Assignment on

Topic:

Opportunities and challenges that a foreign investor faces when seeking to invest in
the Indian aviation industry

Subject:

International Business

Subject Code:

MGT 2133

Section: C

Submitted to:

Lecturer Aruna Anwar

Southeast Business School

Southeast University

Submitted by:

Name: Tasnim Rouf

ID: 2017210000123
Table of Contents

Introduction 2

Emerging Wealth & Work Force 2

Competition and Native Brand Loyalty 3

Strategic Alliance & Acquisitions 4

Off Pace Infrastructure 6

Conclusion 6

Appendices 8

Reference List 11

Introduction
The Indian aviation industry is one of the fastest growing markets within the BRIC economies (Brazil, Russia,
India & China) showing a 20.7% year on year growth to 11.9 million passengers, figure 1 (see appendices)
shows the growth of traffic within the Indian domestic airline market. Nonetheless its India’s budget airlines
that are taking up market share and the market is currently dominated by natively owned low cost airlines.
Centre For Asian Pacific Aviation (2011) quotes “The combined market share of pure LCCs is now close to
40%, while the nation’s full service carriers are now deploying almost 70-80% of their domestic fleet on budget
brands.” Figure 2 (see appendices) highlights the capacity share by LCC’s against full service airlines in both
India’s international and domestic markets.

However a foreign investor seeking to invest in the Indian aviation market can take advantage of a large amount
of opportunities. The emerging wealth of the Indian population into a middle class nation and a large amount of
aviation industry trained citizens. Foreign investors can capitalise on this new found wealth and demand for
domestic and global travel, while been able to access a large workforce. A key area for foreign investors is to
also fabricate strategic alliances or part acquisitions with Indian airlines to gain direct access to this fast
growing market as legislation still blocks full 100% FDI.
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The Indian aviation market however offers a variety of challenges to foreign investors seeking to invest. One of
those being that within the aviation industry foreign direct investment (FDI) is capped by the government
possibly creating difficulty successfully completing a move into the Indian aviation sector. Also a market
dominated by native and local brands could hinder the success of a foreign investor as even though the market
is growing it is heavily saturated and brand loyalty may already exist among native airlines. Also the fast pace
of growth has not been seen throughout the industry and much of the required infrastructure is struggling to
keep up with the double digit growth, a hindrance that could stagger any success from a potential investment .

Emerging Wealth & Work Force

India’s population is accumulating more wealth as its economy continues to develop. One fifth of the worlds
middle class population live in a BRIC economy. Figure 3 (see appendices) shows the growth of the global
middle-class population over the next 20 years. China circa 2010 were 13th in the list of countries with the most
of their population who were middle class this can be seen in figure 4 (see appendices). India over the coming
years has the opportunity to expand its middle-class population to overtake the likes of China. According to Li,
C (2010:39) this will be a result of “India’s...more rapid population growth and even income distribution which
allows growth to be distributed across all segments of society.”

This is ideal for a foreign investor as the wealth and growth of the Indian population currently being seen is a
long-term benefit. Any investor seeking to invest can have the reassurance that there will an ever-increasing
number of middle class citizens with higher disposable income. This is a huge opportunity for an investor
seeking to invest in the Indian aviation industry as there seems to be a strong correlation between economic
growth and growth in the aviation industry. Currently there is a lack of a western influenced Indian based
airline that offers both domestic and international routes, the Indian’s desire to embrace the western lifestyle
gives the ideal platform for a western influenced airline. Hjarvard, S (2003:243) backs this up by quoting “a
middle-class utopia of India’s global modernity is a desire to appropriate and take part in certain forms of
Western otherness: the ability to travel abroad...the ability to consume foreign goods and to appropriate other
aspects of a Western material lifestyle.”

Not only is there a wealth of potential customers within India there is also a large amount of workforce that are
trained within the aviation industry. This will allow any foreign investor to quickly build a quality workforce
and integrate them into business operations. Swaminathan, M (2009:140) states that the India’s civil aviation
has become the third largest creator of jobs and careers. Also states that in the 1980’s state-owned Indian
Airlines recruited personnel in so much excess compared to its operational demand. Therefore recruitment
within the industry would be the ideal opportunity to recruit the best personnel from industry competitors as
they would in most cases be operating from the same airports across India.

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Competition and Native Brand Loyalty
With double digit growth occurring within India’s aviation industry over such a short period of time with
domestic passenger growth hitting 18% in the first half of 2011, it was the perfect opportunity for new start up
airlines to gain a foothold in the market and compete as demand was outstripping supply. This can be seen in
figure 5, Figure 6 (see appendices) shows the amount of competition in the ever growing domestic market and
there representative market shares. This quick emergence of suppliers eventually led to the supply of budget
domestic airline flights outstripping demand for the first time in June 2011.

Any potential foreign investor would face a series of challenges seeking to invest in the aviation industry one of
them being the level of competition from home grown firms. Already established firms in the Indian domestic
market will able to take advantage of brand loyalty and economies of scale and take full commercial advantage
of a jurisdiction they know thoroughly. Taking full advantage of native affinity. Van Gelder, C (2003:134)
states this would affect a foreign brand by quoting “Native brand affinity is based on a sense among consumers
that an indigenous brand is closer and better suited to them than a foreign one.” This would leave any potential
new entrant to the market on the back foot especially in the Indian aviation market which is renowned for its
competitive nature. Centre For Asian Pacific Aviation (2011) backs this up by quoting “aggressive and
sometimes predatory pricing, resulting in moderate pricing power and price wars, which is negatively impacting
yields.”

Within the airline industry there are few firm specific advantages to be had, even less now during the current
economic climate. Factors such as soaring fuel costs do not allow allow new competitors to differentiate in
other areas as price is a deciding factor in choosing airline and is diminishing profits. This is evident with the
majority of airlines in India concentrating on budget flights. A potential investor would have financial backing
to enter such a market, possibly taking a loss leader approach to initial operations to gain brand loyalty however
investors looking to seek investment in the aviation industry in India will have there investment capped.
Bhandari, J (2009) states that certain sectors do have foreign direct investment caps on the amount prohibited.
including the civil aviation industry. Therefore, one of the key challenges facing a foreign investor is gaining
maximum exposure and market share on a limited amount of foreign direct investment.

Strategic Alliance & Acquisitions

Due to the current legal legislation does not allow a FDI to take full control of an Indian airline The Hindu
Business (Oct-2011) states this as “Currently, the foreign direct investment limit is 49 per cent in scheduled
domestic passenger airlines and 74 per cent in non-scheduled domestic passenger airlines.” Also the
competitive nature of the Indian airline industry means a key opportunity for a foreign investor is to seek for a
strategic alliance with an existing Indian airline. Extremely large start up and running costs within the airline
industry and competitive advantages often coming from an aspect of location such as landing slots at airports or
flight routes, suggest that a non-equity strategic alliance would be best suited. Rakowski, N & Patz, M
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(2007:5) state that a non equity strategic alliances tend to be contractual and are often an arrangement that
indicates the responsibilities of each member.

A non-equity strategic alliance would allow a very limited entry into the Indian aviation market in exchange for
sharing aspects of home markets. However, choosing whom to operate a strategic alliance is the key to its
success. According to Park, N, K & Dong-Sung, C (1997:162) “alliances can seriously affect the competitive
dynamics of increases the carriers’ market shares. In terms of partner selection, we found that codesharings
between existing airlines increase market shares less than those between relatively new carriers.” Therefore, the
best opportunity for a foreign investor in-terms of creating an non equity strategic alliance is to approach a
relatively new entrant to the Indian airline industry.

Also, the lack of infrastructure that a foreign investor would experience when entering the Indian aviation
market would suggest that a certain aspects of a non-equity strategic alliance would take priory over another.
For example, the sharing of unique resource to achieve a competitive advantage. Rhoades, D, L & Lush, H
(1997:111) support this and identify an example within the airline industry by quoting “baggage handling,
ground maintenance, and facility sharing. This type of alliance is for airlines with similar routes who have the
ability to work together in providing baggage handling and ground maintenance so that the operations of both
airlines can run smoothly.”

If there is reluctancy from a foreign investor to share an alliance with a potential competitor maybe the key to
entering the market, to use existing knowledge and skills along with FDI to pursue an acquisition of an already
existent Indian Airline. Currently Air India is in financial meltdown Overdorf, J (2011) “Air India couldn't
make money if all the other airlines shut down.” However it would be ideal for a foreign investor to take over
and gain instant access to the Indian Airline market. The process of re investing and restructuring firms like
these can return a firm a profit. Subrahmanyam, S & Singh, A (2011) back this up by quoting “recent US
airline restructuring (e.g. United, Delta, and US Airways) that helped carriers on the brink of liquidation
achieve profitability.”

Therefore, a part acquisition (within the legal limits) of an already existing airline would allow a foreign
investor direct access to industry resources such as landing slots, terminal real estate and airplane leases etc...
Areas of the business which to a new start up in the industry would be hard to achieve and acquire. The ease of
integrating business practices into a recently acquired Indian airline would be another opportunity for a foreign
investor because according to Wallraff, B (2000:59) “English is a second language for virtually everyone in
India who speaks it. And obviously the United States, too, contains speakers of English as a second language --
some 30 million of them in 1995, according to an estimate.”

Off Pace Infrastructure

One key challenge that faces a foreign investor when deciding to invest in the Indian aviation industry is how to
maintain customer satisfaction, brand image and steady growth in an fast growing aviation industry where
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required infrastructure is not been developed at the same rate. This has led to the necessity of vast investment
by airports to expand and upgrade facilities and infrastructure to meet the ever-increasing demand. Asian
Aviation (2010) quote “airports trying to cover the cost of upgrades and construction by charging airlines
higher landing and parking fees.” These higher costs are leading to diminishing yields on investment making
turning a profit in a already competitive market extremely difficult. This matched up with rising fuel costs lead
to foreign investors facing serious challenges with business fundamentals in the Indian aviation market.

The off-pace infrastructure does not only spread to airports, personnel infrastructure is at tipping point. Even
though the aviation industry is the third largest employer in India there has been issues in keeping up with the
demand for pilots to match the ever-increasing air traffic. Asian Aviation (2010) “A shortage of skills is
already impacting their expansion and this is the case in technical roles such as pilots.” This would be a
challenge for foreign investors because even though the demand and growth for air travel is there if airlines are
unable to supply all aspects of operations then their companies will struggle to grow at the same rate as the
industry.

Conclusion
In my opinion the double digit growth being experienced in the Indian aviation market matched with the
emerging middle class wealth of the Indian population and their desire to experience the western world make it
an ideal business proposition for a foreign investor. However it has to be taken into consideration that the heavy
and constantly evolving legislation in this industry does currently allow full 100% FDI in either domestic or
international airlines. Ultimately, it is apparent that any investment from a foreign investor would take on the
form of a strategic alliance or part acquisition of an already existing Indian airline allowing for instant direct
access to the market, therefore any investment has to be seen as long term.

The tight legislation nonetheless is becoming more in favour of full FDI, Federation of Indian Airlines (2011)
quote ‘India allows 100% FDI in greenfield airports and this is a good example of a proactive government
policy.” This is evidence that India is opening up to the concept of full FDI in aviation and is a great indication
for any foreign investors that eventually the freedom of investment will be available in the Indian market.
Ability to get investment into the market now is crucial, as it will allow a strong brand image and loyal
customer base to be built before the legislation frees up and the double-digit growth being experience is taken
advantage of by many other foreign investors.

The highly competitive nature of this market is a challenge for a foreign investor. Poorly run public airlines
such as Air India have struggled to maintain profitable business and an investor with little native knowledge
and a lack of experience in the Indian aviation market; will find it extremely difficult to get a foothold on the
market especially when the supply of the most popular low budget flights has outstretched demand. The low
prices charged for flights and rising running costs are stretching profit margins and its only the most efficient
run airlines that are surviving.
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I believe there are greater opportunities within the Indian airline industry than significant challenges that would
stop a potential investor. An expansion into any foreign market regardless of the industry is always a risk. An
investment in the Indian aviation industry is a long-term prospect and one that will unfold and as the market
expands and legislation changes.

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Appendices
Figure 1 - Indian domestic market

Source - www.centreforaviation.com

Figure 2- Capacity Share By LCC’s Against Full Service Airlines

Source - www.centreforaviation.com

Figure 3 - Global Middle Class Growth Over Next 20 Years

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 Source - Cheng Li (2010:38)

Figure 4 - Middle Class Consumption

Source - Cheng Li (2010:40)

Figure 5 - Indian Budget Airline Capacity Versus Demand 2010/2011

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 Source - www.centreforaviation.com

Figure 6 - Indian Budget Airline Market Share 2011

Source - www.centreforaviation.com

Reference List
Asian Aviation (2010) Indian Aviation Faces Challenges, Opportunities, Asian Aviation 10th November 2010,
www.asianaviation.com accessed 17/11/2011

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Bhandari, J (2009) Emerging Markets Review, MGI Business Solutions Worldwide, www.mgi-uk.com accessed
14/11/2011

Centre for Asian Pacific Aviation (2011) Brazil, Russia, India, China (BRIC): Emerging aviation markets performing well in
2010, CAPA, Centre for Aviation 10th May 2010, www.centreforaviation.com/analysis accessed 14/11/2011

Centre for Asian Pacific Aviation (2011) India is world’s fastest growing aviation market as double-digit domestic growth
continues, CAPA, Centre for Aviation 29th September 2011, www.centreforaviation.com/analysis accessed 14/11/2011

Federation of Indian Airlines (2011) FDI in Airline Industry, www.fiaindia.in, accessed 17/11/2011

Hjarvard, S (2003) Media in a Globalized Society, Museum Tusculanum Press, Denmark

Li, C (2010) China's emerging middle class: beyond economic transformation, The Bookings Institute, United States of
America

Overdotf, J (2011) Sell Air India Now, Before it’s Worthless, Global Post 11th July 2011, www.globalpost.com accessed
16/11/2011

Park, N, K & Dong-Sung, C (1997) The Effect of Strategic Alliance on Performance: A Study of International Airline
Industry, Journal of Air Transport Management Vol. 3(3), pages 155-164

Rakowski, N & Patz, M (2007) An Overview and Analysis of Strategic Alliances, GRIN Verlag, Germany

Rhoades, D, L & Lush, H (1997) A Typology of Strategic Alliances in the Airline Industry: Propositions for Stability and
Duration, Journal of Air Transport Management Vol. 3(3), pages 109-114

Subrahmanyam, S & Singh, A (2011) Saving India’s National Carrier, Airline News India 25th September 2011,
www.airlinenewsindia.com accessed 16/11/2011

Swaminathan , J, M (2009) Indian economic superpower: fiction or future?, World Scientific Publishing Co, Pte, Ltd,
Singapore

The Hindu Business (2011) India may allow direct foreign investment in domestic airlines, The Hindu Business 23rd
October 2011, www.eturbonews.com accessed 16/11/2011

Van Gelder, S (2003) Global Brand Strategy: Unlocking Brand Potential Across Countries, Cultures and Markets, Kogan
Page Ltd, United Kingdom

Wallraff, B (2000) What Global Language?, The Atlantic Monthly Company Vol.286(5) pages 52-66

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