NATIONAL INSTITUTE OF TECHNOLOGY DURGAPUR (DEEMED UNIVERSITY

)

DEPARTMENT OF MANAGEMENT STUDIES
INDIAN AVIATION INDUSTRY (STRATEGIC MANAGEMENT)
SUBMITTED TO

Prof. AVIJAN DUTTA
BY

BANHI GUHA (07/MBA/47) SUKANTA MAJI (07MBA/40) INDRAJEET ROUT (07/MBA/06) SUBHANKAR ROY (07/MBA/48) ABHINANDAN DASGUPTA (07/MBA/15) PRAMITENDRA NATH DUTTA (07/MBA/52)

MARCH, 2009

INDIAN AVIATION INDUSTRY.

INDEX 1. INTRODUCTION OF AIRLINES …………..…………………………………….………………..………………..3 2. MACRO ENVIRONMENT ANALYSIS OF AIRLINES ...………………………………………………………4 3. LOW COST AIRLINES …..………………………………….……………………………………………….….……10 3.1 SWOT ANALYSIS OF SPICE JET ….………….……………………………………………………….…...11 4. MICHAEL PORTER’S FIVE FORCES OF AIRLINES....……………….…………………………………….12

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1. INTRODUCTION 1.1 HISTORY The birth of civil aviation in India began happened on Feb 18, 1911 when Henri Piquet flew a Humber biplane. In 1932, JRD Tata, a visionary launches India’s first scheduled airline, Tata Airline and also piloted its first inaugural fight. In early 1948, a joint sector company, Air India International Ltd. was established by the Government of India and Air India (earlier Tata Airline) with a capital of Rs 2 crore and a fleet of three Lockheed constellation aircraft. The joint venture was headed by J.R.D. Tata. After the Second World War as many as eleven private domestic airlines operated in India. The supply-demand was not in balance as the Indian aviation market was still in a fledgling state. Many of these airlines were making heavy losses as a result of which the government decided to nationalize the airlines by forming one domestic carrier and one international flag carrier. In 1953 Air-India International (name truncated to Air-India in 1962) became a public sector corporation along with Indian Airlines Corporation (catering to domestic and regional routes). Eight erstwhile private airlines were merged to form Indian Airlines Corp., namely Deccan Airways, Bharat Airways, Air India, Himalayan Aviation, Kalinga Airlines, Indian National Airways, Air Services of India and Air-Services India. The fleet was fairly big consisting of 73 DC-3 Dakotas, 12 Vikings, 3 DC-4s and some other smaller aircraft. 1.2 TODAY There has been a marked change in the civil aviation scenery in India. Whereas prior to 1992 when the two public sector airlines, namely Air-India and Indian Airlines enjoyed a monopoly in the domestic sector, today a dozen airlines are competing for a market share. The Indian civil aviation industry is expanding by leaps and bounds. A slew of low-cost airlines is operating or will commence operations during the current year. India's main airports are beginning to face capacity constraints and are in the process of being modernized. Indian airlines have lately placed a record number of aircraft orders. As an example, ATR received firm orders for 90 new aircraft in 2005 of which India’s (Kingfisher Airlines and Air Deccan) share was 55 per cent. 1.3 INDIAN AIRPORTS A government controlled body AAI (Airports Authority of India) manages 127 airports in the country comprising 15 international airports, 7 restricted international airports, 80 domestic airports and 25 civil enclaves at defense airfields. Indian airports handled 51.9 million domestic, 22.4 million international passengers and 1.4 million tons of cargo in the year ended March 2006. Projected traffic for 2012 is 130 million passengers. 1.4 INFRASTRUCTURE The government of India has recognized the need to improve the aviation infrastructure in the country. Airports account for 40 per cent of India's trade by value and 95 per cent of international travel to and from India takes place through this mode. According to estimates, the present infrastructure can support a 20 per cent growth in passenger traffic
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and 10 per cent growth in cargo traffic. The ministry of civil aviation estimates that there is a need for an investment of Rs 260 - Rs 360 billion . The restructuring of the first phase of Delhi airport is expected to be completed by 2009 at a cost of Rs 1.9 billion. Expansion and up-gradation of the current facility at Mumbai is already under way. Work has started on a new international airport at Bangalore. Apart from strengthening of the Hyderabad runway at a cost of Rs 700 million, a new international airport is also being planned at a cost of Rs 13 billion. The government has also decided to modernize 25 airports in non-metro cities. Improvement of another 55 airports is also on the anvil. 1.5 FDI Forty nine per cent foreign direct investment (FDI) is permitted in financing airport infrastructure as well as in airport ground handling. The government has recently increased FDI from 40 per cent to 49 per cent in domestic air carriers. However foreign airlines are not permitted to pick up a stake directly or indirectly. Non-resident Indians and corporate bodies are allowed to hold up to 100 per cent equity in domestic airlines. 1.6 AVIATION REGULATOR The Civil Aviation Ministry plans to table a Bill to establish an independent Civil Aviation Economic Regulatory Authority (CAERA). The new regulator would be responsible for formalizing all charges to be levied on operators and ensuring a level playing field for all players. Its tasks would include fixing of tariff, finalizing parking and user charges, issuing broad guidelines to service providers, settling disputes among stakeholders in new airports and arbitrating between various users and service providers, including airlines. Initially the scope of the regulator would be limited to regulating the economic aspects of Delhi, Mumbai, Bangalore and Hyderabad airports where there is private participation and AAI is a stakeholder. Henceforth, the AAI too would be answerable to the new regulator. To start with, CAERA is expected to be a single-member regulator assisted by technical staff. The Bill seeks to expand its role in the days ahead. That may become necessary anyway, given the liberalization initiatives underway in the sector. 2. MACRO ENVIRONMENT ANALYSIS Macro environment analysis refers to study of those factors which affect an organization but are beyond the control of an organization. These factors are uncontrollable. Macro environment consist of following six broad areas: • Political environment • Economic environment • Social environment • Technological environment • Demographic environment • Natural environment
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2.1 POLITICAL ENVIRONMENT Indian political scenario has, is and will undergo various changes. Following are the various policy changes which might have an impact on aviation industry in coming years: Open Sky Policy India had this agreement with 40 countries and lately it signed the policy with UK, USA and European Union. According to this policy, the signatories are allowed to fly over the skies of India. Under this arrangement, airlines from EU member nations will be allowed to operate flights to India from any of the 25 EU nations regardless of the carrier's country of origin. Effect: Tourist arrivals in India are expected to grow exponentially, especially due to the open sky policy between India and the SAARC countries and the increase in bilateral entitlements with European countries, and the US. The increase in number of international tourists will percolate down to increase in domestic passengers. Deregulation

Prior to 1991, aviation was nationalized and heavily regulated In 1953, the Air Corporation Act, 1953, changed the landscape of the airline industry in India. It was in 1994 that the Air Corporation Act was repealed and thus this allowed private operators to operate in the domestic airline and aviation industry. Requirements to become a scheduled operator air carrier in India have being reformed, the reduced restrictions on foreign direct investment is 49% for flights and 100% for airports

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Effect: Entry into the air travel industry is not only cheaper, but also affordable to new operators Modernization of Airports The Indian Cabinet has approved a proposal mandating the state-run airport operator to modernize 35 airports in second-tier cities within the next two years. The modernization process will cost the government between Rs. 70 to 80 billion. Delhi (Rs.8,700 cr) to GMR and Mumbai Airport Modernization (Rs.6,400 cr)to GVK are two biggest investment projects . Total investment on hand in airport infrastructure crossedRs.35,000 crore in the quarter ended January 2006.This investment was spread over 89 projects. Upgradation of Kolkata and Chennai airports is on anvil. Simultaneously, 20 non-metro airports will be developed. Two biggest active projects are the Bangalore International Airports Authority Ltd (Rs.1.5 crore) and GMR Hyderabad International Airport Ltd (Rs.1.5 crore). Effect: Improved infrastructure would lead to rise in no. of travelers and also so would encourage more operators. Abolishment of Taxes Foreign Travel Tax (FTT) Rs500 and 15% inland air travel tax (IATT) charged on Basic airfare has been abolished by the government w.e.f from January 9, 2004 to reduce fares. Reduction on Excise Duty From January 9, 2004, the excise duty on ATF was reduced from 16 to 8 percent. The average domestic price of ATF is 99 per cent higher than prices in foreign countries and affects domestic airlines drastically as ATF accounts for 30 to 40 per cent of operating costs Effect: It would lead to low fares thus giving a boost to air travel. The government has reduced the average age of aircraft being imported into India for commercial airline operations by five years. Effect: It would lead to increase in imports of aircraft thus can discourage more operators coming in and improve services Landing Charges abolished Landing charges for aircraft with less than 80 seats were abolished and landing charges for larger aircraft have been reduced by 15% with effect from February 11, 2004 2.2 ECONOMIC ENVIRONMENT

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India, ranked tenth in the world in 2004, is expected to be holding eighth rank in the world by 2014 and fourth rank in next years with a GDP of $1.15-1.4 trillion and $2.1-3 trillion respectively, and a projected growth rate of 6-8%. Effect: This rise in income levels along with introduction of no-frills flights will lead to • Rise in no of travelers, • More investments in aviation, • More competition and • Rise in industrialization leading to more need of air transport 2.3 SOCIO-CULTURAL ENVIRONMENT Change in Lifestyle Average income of middle class household is expected to rise to 194000 Rs by 2010 from 169000 Rs in 2001-02.No of households projected to be 43.6million in 2010. Effect: So there is going to be change in lifestyle and spending of people Due to this change people will prefer Low cost airlines instead of Railways first air-conditioned thus rise in air traffic

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Rise in Leisure travel Tourism industry grew 8.8 per cent over 2003- highest growth rate in the world. 3.2 million Foreign tourists visited India last year. There has been an increase in leisure travel by tourists of 15% in 2004. Effect: It will lead to rise in no. of tourist passengers thus more encouragement for new operators. 2.4 TECHNOLOGICAL ENVIRONMENT Introduction of Airbus A380 The double deck Airbus A380 is the most ambitious civil aircraft program yet was launched in December 2000. An all new design Superjumbo, the Airbus A380 is the world’s first twindeck, twin-aisle airliner. It could be outfitted for special passenger uses such as sleeper cabins, business centers or even child care service. In a one-class configuration, the A380 could accommodate as many as 840 passengers advantages of the A380 include lower fuel burn per seat and lower operating costs per seat. Airbus states the A380 will use 20% less fuel and will fly quieter, cheaper and more environmentally friendly than the 747 ILS-Instrument Landing System Instrument landing system (ILS) facilities are a highly accurate means of navigating to the runway under low visibility conditions various runway environment lighting systems serve as integral parts of the ILS system to aid the pilot in landing when using the ILS, the pilot determines aircraft position by instruments. ILS is classified according to capabilities of the ground equipment. Category I ILS provides guidance information down to a decision height (DH) of not less than 200 ft. Improved equipment (airborne and ground) provide for Category II ILS approaches. (DH of not less than 100feet)
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2.5 DEMOGRAPHIC ENVIRONMENT Changing Structure of Consumers

Middle class population of India was 300 million in 2005 and is projected to be 400 million for 2010. Effect: For aviation, this growth is a remarkable achievement and a sign that the industry can only expand as more people gain the ability to purchase airline travel, supported by introduction of low-cost carriers. High %age of young population India has highest percentage of people in age group of 20-50, with high earning potential. Also younger segment has more mobility needs due to education or work, so it shows high probability of rise in Domestic air travel. Higher number of literates Due to rise in education awareness, there has been rise in no. of graduates and those pursuing higher studies which translates into higher earning potential and higher spending on travel in future. Nuclear Families Due to lesser number of joint families and increasing nuclear families, there would be rise in air travel by children to meet their grandparents. 2.6 NATURAL ENVIRONMENT The average domestic price of ATF is 99 per cent higher than prices in foreign countries and affects domestic airlines drastically as ATF accounts for 30 to 40 per cent of operating costs
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After a fall in ATF in Nov and Dec by 2%, and 11%, for the 2nd consecutive month, ATF price in February soared by 3.5% to the price prevailing in Jan 2006.(from Rs.35 a liter to Rs.36.2 a liter.) Earlier, under the fuel pricing mechanism the subsidy given to Kerosene/diesel was loaded onto ATF. While this has been phased out, States are now levying heavy Sales Tax on ATF which made it costly. Effect: Due to high factor costs, short haul operations are rendered unviable. It would lead to low profits thus discouraging new operators. 3. LOW COST AIRLINES A low-cost carrier (also known as a no-frills or discount carrier) is an airline that offers low fares but eliminates all “non-essential” services. The typical low-cost carrier business model is based on: Single passenger class Single type of airplane (reducing training and servicing costs) Simple fare scheme (typically fares increase as the plane fills up, which rewards early reservations) Free seating (which encourages passengers to board early) Direct, point to point flights with no transfers Flying to cheaper, less congested secondary airports Short flights and fast turnaround times (allowing maximum utilization of planes) “Free" in-flight catering and other "complimentary" services are eliminated, and replaced by optional paid-for in-flight food and drink.

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3.1 SWOT ANALYSIS OF SPICE JET At present it has a market share of 6%. This indicates huge potential of growth compared to other low cost airlines in India. 3.2 STRENGTH OF SPICEJET Entered with Rs. 99 fares for first 99 days. “offering low everyday spicy fares” Compete with Indian Railway AC Segment Fleet of 6 Boeing 737-800 with 189 Seats 3.3 WEAKNESS OF SPICEJET A fixed-cost perishable product Limited sectors (Concentrated at only North-West-South Indian Sector) Small Load Efficiency compared to Air Deccan 3.4 OPPORTUNITIES OF SPICEJET Future Fleet Expansion will increase its Market Share. Attractive fares and up to date Quality service will generate a huge customer base comprising frequent flyers. Huge Market Potential: We have 12 million people who travel by air every year against 3 million passengers who fly everyday in the US, even though its population is one-fourth that of India. The number of daily flights in India averages just about 400 a day, as against 40,000 flights a day in the US. India's 200-million middle-class population is equal to that of the whole of Europe. Un-serviced Hinterland - Out of the 400-odd airstrips and airfields in the country, only 62 are in use. Available infrastructure is under-utilized. Tax holiday on aircraft leasing – The Union Budget of the Government of India announced in June 2004, announced a 5year tax holiday on aircraft leasing. 3.5 THREATS OF SPICEJET High Attrition Rate Killer competition – The Indian skies are witnessing a bloody battle for market shares. A much anticipated fare war has broken out across Indian skies.

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Oil price fluctuations – Oil price hikes spare no airline. Aviation turbine fuel (ATF) cost and other operational costs (all government controlled) are the same for all airlines, whether it is a low cost airline or not. 4. MICHAEL PORTER’S FIVE FORCES Michael Porter’s five forces model has been used as a framework to analyze the Indian airline industry and its attractiveness to new and existing players 4.1 THREAT OF NEW ENTRANTS Huge capital requirement: Capitalization of minimum Rs.30Cr without which it is not allowed to takeoff Expected retaliation: market is concentrated in the hands of a few players thus any new player would to face stiff competition Legislation or government action: along with the equity restrictions for floating an airline they also compel the airlines to operate on uneconomical routes Inadequate airport infrastructure: difficult for the existing airlines to function smoothly and thus deters new ones Shortage of pilots and high fuel costs Exit barriers 4.2 POWER OF BUYERS General Indian traveler is extremely value conscious. Growing awareness has increased expectations for punctuality, safety and service. Minimal switching cost and alternatives available. No differentiation among the players in the same segment e.g. the differences between Air Deccan and Spice Jet is minimal. Transparent Web based comparisons in fare structures are available which increases the power of the customer to choose the best deal. Role of intermediaries like travel agents diminishing 4.3 POWER OF SUPPLIERS Two major critical suppliers: • High fuel costs-Fuel accounts for nearly 35% of the total cost and the cost of fuel is increasing rapidly posing a threat to the companies profits.
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aircraft suppliers enjoy in a duopoly and fiercely control their market shares

Acute shortage of pilots which makes the industry dependent on them Forward integration: airlines also face a threat of forward integration as the suppliers have or know about most or the technical aspects of the industry Airbus and Boeing have two radically diverse views on the future needs of civil aviation and this is reflected in their new product developments. Boeing has focused on medium capacity long haul aircraft (expecting that demand will grow for smaller aircraft that can fly more frequently offering a wide choice of departures in flight schedules). Airbus has made huge investments in the A380 which is its new large capacity-long range super jumbo (expecting that demand will grow for larger more fuel efficient and luxurious aircraft that can accommodate more people per flight) 4.4 AVAILABILITY OF SUBSTITUTES Product for product substitutionConsumers have various options in terms of airlines to choose from. They may also switch to other modes of transport such as road and rail. Substitution for needWith the advent of technology options such as video conferencing and conference calls reduces the need to travel thus the option of substitution of need in present but it is marginal as it is not possible to totally do away with traveling. 4.5 POWER OF COMPETITORS Intense Competition amongst low cost airlines and the full service airlines. Apex fares and promotional schemes offered by all the full service carriers, offering prices at lower or similar to the low cost ticket fares are a tremendous competitive force. Entry of additional players Mergers and acquisitions take place here too which increases competitive rivalry between airlines Low level of differentiation between the services offered by the different airlines increases the risk of switching High fixed costs and input constraints also add to the competitive pressures in the industry

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