppliers of ATF have on the sector. A slight rise in ATF can impact the industry very harshly and bring down the margins to a great extent. Therefore considering the effect of the Oil Companies, it can be concluded that the Bargaining power of the Supplier is quite significant on the Airline Industry.

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References
1. Meeting on Rationalization on ATF Prices Ministry of Civil Aviation 2. http://bcs.solano.edu/workarea/mgarnier/MGMT%2050/Southwest%20Porters%20%20Brief%202.pdf 3. Airline Turbine fuel MCX 4. Economic Times 5. PEST and Porters Five Forces analysis of the Global Airline Industry - P/B/463 6. C/B/2772. Pressures on airline industry: case of BA 7. http://www.centreforaviation.com/news/2010/03/23/boeing-and-airbus-raising-output-willdeliveries-top-1000-aircraft/page1

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8. http://www.centreforaviation.com/news/2010/05/03/more-a380-delays-plague-airbus-suppliers-share-wrap/page1 9. http://www.bloomberg.com/news/2010-08-06/airbus-order-book-shaved-by-cancellationsfrom-dubai.html

10. http://www.hindu.com/2009/08/19/stories/2009081956020900.htm 11. http://www.ndtv.com/news/india/govt_plans_bailout_for_air_india.php 12. http://timesofindia.indiatimes.com/biz/india-business/Govt-to-bail-out-a-leaner-trimmerAir-India/articleshow/4698022.cms 13. http://www.indianexpress.com/news/air-india-seeks-a-second-lifeline-of-rs-1-20/650901/ 14. http://www.business-standard.com/india/news/aviation-majors-plan-supply-units-inindia/320509/
15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. http://www.fiaindia.in/Oil-cos-told-to-consider-new-jet-fuel-discounts.htm http://www.iata.org/pressroom/Documents/IATAAnnualReport2009.pdf http://www.fiaindia.in/Cost_of_ATF.htm http://www.iata.org/worldwide/asia_pacific/india/Pages/index.aspx http://news.outlookindia.com/item.aspx?661953 http://www.dancewithshadows.com/aviation/aviation-%20turbine-fuel-prices-up-by-67-percent-in-india/ http://www.hindustanpetroleum.com/En/UI/hp-aviation-PLATTS-based-pricingindia.aspx?Type=2 http://www.dnaindia.com/money/report_we-ll-import-atf-save-rs-800-crore_1171440 http://www.iocl.com/Products/AviationTurbineFuel.aspx http://www.iocl.com/Products/ATFInternationalPrices.aspx http://www.iocl.com/Products/ATFDomesticPrices.aspx

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Prepared by
Priyank Sinha [FT11441] Purnendu [FT11442] Rachna Saini [FT11443] Rahul Jain [FT11444] Rahul Raj [FT11445]

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