A

Project Report

On

Issues and Challenges in the Indian Aviation Industry

In partial fulfillment of the requirements of

Masters of Management Studies

Conducted by

University of Mumbai

Through

Rizvi Institute of Management Studies & Research

Under the guidance of

Prof. Umar Farooq

Submitted by

Aafreen Javed Mulla

MMS

Batch: 2018-2020
 CERTIFICATE
This is to certify that Ms. Aafreen Javed Mulla, a student of Rizvi Institute of Management Studies
and Research, of MMS III bearing Roll No. 001 and specializing in Finance has successfully completed
the project titled.

“Issues and Challenges in the Indian Aviation Industry”

Under the guidance of Prof. Umar Farooq in partial fulfillment of the requirement for Masters of
Management Studies by University of Mumbai for the academic year 2018-2020.

Prof. Umar Farooq Prof. Umar Farooq Dr. Kalim Khan

Project Guide Academic Coordinator Director
 ACKNOWLEDGEMENT
I cannot express enough thanks for their continued support and encouragement: Dr.Kalim
Khan our director; Prof. Umar Farooq; my project guide for encouraging and allowing me to
present the project on the topic ‘Issues and Challenges in the Indian Aviation Industry’.

My completion of this project could not have been accomplished without for their valuable
inputs, guidance, encouragement, whole-hearted cooperation and constructive criticism
throughout my project. I offer my sincere appreciation for the learning opportunities provided
by my institution; Rizvi Institute of Management Studies and Research.

I take this opportunity to extend my heartfelt thanks to all the faculty of the institution, batch-
mates, friends and family who have supported me for the duration of this project.

Aafreen Javed Mulla

Date Place
 Executive Summary
Aviation by its very nature is a critical part of the infrastructure of the country and has important
implications for the development of trade and tourism and other allied industries opening up
of inaccessible areas of the country and increasing business activity and economic growth of
the country.

The domestic as well as the international aviation industry in India has seen a double digit
growth ever since the private players we allowed in the sector. There has been a tremendous
increase in the Air cargo sector along with the passenger sector.

The Government has been very supportive for the growth of the industry as it has launched the
UDAN scheme which will ensure affordability, connectivity, growth and development. It has
recently increased the FDI to 100% from 49%. Allowing 100 per cent FDI in Air India would
allow Non-Resident Indians (NRIs) to invest up to 100 per cent.

India’s civil aviation industry has so far seen more failures than successes. With some of the
major airlines closing down, the industry has seen a drastic downfall as it is continuously
making losses which keeps on accumulating.

Major reasons because of which the industry is going down is because of stringent regulations
which the airlines have to comply with, Aviation turbine fuel (ATF) prices which Indian
government didn’t reduce in proportion to the fall in international crude oil prices. But, when
there was a rise in crude prices, it increased the fuel cost which eventually increased the
operation of the airlines, high Airport charges levied by Airport Authority and stringent
competition and the race to stay ahead in order to stay competitive.

The resultant impact because of the losses faced by the industry is losses faced by employees
in their jobs and increase in the airfares. It would also affect the trading conditions as the
imports and exports would thus be higher. Along with that the stock market would also see a
fall.
 Table of Contents

Sr. No Chapters Page No.

1 Overview of the Indian Aviation Industry

2 Macro-Economic Factors/ Situations

3 Challenges faced by the Industry

4 Factors affecting the industry (Rising Debt Concerns, Competition)

5 Growth and Future of the Industry

6 Case-Study - King Fisher Airlines, Air India

7 Conclusions

8 Bibliography
 Chapter 1

Overview of the Aviation Industry

History
Air travel has been perceived to be an elitist activity right from the beginning of civil aviation
in India. This view arose from the "Maharajah" syndrome where, due to the prohibitive cost of
air travel, the only people who could afford it were the rich and powerful. Though, the elitist
image of civil aviation still lingers, it has changed recently with the introduction of low cost
carriers (LCCs).

Aviation by its very nature is a critical part of the infrastructure of the country and has important
implications for a) the development of trade and tourism and other allied industries b) opening
up of inaccessible areas of the country and c) stimulating business activity and economic
growth of the country. The civil aviation in India has witnessed many changes since its
beginning in tenns of the quality of services provided to passengers, development of airport
infrastructure, employment opportunities and profitability of airlines.
The evolution and growth of the aviation industry in India can be classified as a) Growth in the
pre-privatization era b) Growth in the post-privatization era. This chapter reviews the evolution
and growth of the Indian Domestic Aviation Industry (IDAI) in the pre- privatization era i.e.
since its early beginning in 1911 until 1994.
Growth of Domestic Aviation Industry in India
a) Domestic Aviation Industry in India
A Historical Perspective Commercial aviation in India began on February 18, 1911 when
Henri Pequet, a French pilot set a world record by flying the world's first air mail from
Allahabad's industrial and agricultural exhibition ground to Naini, a distance of 8 miles.
Regular air mail services were started subsequently by the Royal Air force on January 24, 1920
between Karachi and Bombay with a night stop at Rajkot.
The operations, however, were terminated after six weeks due to losses suffered. On October
1, 1915, the Government of India sanctioned the setting up of a central flying school at Sitapur
(UP), under the control of Army Headquarters. At the end of the First World War, an 'Air
Board' was formed to advice on ways of assisting and encouraging civil aviation. Detailed rules
governing registration of aircraft, licensing of personnel etc. were promulgated in the year 1920
and in 1924, work was initiated for the construction of civil aerodromes at Calcutta (now
Kolkata), Allahabad and Bombay (now Mumbai). A separate department of civil aviation came
into existence in April 1927.
One summer in 1929, late Mr. Neville Vincent, a Royal Air Force pilot came to India fi-om
Britain on a tour during which he surveyed a number of possible air routes. He saw the immense
potential for aviation in India. Mr. J.R.D. Tata, a young Indian, was the first to get his A-license
in India. In 1929, an entirely Indian owned company, 'Tata Sons', (later known as 'Tata Airlies')
submitted its plans to the Government of India to operate air services between Karachi and
Mumbai (then known as Bombay).
On October 15, 1932, a small plane called 'Puss Moth' took off from Karachi on its flight to
Bombay via Ahmedabad. At the control of the tiny plane was Mr. Tata, operating the first
scheduled air service in the country. In 1933, when the Tata Airlines completed the first year
of its operations, it had flown 1,60,000 miles and carried 155 passengers and 10.71 tonnes of
mail.
In the next few years, Tata Airlines continued to rely for its revenue on the mail contract,
including a considerable quantity of overseas mail brought to Karachi by the Imperial Airways
for different destinations in India. On the Karachi-Madras route, frequency was stepped up to
twice a week in 1934, and a year later, a weekly service was started between Mumbai and
Trivandrum (now known as Thiruvananthapuram) with stops at Goa and Carmanore.
In 1937, the frequency was increased further to two per week and another flight between
Bombay-Delhi via Indore, Bhopal and Gwalior was started. In early 1930s, (1933-34), a
number of airlines viz. 'Indian Trans Continental Airways', 'Indian National Airways', 'Madras
Air Taxi Services' came up. Aviation activities expanded and a number of new routes viz.
Karchi-Jodhpur-Delhi-Allahabad-Gaya- Kolkata-Akyab-Rangoon (Burma) etc. were
introduced.
The difficulties of the Second World War led to the exploration of possibilities for
manufacturing aircraft in India and the 'Hindustan Aircraft' was established in December 1940
by Walchand Hirachand in association with the then Mysore Government at Bangalore. India's
first aircraft - the 'Harlow Trainer', a single engine aircraft was rolled out for test flight in July
1941.
The Tata Airlines was converted into a Public Limited Company on July 29, 1946 and named
'Air India International Ltd'. Around this time, the airline moved its operating base from Juhu
to its present location at the Mumbai Airport.
After India became independent in 1947, the aim of the Indian Government was to promote the
development of indigenous industry and agriculture along capitalist lines.
To achieve this, the State actively intervened in the economy in order to a) ration scarce
resources b) direct the resources to planned uses c) curb the power of monopoly houses and d)
limit the penetration of foreign capital.
At the time of independence, the capitalists were unwilhng to invest in the development of
infrastructure. Firstly, because they did not have the massive amount of capital needed for
investments in infrastructure. Secondly, due to the longer gestation period and low returns, the
capitalists were more interested in investing in areas like consumer goods, where the gestation
period is relatively short and the profit margins are high with comparatively little investment.

So, the large-scale projects in the sectors such as energy, transportation, steel, oil, telecom and
other areas of the infrastructure were set up in the public sector. After the Second World War,
the aviation sector got a big boost.

A number of airports were constructed as part of the war efforts and at the time of India's
independence in 1947, the civil aviation department operated forty four (44) airports. The
techniques of flying and communication were improved over a period and the civil aviation in
India was established as a safe, efficient and comfortable means of transport. The licensing
system for Air Transport Services was introduced.

The availability of cheap, war-surplus Douglas-DC3 aircraft gave rise to many new airlines,
opening up more routes across the country. In spite of large growth of the aviation industry
during the initial period, the financial condition of many airlines was deteriorating around 1947.

Due to poor financial conditions, Jupiter Airways went into liquidation in 1948 while Ambica
Airlines had to close down its operations in 1949. Eight airlines were still operational till 1953.
They were:
i) Air India
ii) Airways India
iii) Air Services of India
iv) Bharat Airways
v) Deccan Airways
vi) Himalayan Aviation
vii) Indian National Airways and
viii) Kalinga Airlines.
Due to the soaring prices of aviation fuel, mounting salary bills and disproportionately large
fleet size, these airlines were incurring huge losses. The financial health of these airlines kept
declining despite liberal Government patronage. In order to survive, airlines were asking the
Government for more and more subsidies. To diagnose the problems of these airlines, the
Government of India appointed Rajadhyaksha Committee. Having studied the problems of
these airlines in depth, the Committee reported that the main reason for dissatisfactory
condition of the airlines was the existence of too many airlines in the market, operating with
multiplication of resources. To address this problem, the Goverrmient of India took an
important decision to nationalize these eight airlines.

b) Nationalization of Airlines

With the "Air Corporations Act 1953" all the assets (and liabilities) of the then existing private
airlines were transferred to two new national carriers viz. Indian Airlines and Air India. Indian
Airlines (lA) started its operation on August 1, 1953. It was entrusted with the responsibility
of providing air transportation within the country as well as to the neighboring countries in
Asia. Air India (AI) offered international air services only.

The "Air Corporations Act 1953" prohibited any person or company to operate any scheduled
air transport services from, to or across India. Thus, this Act conferred monopoly in air
transport services on Indian Airlines and Air India.

Growth & Operations of Indian Airlines (lA)

Right from the beginning, Indian Airlines always focused at strengthening its dominance in the
domestic circuit and providing world-class services to its international passengers. Indian
Airlines inherited a fleet of 99 aircraft including 74 Douglas DC-3 Dakotas, 12 Vickers
Vikings, 3 Douglas DC-4s and various smaller types from the eight airlines. The jet age for the
Indian Airlines began with the introduction of the 'Sud Aviation SE 210 Caravelle' in 1964,
followed by Boeing 737-200s in the early 1970s. Between 1962 and 1972, Indian Airlines was
called upon to support the military in several campaigns, first in unplanned fights with China,
and later with the wars with Pakistan. Indian Airlines reported a loss of Rs. 45 million in 1972.
The next year, the company had several incidents of aircraft damage or loss. Labor unrest, high
fuel costs, political burdens, and built-in inefficiencies added to the company's problems.
However, these were met with such resolve that IA had the confidence to order its first wide-
body jets. Airbus A300s, in 1975. A program to produce ground support equipment in Indian
factories was a part of the deal. In 1976, lA started operating new routes like Kabul,
Afghanistan in the northwest, and the Maldives Islands in the south. The first three Airbus
A300 wide-body jets were introduced in April 1976.

The Indian Airlines was doing well till 1989-90, however it started incurring losses thereafter.
To examine the causes for the losses and to come up with the turnaround strategy, the
Government of India constituted a Committee on February 13, 1995.

The Committee chaired by Dr. Vijay Kelkar - the then Secretary, Ministry of Petroleum &
Natural Gas, Government of India, published its report titled 'Report of the Committee of
Experts on Indian Airlines' in November 1996. The salient features of this report are discussed
hereunder.

The data in the below table shows that the performance of lA was improving till 1988-89.
It started declining since 1989-90.
TABLE 3.1: PERFORMANCE OF lA DURING 1984-1996
Year R P K PAX (Million) LF (%)
1984-85 6676.5 8.5 69.2
1985-86 7336.4 9.1 69.4
1986-87 8036.3 9.9 69.1
1987-88 8666 10.4 72.9
1988-89 8677.8 10.1 76.4
1989-90 8622.1 9.8 72.8
1990-91 7199.8 7.9 75.5
1991-92 7990.3 8.9 69.8
1992-93 7200.7 7.8 70.9
1993-94 7246 7.9 65.8
1994-95 7014.3 7.6 66.9
1995-96 7323.7 7.7 69.1
Launching of the Air Taxi Scheme

By late 1980s, lA was not able to cope with the growing passenger traffic. The Government of
India realized that if the domestic civil aviation industry is to succeed, it is high time to promote
competition, so in 1986, private Air-Taxies were allowed to provide chartered and non-
scheduled services. The Air Taxi operators were not permitted to publish time schedule and
issue tickets to passengers. The Air-Taxi was introduced to boost tourism and augment
domestic air services.

The operations of Air Taxies had several restrictions such as a) maximum 10 seater aircraft
manufactured abroad & 19 seater aircraft manufactured in India b) can fly to notified airports
only c) should fly two hours before/after schedule time of national carrier e) fares should not
be less than Vayudoot. Though air taxies helped in handling domestic traffic, their services
were not enough to handle the growing passenger traffic.

Privatization of the Indian Aviation Industry:

After India became independent in 1947, the development model implemented in India was
essentially a model of capitalist development. The aim of the Indian Government was to
promote a development of indigenous industry and agriculture along capitalist lines. To achieve
this, the State actively intervened in the economy in order to a) ration the scarce resources and
direct them to planned uses b) curb the power of monopoly houses and c) limit the penetration
and influence of foreign capital. For the private sector to prosper, the Government of India took
upon itself the large-scale projects in energy: transportation, steel, oil, telecom and other areas
of the infrastructure.

Advanced institutes for scientific and technological education and research were also set up in
public sector. While a lot of emphasis was laid on setting up huge industries, the agriculture
sector was neglected.

As a result of this, the purchasing power of more than 70 per cent of the population living in
the rural areas remained underdeveloped.
Due to this, the Indian economy became crisis ridden in the 1960s itself. In the 1970s, an
attempt was made to stimulate growth by giving a boost to capitalist development in
agriculture.

The Green revolution was initiated. One of the reasons for the nationalization of banks was that
the Government could direct credit to the agricultural sector in a big way. These measures
however provided temporary relief and the crisis continued to deepen. To keep the economy
growing, the Goverrmient of India resorted to increased external borrowings in the 1980s. It
also opened up the economy to a limited extent for increased foreign direct investment (FDI).

With exports less than imports, the current account deficit of the country went up by six times
in less than a decade from Rs. 1675 crores in 1980-81 to Rs. 11,382 crores in 1989-90. The
only way to recover this growing gap was to take still more loans from abroad. Consequently,
the external debt of the Government of India zoomed upwards - from $20.58 billion in 1980 to
$83.7 billion in 1990. The Indian economy was thus in deep crisis (Source: Globalization or
Re-colonization, by Neeraj Jain, published by Alka Joshi, 2001). The western creditors sensed
that the time was opportune to force the Government of India to submit to a 'restructuring' of
the Indian economy and open it up to foreign capital inflows and imports.

The international environment was also extremely favorable for mounting the pressure, as
USSR had collapsed and disintegrated in 1989. In 1985, the World Bank (WB) initiated an in-
depth study into India's industrial and trade policies and submitted its report to the Government
of India on November 30, 1990.
The balance of payments crisis around 1991 opened the way for an International Monetary
Fund (IMF) program that led to the adoption of a major reform package. Though, the foreign-
exchange reserve recovered quickly and ended effectively, the temporary clout of the IMF and
World Bank reforms continued.

The Government had to fulfill the conditions laid down by IMF in its structural adjustment
program to address this crisis. So, the Government of India decided to privatize the public
sectors in a phased manner. Privatization implies the induction of private ownership in publicly
owned enterprises. The World Bank-IMF sponsored Structural Adjustment Program (SAP) has
two phases. The first phase is short-term macro-economic stabilization.
It is followed by implementation of a necessary structural reforms phase. In the early 80s, most
SAPs focused on a narrow range of policies aimed at reducing account deficits. As the debt
crisis deepened, it became obvious that the stabilization programs were not working, the US
Treasury Secretary, Mr. James Baker came up with a strategy to solve the debt crisis. This was
called the 'Baker Plan'. Under this plan, the WB was asked to impose more comprehensive
conditions on the debtor countries. By 1990, majority of the countries that had received
conditional loans from the IMF also received structural adjustment loans with harsh
conditionalities from the World Bank.

The developed countries began tightening their purse strings, putting on hold fresh loans to the
Indian Government, demanding that it first implement the requirements stated in SAP. The
following ingredients of SAP are based on the Anderson Memorandum titled "Trade Reforms
in India" dated November 30, 1990 submitted to Government of India by the World Bank.
Current Scenarios
Cargo Growth

Figure 1 Source: Global Aviation Summit

Air cargo handled at Indian airports grew by more than 20 times from 0.08 MMT in 1972-73
to 2.5 MMT in 2014-15. During the period 2013-14 to 2017- 18 it accelerated sharply and grew
with a CAGR of 10.0%. International cargo comprises of 60% of total air cargo tonnes handled
in India and grew at 15.6% in 2017-18. Domestic cargo grew by over 8%, which reflects the
skewed modal mix in which roads account for over 60% of cargo transportation as compared
to the global average of around 30%. Indian express industry is one of the fastest growing
market globally, but with a small share of about 2% of the global market.
This industry grew at 17% CAGR over the past 5 years and was estimated to be INR 22,000
crore in 2016-17. Domestic express industry a key constituent of the Indian express industry is
estimated to be worth INR 17,000 crore. International express is estimated to contribute INR
5,000 crore (23% by value) to the Indian express industry. Transshipment cargo which
constitutes about 60- 70% of total volumes handled by some of the leading global airports is
quite low in India.

Boeing 20 year forecast

The Indian air cargo industry is poised for significant growth on the back of both the strength
of India's economic growth and many other drivers of growth in India's commerce, trade,
investment and consumption, which include significant demand from small and medium B2B
segments. However, the magnifier impact of lower air freight costs is as yet not adequately
seen. Logistics costs in India comprise about 13-14% of GDP as compared to 7-8% in
developed countries which has also hampered the growth of air cargo logistics industry. A
strong impetus has been provided through the holistic National Civil Aviation Policy 2016,
which has included a number of initiatives for achieving growth of cargo volumes to 10 million
tonnes by 2027.
Open Sky Policy for air cargo and improved international connectivity coupled with expanding
cargo-handling infrastructure, both physical and digital have sustained the high growth of air
cargo in India in the last few years. As per the Boeing 20-Year Forecast, while global air cargo
would reach 509 billion Revenue Tonne Kilometers (RTKs) by 2035 i.e. twice that seen in
2015, at an annual average rate of 4.2%, Asia will lead the growth, with domestic China, intra-
Asia, and Indian market expanding at the highest rates of 6.2%, 5.5% and 6.7% p.a.
respectively, as shown in the graph below.
 Figure 2 Source: Global Aviation Summit

Commercial Growth

Figure 3 Source: IATA

In 2017, more than 158 million passengers flew on routes to, from and within India (Figure 3). This
represents an increase of almost 15% over 2016 and is the third consecutive year of growth in the order
of 15-20% per year.
The figures for the 2018 year-to-date suggest that India is on track to record a fourth straight year of
double-digit passenger growth.
 CHAPTER 2

Macro-Economic Situations
Government Initiatives
1. UDAN
The Ministry of Civil Aviation took a major step today towards making flying a reality for the
small town common man. The Civil Aviation Minister Shri P Ashok Gajapathi Raju launched
the Ministry’s much awaited Regional Connectivity Scheme “UDAN” in New Delhi. UDAN
is an innovative scheme to develop the regional aviation market. It is a market-based
mechanism in which airlines bid for seat subsidies. This first-of-its-kind scheme globally will
create affordable yet economically viable and profitable flights on regional routes so that flying
becomes affordable to the common man even in small towns.

He said the scheme had been prepared after a lot of stakeholder consultation and called for
support from all players to make it a success.

Also speaking on the occasion the Minister of State for Civil Aviation Shri Jayant Sinha said
that the objective of the scheme was “Ude Desh Ka Aam Naagrik” He said this scheme ensure
affordability, connectivity, growth and development. It would provide a win-win situation for
all stakeholders – citizens would get the benefit of affordability, connectivity and more jobs.
The Centre would be able to expand the regional air connectivity and market. The state
governments would reap the benefit of development of remote areas, enhance trade and
commerce and more tourism expansion. For incumbent airlines there was the promise of new
routes and more passengers while for and start-up airlines there is the opportunity of new,
scalable business. Airport operators will also see their business expanding as would original
equipment manufacturers.

The scheme UDAN envisages providing connectivity to un-served and under-served airports
of the country through revival of existing air-strips and airports. The scheme would be in
operation for a period of 10 years.
Finance Minister Nirmala Sitharaman on Saturday announced that the government plans to set
up 100 more airports by 2025 under the Regional Connectivity Scheme (RCS), also known as
UDAN or Ude Desh ka Aam Naagrik.
Under the program, airlines compete to win subsidies for operating flights linking small
airports with the bigger ones. The scheme, launched in October 2017, is now in its fourth phase.
At present, 232 routes across 43 cities and towns connect 137 small cities under the RCS.
Currently, state-run Airports Authority of India (AAI) manages 125 airports in the country
including 11 international airports. Sitharaman also proposed launching a separate Krishi
UDAN scheme, which will improve connectivity with the country’s northeast region.

2. FDI

The civil aviation industry in India has emerged as one of the fastest growing industries in the
country during the last three years. India is currently considered the third largest domestic civil
aviation market in the world.The government is working on a proposal to allow 100 per cent
foreign direct investment in Air India as it moves ahead with disinvestment of the national
carrier, according to sources.

Currently, FDI in Air India is capped at 49 per cent through the government approval route
while 100 per cent FDI is permitted in scheduled domestic carriers, subject to certain
conditions, including that it would not be applicable for overseas airlines.
Allowing 100 per cent FDI in Air India would not be applicable for overseas airlines. Allowing
100 per cent FDI in Air India would allow Non-Resident Indians (NRIs) to invest up to 100
per cent. Currently, they can acquire only 49 per cent in the national carrier.

The Substantial Ownership and Effective Control (SOEC) prevents any foreign investor from
taking control of any airline in India, run by a board that has two-third Indians.
In the previous budget in July, Finance Minister Nirmala Sitharaman had said that the
government has proposed to hike FDI limit in domestic carriers. As of now, 100 per cent FDI
in the aviation sector is only allowed under automatic route for MR0 (Maintenance, Repair and
Overhaul), aircraft purchase and ground hailing.

"In the airline operation, there is an issue of substantial ownership and effective control. Thus,
the Civil Aviation Ministry will have to see all these to sell Air India, which would require
liberalising FDI in the sector," IANS quoted an official as saying.
"The 100 per cent FDI will have a better effect on the Air India bidding prospects. The Civil
Aviation Ministry is in the loop," sources told the news agency.
 3. Environment factors

Any business is expected to be sustainable. But it is particularly challenging for airlines that
burn fuel to propel their aircraft. Nonetheless, the industry (not just airlines but the whole value
chain) has committed to some very ambitious goals. From 2020 it is expected to cap emissions
and growth will be carbon-neutral. And by 2050 the aspiration is to cut aviations’ net emissions
back to half the levels that we emitted in 2005. Whilst it is not possible to make aviation
sustainable (in its present form) in the very long term, much can be and is being done to
improve aviation’s sustainability including:
 ensuring safety and security;
 efficiently optimizing available capacity;
 collaborating to achieve a shared vision for more sustainable aviation;
 making decisions based on optimizing the balance between social, economic and
environmental imperatives;
 serving the need for mobility in a manner where the greatest overall benefit will arise,
meeting the needs of stakeholders;
 taking every opportunity to minimize adverse impacts and resource use by creating and
operating more efficient ATM systems, equipment and technology;
 targeting efforts where they will produce the greatest improvement in our citizen’s
quality of life;
 investing in adequate research, training, education and awareness;
 being transparent and honest about both the good and bad aspects of air transport;
 avoiding conflicting policy and regulations
 Chapter 3

Challenges faced by the Industry

Compliance with a wide range of regulations and restrictions:

The commercial aerospace industry has to comply with a long list of requirements for aircraft
design, maintenance, pilot training activities and safety regulations. These regulations are
critical for operators and passenger safety and hold the products and services of the OEMs and
suppliers to the highest standard. Aviation companies own a series of intellectual property
portfolios, consisting of patents, unpatented know-how, data, software, trademarks and so
forth. They enter into different types of confidentiality agreements with employees and
suppliers, but these measures are not always enough to deter the misuse of IP and this could
pose a threat for aviation industry to come. Furthermore, Ernst & Young notes, IP laws vary
from country to country. As a result, companies operating in a large number of foreign
countries may be exposing themselves to IP infringement which could ultimately pose a series
of issues for all sorts of aviation companies.

Exposure to cybersecurity events

The biggest challenge in the aviation industry in 2019 is failure to have appropriate
cybersecurity measures in place. As more airlines, OEMs and MROs pursue big data analytics
and predictive maintenance, the risk of cyber breaches increases. And the problem with
inappropriate cybersecurity can be very costly for the aviation industry.
In fact, the total losses incurred by companies as a consequence of cybercrimes are estimated
to be approximately US$400 billion per year, according to Ernst & Young. In the digital world
that we live in today, the risks and consequences of cyber-attacks get magnified by the
complexities of our integrated value chain. With increased interconnection across the value
chain, a cyber-attack on one company can cascade across the network and affect other parts of
the value chain as well, increasing risk for the entire aviation industry.

Foreign currency and commodity price fluctuations

Fluctuations in currency exchange rates is the tenth and final types of risks that in the aviation
industry in 2019. Given that a large amount of aviation companies operate globally, a large
portion of their revenue streams are earned in a variety of currencies, making them vulnerable
to the fluctuations because of the changes in the currency of the countries.
Furthermore, Ernst & Young notes, currency fluctuation also affects the receivables, payables
and return on assets denominated in foreign currencies. Financial performance is also affected
by price fluctuations in key commodities or raw materials, such as aluminum, titanium and
composites that have a significant effect on the manufacturing costs as well as the profitability
of the entire supply chain. Fluctuation in commodity prices can lead to issues along the aviation
supply chain. For instance, it might lead to late delivery and increased failure probability by
smaller suppliers. Commodity price fluctuation risks are generally mitigated via structured
contracts or financial hedges.

Increase in fuel prices:

Aviation turbine fuel (ATF) is one of the important sections of the industry. Indian government
didn’t reduce the jet fuel prices in proportion to the fall in international crude oil prices. But,
when there is a rise in crude prices, it increases in the fuel cost would eventually increase the
operation of the airline. Besides, it could compel airlines to go for an upward fare revision to
offset the increased cost of operations. Why, the jet fuel accounts for 45 percent of an airline's
cost of operation. For the past one year, the ATF price has witnessed an increase of nearly 30
percent and around 25 percent in just last six months.

Government intervention

Frequent government intervention is proving to a great obstacle for the growth of Aviation
industry. Several aviation experts have pointed out that India government should follows
aviation industry free from policy hurdles like regulating airfares and slash taxes, including jet
fuel. Besides, they advise the government to focus on building infrastructure and the air
navigation system. The Indian aviation industry which contributed five per cent of GDP, offers
four million jobs and another seven million jobs through tourism and related activities. So more
efforts are needed, on creating infrastructure which will enable further growth.

Higher airport cost

High Airport (aeronautical) Charges levied by Airport Authority of India are higher. These
charges payable at the International airports are higher than those payable at the airports
designated as Domestic airports. As a result, the domestic airlines in India are incurring
additional costs at the international designated airports without deriving any extra facilities.
According to a latest survey, the airport charges levied by the Indian airports (Domestic and
International Terminal) are amongst the highest in the Asian and the Gulf countries. This adds
more burden to aviation companies.

Severe competition

There is a cut throat competition faced by the top airline due to ticket pricing. Established
Airlines are threatened by low cost carriers, which are eating up their market share. In order to
consolidate their market share, top premium airlines were forced to reduce their ticket fares to
around 15- 20 per cent. Such a slash down in price will lead to a price war in the long run
amongst the airlines with the only goal of increasing their market share.
 Chapter 4

Factors affecting the industry

Troubled past: India’s civil aviation industry has so far seen more failures than successes.
After the 1992 open sky policy of the government, at least half a dozen airlines were grounded
due to huge losses. Though small in fleet size, these airlines (air taxies as they were designated
as the national carrier Indian Airlines was the predominant player in the domestic routes),
including NEPC Airlines, Damania Airways, ModiLuft, Continental and East West Airline,
had been operating with a whole lot of limitations created by ambiguous regulations and
inherent structural issues. For instance, Damania Airways, which started flying in 1993 with
two leased Boeing 737 aircraft, began as a well run airline and even experimented
unsuccessfully with an inflight alcohol service on domestic routes.

In 1995, however, the aviation ministry, apparently under pressure from Indian Airlines to
ensure a level playing field, asked the private airlines to mandatorily fly a certain number of
secondary routes to qualify for operating on the main, profitable routes. The ministry also
delayed approvals to obtain smaller aircrafts as an armtwisting tactic. This rule completely
altered the financials of the private airlines and many of them collapsed. History was repeated
with the latest victims – Sahara Airlines, Air Deccan and Kingfisher Airlines. While Sahara
Airlines, which ran into deep operational trouble due to financial stress, lack of fleet expansion,
and pilot shortage, was sold to Jet Airways in 2006; the country’s first budget airline Air
Deccan, launched by passionate aviator Captain Gopinath in 2003, met the same fate and was
acquired by newly launched Kingfisher Airlines in 2007.

The Vijay Mallya promoted Kingfisher Airlines later collapsed under the weight of huge
accumulated losses and mounting debts. The full service airline, which never made profit after
its launch in 2005, was grounded in 2012. Eyes on new policy India’s draft civil aviation policy
acknowledges that the cost of ATF in India is 40 to 45 per cent higher than in the international
market due to high rates of taxes. So, some steps will be taken in association with the ministry
of finance and state governments to rationalise the rate of taxes so that fuel costs are
competitive. On enhancing regional connectivity, the new law indicates that a special package
will be developed for the North Eastern region to improve air connectivity and provide linkages
to remote locations.
The Route Dispersal Guidelines (RDG) will be reviewed with the objective of encouraging
Indian carriers to enhance regional connectivity through deployment of small aircrafts and code
sharing arrangements.
The draft also says the 5/20 guideline that mandates Indian carriers to complete five years of
operation and a minimum fleet of 20 aircraft to apply for international operation will be
reviewed with a view to encouraging the entry of new Indian carriers. These proposals have
been viewed as discriminatory by established players but are sought for by the new entrants.

High Costs, Low Yields:

Jet fuel prices constitute about 40% of costs for an Indian carrier and are taxed higher here than
anywhere else in the world. A recent analysis by ET of the correlation between fuel prices and
airline profitability in the last 10 years showed at least three points — a rise in the December
quarter of 2013 and significant dents in April-March 2015 and January-March 2016 — that
plunged airlines into deep losses or catapulted them to significant profitability.
Aviation turbine fuel (ATF) prices have risen 9% between January and March-end, shows data
from the fuel’s biggest supplier, the state-run Indian Oil Corporation. That, combined with
typical low-ticket pricing in India’s price-sensitive market, will continue to hamper airline
margins.
Not that Indians don’t spend on air travel. A recent report by Google and Bain & Co said Indian
travellers took approximately 2 billion domestic and international trips in 2018, spending
nearly $94 billion on transportation, lodging and consumption during their travels. Of that, they
spent $36 billion on transport in 2018, up from $25 billion in 2015. About 51% of transport
expenditure in 2018 was on airline tickets, compared with 38% in 2015. But still the yields are
lower than the expenditure.
Hiredesai, in his note, gave a comparison between revenue per kilometre flown by an airline
compared to levels of crude prices. The report says that when crude is $60 to a barrel, for
instance, even a 5% drop in yields can net Rs 611 crore in annual profit for IndiGo. But as it
crosses $70, the yield has to increase by 5% to garner profitability for the airline. But that isn’t
happening.
IndiGo’s per flight seat per kilometre revenue for the October-December quarter fell 3% year-
on-year. Its net profit fell 75% to Rs 190 crore. Brent crude is currently trading at $72. Yields
will rise due to the Jet shutdown, but if they aren’t kept at that level, IndiGo and all other
airlines are staring at the losses.
Government Apathy: Airlines in India have been appealing, in vain, to the government for a
decade for a reduction in taxes on fuel. Jet fuel is 35-40% more expensive in India than in the
rest of the world, because of relatively high tax rates.“The fundamental of the business has not
been addressed by the government. India is a price-sensitive market.

If the fuel price is low, airlines can make money even at current revenue levels,” said a senior
executive of an airline, asking not to be named. The Civil Aviation Ministry and the regulator
have been allegedly slow in addressing issues. For example, India was one of the last nations
to ground the beleaguered 737 Max planes.

Executives speak of archaic rules called the route dispersal guidelines (RDG) that mandate
airlines to fly a certain percentage of flights in smaller, unprofitable air routes.

“The government can also reduce cumbersome regulation like RDG that results in overcapacity
in certain markets with a more comprehensive demand-supply and auction-driven regional
connectivity scheme. The current form of RDG drives up costs and introduces inefficiencies,”
said a second airline executive, who also asked not to be named. To be sure, the government
has in the past one year opened smaller airports across the country and have auctioned smaller
routes for airlines to fly. SpiceJet has been the biggest beneficiary of the scheme, with 21% of
its 1,10,220 flights operating on monopoly routes in the ongoing summer schedule, making it
the biggest chunk of such routes for a pan-Indian carrier.

The much bigger IndiGo has 16% of its 2,27,201 flights on monopoly routes. Lack of
competition on these routes mean higher volume and yields for airlines, a dual benefit they can
never enjoy in a fiercely competitive sector such as Mumbai-Delhi. “There is also a need to
professionalise regulators like DGCA to ensure that officials have an understanding of the
sector. That will ensure bringing in better systems by airlines, leading to reforms in the way
they are run,” said a third airline executive.
 Chapter 6

Growth and future of the Industry

  Digital Transformation and ‘Big Data’
This year, the real applications and use cases for Big Data in travel finally came to the fore.
There were distinctions made about the three different types of data in an airline:

 Customer data
 Product data
 Operational data

However, as was pointed out by all, data it doesn’t have any value, it’s what you do with it that
matters. Having clean data – data that is accurate, collated, quantitatively measurable, and
easily analysed – is half the battle.

 Airlines should be taking a much bigger share of the travel ecosystem

One of the starkest truths that struck was that airlines bring a lot of passengers, and a lot of
revenue into the travel ecosystem, but are not getting their fair share of the total margin and
total revenue available.

What percentage is going to airlines and what is going to the ecosystem? One estimate was that
30% is going to airlines with the rest of the money going to the ecosystem such as hotels,
transfers, ground transportation and events. Even worse than this, the airlines have the data on
what the passenger is looking for, where they are going and why they are going but still the
average airline margin remains at 6-7%. The resources and the repertoire is there, but not the
appetite.

Consider the OTAs and other ‘gatekeepers’ of travel: Expedia, Kayak, CTRIP, for example.
Equally, the big technology brands such as Google and Facebook play a bigger role in the travel
industry, not as travel providers, but as tollbooths and curators to lead consumers towards
making the travel booking.

Both the OTAs and Google/Facebook monetise this slice of the travel pie and are making it
very profitable for themselves.
The question remains, what should the airlines do

1. Airlines becoming a platform: the view was that only airlines with large passenger
numbers, deep pockets and the appetite (for example, Ryanair or EasyJet) can choose a
strategy of being a travel platform with an airline attached.
2. Airlines embracing retailing properly: the clear message coming through all the talks
was that the opportunity still remains for airlines to up their game on retailing. Airlines
are really only starting out on their journey to true retailing. The starting point is still to
think about ancillaries: air/non-air offer, fulfilment and merchandising.

 Conversational commerce will go mainstream

Chatbots are going past the proof of concept stage into production and real actual usage, with
hotels leading the charge in the travel industry. The best definition we heard at the conference
was that:

‘Chatbots take the intent of the customer, understand the intent through Artificial Intelligence,
and point the customer in the right direction’. One very interesting point made was that
conversational interfaces can be seen as ‘retailing touchpoints’, because they reflect the way
that people live and act. One eye-catching quote from technology consultants, Gartner, was
that ‘by 2020 most people will be talking to bots rather than their spouse’!

So where are airlines with chatbots? The starting point for chatbots is to see development as an
iterative process just to figure out where they can add value to the traveller, and in particular,
reduce call centre costs. Chatbots are a new tech and so a learning curve is required. Indeed,
there are two very interesting issues that airlines need to think about: ‘empathy v speed’, as
KLM called it. For example, if there is a problem with flights, customers want an immediate
answer and are ok with lack of empathy. Chatbots typically know before a call centre that there
is a problem or disruption, due to their connection with the back end systems, so a fast, fact-
based reply is needed, stripping out niceties.

However, if there is a big emotional impact or empathy requirement, then the customer is better
talking to an agent. With KLM, the Call Centre agents see all push notifications on their screen,
so they can work out the right answer and the right tone.
The current use cases of chatbots are many and varied. Here are five we could uncover:

 Customer Service
 Bookings
 Ancillary Upsell and Cross Sell
 Servicing Customer Bookings (e.g. MMB)
 Retailing

You can narrow these themes to ‘cost reduction’ and ‘revenue increase’. By driving customers
with simpler requests to a chatbot, airlines can reduce costs, and get the opportunity to upsell
customers with air ancillaries and cross-sell. Indeed, the option to sell in-path is the real upside,
as it offers another channel for airlines to reach customers outside of the traditional eCommerce
channel.
 Chapter 7

Case study of Jet Airways

Background
Jet Airways (India) Pvt Ltd. was a reputed privately-owned airline in India with an average
convoy age of 4.45 years. It flew 63 destinations, domestic and internationally which includes
New York (both Newark and JFK), Brussels, Toronto, Hong Kong, London (Heathrow),
Singapore, Colombo, Muscat, Kuala Lumpur, Bangkok, Colombo, Dhaka, Kathmandu,
Kuwait, Doha, Bahrain, Jeddah, Riyadh, Dubai and Abu Dhabi. Out of the total 4.08 million
air passengers, 1.28 million used to be Jet flyers. It was known for its outstanding service and
punctuality, and that helped them attract a large number of business travelers. It had the fleet
of 97 aircraft – 42 Boeing 737-800, 20 ATR 72-500 aircraft, 12 Airbus 330-200, 11 Boeing
737-700, 10 Boeing 777-300 and 2 Boeing 737-900. The team was growing big and
management had plans to start its own pilot training centers and maintenance hangers.

Origins
In 1974, Jet Air (Private) Limited was formed by Naresh Goyal, a recipient of several business
and leadership awards. Being the founder of the company, he was involved in developing
studies of route structures, traffic pattern, operational economics, and flight schedules.
Eventually, Jet Air grew as big as it opened 60 branch offices.

After the aviation industry was opened for private players in 1989, Mr. Goyal established Jet
Airways (India) Pvt. Ltd. in 1991 and started commercial operations on 5th May 1993. Since
the deregulation, 20 airline companies entered the market and Jet Airways was one of the very
few survivors.

On 22nd March 2004, Jet Airways and its competitors were free to fly internationally. To
finance the new aircraft, Jet borrowed $800 million, and an IPO of 25% of its shares was also
in the works. Soon, Jet became the leading Indian player and after buying Air Sahara for Rs.
1,450 crores, it became the only private Indian carrier to fly abroad in 2006.

However, buying Air Sahara meant a considerable drain on the airline’s resources, financially
and on the management front as well.

Crisis 1: 1900 Employees fired and reinstated

Buying Sahara proved to be the biggest mistake by Jet. The airline company was growing
aggressively on the international front, but the local market was extremely competitive.
In 2008, the first sign of the trouble became apparent when Goyal did an operational tie-up
with Jet Airways’ arch-rival, Kingfisher.

By the end of 2008, the company sacked 1900 cabin crew members. Those members were all
probationary and temporary employees, across all departments and categories. The action was
an attempt to optimize the cost of business operations.

“The economic viability of the industry has been severely affected by the record high fuel
prices and most recently due to the crisis of the financial markets globally and the downturn in
traffic,” Jet stated. “Jet Airways expects these severe market conditions to continue.”

Explaining the company’s decision in a press conference, Executive Director Saroj Dutta said,
“It is an unfortunate decision, which all of us in the company regrets. A total of 1,900 people
are being served separation notice. 800 have already been served notice. In the next few days,
the others will also be serving notice. It is an attempt to save the jobs of remaining 11,100
employees. It has nothing to do with the workforce of the companies. These are independent
decisions of the two companies.”

Not just the employees, Jet suffered a backlash from the government, regulatory bodies and
political parties. Many others also commented on how the change management plan was
executed.

Reinstatement of 1900 employees

Later in a press conference, Naresh Goyal stated “I apologize for all the agony that you went
through. I was not there when this decision was taken. I came to know about it later. I have not
been able to sleep all night. I apologize for what has happened. I request all of you to start work
from tomorrow morning.”

The management said they were forced to downsize to cut down its losses. However, Mr. N
Goyal claims that he was not aware of any such decision taken in the company. So, the whole
situation created confusion as the earlier statements were contradictory.
Crisis 2: Revolt by Pilots

Formation of National Aviators Guild

The firing and re-hiring had created insecurity among the employees. The primary concern was
for airline pilots who were contract employees, which means they could be sacked anytime. In
the current situation, the younger pilot’s career was at stake because of the mass sacking being
indicated. The whole thing led to the formation of the NAG, National Aviators Guild. It got
registered by the Regional Labour Commissioner on 24th July 2009.

Termination of two pilots

On 31st July 2009, two senior pilots were dismissed from Jet Airways over an email, only
stating that their services are terminated with immediate effect. They were both office bearers
of NAG. Upon asking the reason, the management said that they were pressurizing pilots into
signing the membership form to join the union. The pilots were not given a chance to explain
or discuss their side, which led to a strike notice from NAG on 24th August 2009. The strike
led to the cancellation of 130 flights and caused considerable losses to Jet.

In further discussions, the management and pilots failed to resolve the issue, and the standstill
continued. The pilots’ demand was the reinstatement of the dismissed pilots. By the 4th day of
the strike, 700 flights were canceled, causing inconvenience to 28,000 passengers.

On 31st August 2009, Labour Commissioner asked Jet to furnish reasons for sacking the pilots
by 7th September 2009, which they failed to comply and fixed the next meeting for 14th
September. Later, Goyal referred to pilots as terrorists and that they were holding the country
to ransom. He further announced that if need be, he will bring in foreign pilots.

The airline chief said, “I am open to meeting and talking to the pilots. I will be more than happy
to meet them. But they cannot harass the passengers. We won’t tolerate such blackmail. The
livelihood of more than 30,000 employees of Jet Airways is at stake.

The NAG withdrew the strike on 7th September, but the pilots were unhappy about their
demand not being met. To express their disagreement, more than 300 pilots reported sick.

The outcome of it was:

 Cancellation of 21 international flights operating on South East Asia belt including

flights to Hong Kong, Bangkok, and Singapore
  Badly affected the services to Gulf countries, Europe and the US
 15 flights remained cancelled in Delhi
 For Jet Airways, the cost of not taking back the two pilots was approximately Rs. 15
crores a day. The negotiations finally ended at the following terms:
 Jet to take the pilots back and the pilots resumed the duty with immediate effect
 Grievance committee was formed to hear both the pilots and administration members
in such cases
 The committee would look into the coordination between the management and pilots
 The committee would operate under Central Labour Commissioner

Crisis 3: External Factors

By the fourth quarter of the financial year 2017-18, Jet reported massive losses of Rs. 1,045
crores and that only got worse by April-June quarter when the reported losses were Rs. 1,323
crores. The crisis was to the point that the company stated it doesn’t have the capital to operate
beyond 60 days.

Following reasons led to the losses:

The rising cost of ATF (Aviation Turbine Fuel): During June – September 2018, there was
a significant hike in the global oil prices and Jet being an international flyer was affected by
the hike in price much more. The rates of the ticket could not be increased because of the low-
cost models.

Low-cost model and budget airlines: The low-cost model is one of the most significant
factors for increasing the operational cost in the aviation industry. The model, followed by
budget airlines entering the market, Jet was one of the deeply affected players.

Depreciation of Indian Rupee: Recently, the value of Rupee took a dip globally and that as
well affected the airline industry. Even after excluding fuel, 25-30% of the cost for the
companies are dollar dominated. Such expenses included the major ones like maintenance costs
to ground handling, parking charges abroad and aircraft lease rents.

Crisis 4: The Goyal Problem

By November 2018, Jet started taking cost-cutting measures and was looking for potential
investors or buyers.
Etihad Airways PJSC had a stake of 24% in the company and wanted to increase its investment.
However, Goyal was reluctant to lose control of the company, which held back Etihad and
other potential investors.

“Mr. Goyal has always wanted to keep control of the airline at any cost. Even in the past when
the airline was going through tough times, he turned down deals to protect his position,” says
a former senior executive of Jet Airways who didn’t want to be named.

Many experts say that the decision of Naresh Goyal to have a self-headed single management
team was a crucial mistake. Jet Airways, being a full-service airline, was a huge company. He
should have had two teams handling budget flyer and full-service carrier respectively.

The founder and chairman of the Jet, Goyal has also been accused of making bad investment
decisions, and that affected the company’s financial health majorly. The operational cost of the
airline was higher than the others, and it kept on accruing debts.

Impact:

Loss of jobs: Jet Airways was a team of 20000 – 23000 employees and many of their salaries
were not paid for months even before shutting down. Apart from them, there were other
vendors and outsiders working with the company. After it stopped operations, many HR
consultancies have confirmed that the rush for job seekers have shot up. After the airline halted
its operations, 1300 pilots are left with no job.

A rise in airfares: With one less player, the major one, in the market, the supply of seats have
gone down. However, demand remains the same. The Ministry of Civil Aviation had asked
airlines to not indulge in predatory pricing and keep fares at affordable levels. However,
airfares on short-haul routes like Mumbai-Bangalore, Delhi-Dehradun and more have risen
sharply. There is a rise of 10-15% of the average ticket prices across various sectors.

Exports: Jet had the highest capacity for cargo and accounted for 50% of the exports from
Mumbai to Amsterdam, Singapore, Paris, and London. As per the reports in Economic Times,
the exports of freshly produced items to Europe has mainly been affected.

“From an average of Rs 75-80 per kg, the latest freight rates are over Rs 100/kg. As a result,
exporters are unable to fulfill their volume and price commitments with their customers,” the
daily quoted Kaushal Khakhar, CEO of Kay Bee Exports, as saying.
Stock market: As Jet’s ship has sunk, the stock prices of its competitors are skyrocketing.
SpiceJet and InterGlobe (IndiGo) have become the costliest airlines stocks. The losses are not
going to be suffered by the Jet shareholders only. The mutual funds that had bought into these
shares and the shareholders of the other companies working with Jet will also see a downside.
Conclusions
Tourism is a human experience, a social experience, a geographical phenomenon, a resource
value, and a business industry. It is a major social phenomenon of the modern society with
enormous economic consequences. Its importance as an instrument for economic development
and employment generation, particularly in remote and backward areas, has now been well
recognized the world over. The industry today is globally recognized as a major economic
contributor and employment generator. The investment flows into this field are constantly on
the increase.

The aviation industry has seen a downfall with major players exiting the market namely Jet
Airways, Kingfisher, Damania, etc. Due to stringent continuous losses faced by the service
providers and because of the race to stay ahead in the competition, the service providers in
order to leave their mark and attract customers focused on decreasing the prices whilst
providing attractive offers.

In the recent budget, the finance minister has announced the privatization of Air India as a part
of their disinvestment strategy. Allowing 100 per cent FDI in Air India would allow Non-
Resident Indians (NRIs) to invest up to 100 per cent. Currently, they can acquire only 49 per
cent in the national carrier.

Despite the difficult situations, the Indian aviation industry has time and again shown the
potential to bounce back. With the recovery of the Indian economy, favorable government
policies, the current declining trend of fuel prices, and expansion/development of airport
infrastructure in the country will most likely help the airlines to tide over the adverse situation.

The key to the fast pace development of Indian aviation industry lies not just in the ‘formation
of strategies and policies’ by the stakeholders (namely the airlines, airport operators, and the
government), but also on early and effective implementation of these decisions.
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