Business Environment - The Aviation Industry - An Environment Factor Analysis

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Business Environment - The Aviation Industry - An Environment Factor Analysis

  1. 1. The Aviation Industry 11EX-013 Bishnu Kumar 11EX-015 Davinder Singh 11EX-038 Pankaj Mohindroo 11EX-040 Prateek Wadhwa 11EX-043 Rajat Goel Institute of Management Technology Ghaziabad
  2. 2. Term III - Business Environments Table of Contents Introduction .....................................................................................................................................................2 Characteristics of the Aviation Industry...........................................................................................................2 Indian Aviation Industry ...................................................................................................................................3 History ..........................................................................................................................................................3 Recent Times................................................................................................................................................3 Global Aviation Industry ..................................................................................................................................4 Major Changes in the Industry.........................................................................................................................5 SWOT Analysis of the Industry .........................................................................................................................5 Porters 5 Forces Analysis ................................................................................................................................6 Overview of Industry in India ...........................................................................................................................7 Market Share ...................................................................................................................................................8 Factors Impacting the Industry ........................................................................................................................9 Fuel Cost.......................................................................................................................................................9 Employees & Manpower .......................................................................................................................... 10 Passengers ................................................................................................................................................ 10 Cargo/Freight ............................................................................................................................................ 12 Accidents ................................................................................................................................................... 13 Currency Exchange.................................................................................................................................... 14 Government Policies ................................................................................................................................. 15 Taxation .................................................................................................................................................... 15 Profitability ............................................................................................................................................... 15 Aviation Industry in United States ................................................................................................................ 17 Economic Impact Summary ...................................................................................................................... 19 Measures of Economic Impacts ................................................................................................................ 20 Aviation Industry in China ............................................................................................................................. 21 Domestic versus International Traffic ....................................................................................................... 22 Chinese Airlines......................................................................................................................................... 22 International Expansion of Indian Aviation Industry .................................................................................... 24 Factors....................................................................................................................................................... 24 Future Prospects and Speculation ............................................................................................................ 26 Profit & Loss Details .................................................................................................................................. 26 References .......................................................................................................................................................0PGDM-Exec 2012 1
  3. 3. Term III - Business Environments Aviation is the design, development, production, operation, and use of aircraft, especially the heavier-than-air aircraft. Aviation is derived from avis, the Latin word for bird. Introduction The aviation industry encapsulates the development, operation and management of aircrafts. While the common perception about the sector is that it‘s only about pilots and airhostesses, there are numerous other, equally significant job options that the industry cannot function without; from in-flight trainers and aircraft maintenance engineers to baggage handlers and reservations agents. The international airline industry provides service to virtually every corner of the globe, and has been an integral part of the creation of a global economy. The global airline industry consists of over 1000 airlines registered to IATA and over 5300 airlines registered to ICAO operating more than 22,000 aircraft, providing service to over 43,000 airports. In 2010, the world‘s airlines flew almost 37 million scheduled flight departures and carried over 2.4 billion passengers. The growth of world air travel has averaged approximately 5% per year over the past 30 years, with substantial yearly variations due both to changing economic conditions and differences in economic growth in different regions of the world. Even with relatively conservative expectations of economic growth over the next 10-15 years, a continued 4-5% annual growth in global air travel will lead to a doubling of total air travel during this period. While major conventional mature markets such as the US and Europe will witness a significant fall in market share from 61% to 52%, emerging markets, such as India, China and the Middle East, offer a great growth potential for the civil aviation sector. The economic slowdown which began in 2008 hit the global aviation industry severely, with many airlines such as United and British Airways in the red. This was due to falling passenger numbers and increasing competition from low-frills airlines coupled with rapidly rising fuel costs. Despite passengers now resuming air travel, the increase has been very gradual. In fact, International Air Transport Association (IATA) Director General and CEO, Giovanni Bisignani, in December 2009, stated the global economic crisis ―has cost the aviation industry 2 years of growth… as the improvement that has started since passenger traffic hit rock-bottom in March 2009 is similar to the pace of growth in 2006-2007.‖ Characteristics of the Aviation Industry The aviation industry has the below significant characteristics –  Industry dominated by a small number of large firms  It sells either identical or differentiated products in terms of service quality and offerings.  It has significant barriers to enter (which holds true both with respect to regulations and huge capital investment required)  Firms are the price setters  Long run profit >=0  Strategy depends on the individual rival firm‘s behaviourPGDM-Exec 2012 2
  4. 4. Term III - Business Environments Indian Aviation Industry History The history of civil aviation in India began in December 1912. This was with the opening of the first domestic air route between Karachi and Delhi by the Indian state Air services in collaboration with the imperial Airways, UK, though it was a mere extension of London-Karachi flight of the latter airline. Three years later, the first Indian airline, Tata Sons Ltd., started a regular airmail service between Karachi and Madras without any patronage from the government. At the time of independence, the number of air transport companies, which were operating within and beyond the frontiers of the company, carrying both air cargo and passengers, was nine. It was reduced to eight, with Orient Airways shifting to Pakistan. 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. Its first flight took off on June 8, 1948 on the Mumbai (Bombay)-London air route. At the time of its nationalization in 1953, it was operating four weekly services between Mumbai-London and two weekly services between Mumbai and Nairobi. The joint venture was headed by J.R.D. Tata, a visionary who had founded the first India airline in 1932 and he himself piloted its inaugural flight. The soaring prices of aviation fuel, mounting salary bills and disproportionately large fleets took a heavy toll of the then airlines. The financial health of companies declined despite liberal Government patronage, particularly from 1949, and an upward trend in air cargo and passenger traffic. The trend, however, was not in keeping with the expectations of these airlines which had gone on an expansion spree during the post-World War II period, acquiring aircraft ad spares. The Government set up the Air Traffic Enquiry Committee in 1950 to look into the problems of the airline. Though the Committee found no justification for nationalization of airlines, it favoured their voluntary merger. Such a merger, however, was not welcomed by the airlines. Then the Open-sky policy came in April 1990. The policy allowed air taxi-operators to operate flights from any airport, both on a charter and a non-charter basis and to decide their own flight schedules, cargo and passenger fares. This allowed several private airlines to venture into the aviation business which accounted for more than 10 per cent of the domestic air traffic. Meanwhile, Indian Airlines, which had dominated the Indian air travel industry, began to lose market share to Jet Airways and Sahara. Today, Indian aviation industry is dominated by private airlines and these include low cost carriers such as Deccan Airlines, GoAir, and SpiceJet etc, who have made air travel affordable. Recent Times Aviation sector in India has been transformed from an over regulated and under managed sector to a more open, liberal and investment friendly sector since 2004. Entry of low cost carriers, higher house hold incomes, strong economic growth, increased FDI inflows, surging tourist inflow, increased cargo movement, sustained business growth and supporting government policies are the major drivers for the growth of aviation sector in India. Forecasts by AAI for the next 5 years havePGDM-Exec 2012 3
  5. 5. Term III - Business Environments projected a sustainable growth rate of 16% for international and 20% for domestic aviation sector. Recognizing the exponential growth of air traffic in India, the Ministry of Civil Aviation has been following a very liberal policy in the exchange of capacity entitlements / traffic rights. Domestic airlines have been allowed to fly overseas, forge partnerships with foreign carriers while foreign carriers in turn have been interlining with domestic airlines to access secondary destinations. The government has also tried to ensure an environment conducive for growth of all stakeholders associated with Indian aviation segment. With the rise in the number of airlines, growing passenger segment and route expansion, there is however a need for Indian airports to have their infrastructure in place, which at present is the weakest link in the chain. Greenfield and modernisation projects are being developed on PPP model to develop facilities conforming to international standards and to encourage the domestic operators to shift base. To monitor the quality of services rendered by various airports and their tariff, an independent regulator, Airport Economic Regulatory Authority (AERA), is proposed to be appointed. Global and domestic aircraft manufacturers are upbeat on the aircraft demands from India. Non-scheduled services have also steadily picked up and are growing at a CAGR of 19% primarily driven by a sustained growth in the economy. In addition, total cargo traffic of all airports has increased from 10% during 2006-07 to 14% in 2009-10, recording a CAGR of 13% for last six years. However, on the manpower front, currently there is a shortage of qualified pilots and other technical staff including Aircraft Maintenance Engineers and Air Traffic Controllers. While there are a lot of new avenues in aerospace services in the coming decades, the constraints associated need to be addressed to enable the smooth growth of the sector. Some of the issues faced by the sector include mounting losses of the airlines, rising aviation fuel prices, congestion at airports, shortage of qualified pilots and technical manpower, up-gradation of security, land acquisition, high taxation, high airport charges etc. There is a need to study the causes of the issues and address the same thereby paving an unobstructed growth path for the various opportunities. In times of US slowdown and fear of recession, the role of developing economies like India assumes greater significance. Its thrust for capacity and capabilities enhancement will be the drivers of growth. The Indian government has initiated several reforms and steps to keep the momentum going. Indian aviation space offers promising opportunities in the areas of aircraft manufacturing, airport infrastructure, airport and ground support equipment, MRO facilities, ground handling services, trained manpower, air cargo, fuel hedging, aerotropolis along with tapping the potential stream of non-aeronautical revenues. Global Aviation Industry As said by Giovanni Bisignani, Director General & CEO of IATA, in the Annual Report 2011, ―The aviation is a resilient industry‖. It had $9.9 billion losses in 2009 which turned into $18 billion profit in 2010. In a single year, the industry recovered around $72 billion in revenues with a capacity expansion of 5.2% and demand increase by 10.3%. After a decade of constant crises, shocks and changes the industry is stronger and more efficient now. Labour productivity has increased by 67%, sales and marketing unit costs has gone down by 10% and the fuel efficiency has increased by 24%. The price of oil has been another factor to the growth of the industry.PGDM-Exec 2012 4
  6. 6. Term III - Business Environments Major Changes in the Industry The air transport has gone through a period of unprecedented change, during the global slowdown. Many commentators claim the industry is almost unrecognizable to that of ten years ago. Major factors that have resulted in this ever changing landscape is -  Many major airlines have been operating under major losses over the last few years, resulting in bankruptcy and the need for massive restructuring.  Revenue raised from business traffic has been greatly reduced.  The emergence of low cost carriers in the US and Europe, and the adoption of this model in Asia and Middle East.  The growth of business via the internet reducing operating cost.  Consolidation of airlines in Europe and Asia through mergers.  The opening up of the Chinese economy to outward investment, and the recovery of the US economy. SWOT Analysis of the Industry Strengths A major strength of any airline is the product itself - the air travel. Despite downturns, over time air travel continues to grow. Strength is the safety record, and the associated public acceptance of air travel as both a fast and safe way to travel. Airline staff is highly trained and experienced, from pilots and flight attendants to mechanics and ground staff. Businesswise, airlines have the ability to segment the market, even on the same routes. This allows airlines to establish different levels of service and make associated pricing decisions. Weaknesses Airlines have a high "spoilage" rate compared to most other industries. Once a flight leaves the gate, an empty seat is lost and non-revenue producing. Aircraft is expensive and requires huge capital outlays. The return on investment can be different than planned. Large workforces spread over large geographic areas, including international points, require continual communication and monitoring. This can be exacerbated during operational irregularities, such as bad weather. While the business climate can change quickly, airlines have difficulty making quick schedule and aircraft changes due to leases, staffing commitments and other factors. Opportunities Airline market growth offers continual expansion opportunities for both leisure and business destinations, especially for international destinations. Technology advances can result in cost savings, from more fuel efficient aircraft to more automated processes on the ground. Technology can also result in increased revenue due to customer-friendly service enhancements like inflight Internet access and other value added products for which a customer will pay extra. Link-ups with other carriers can greatly increase passenger volumes. By coordinating schedules, airlines can offer service to destinations via a code share agreement with a partner carrier. Government allows 100% FDI via the automatic route for the green field airports. Also, foreign investment up to 74% is permissible through direct approvals whilePGDM-Exec 2012 5
  7. 7. Term III - Business Environments special permissions are required for 100% investment. Private investors are allowed to establish general airports and captive airstrips while keeping a distance of 150 km from the existing ones. About 49% FDI is allowed for investment in domestic airlines via the automatic route. However, this option is not available for foreign airline corporations. Threats A global economic downturn negatively affects leisure, optional travel, as well as business travel. The price of fuel is now the greatest cost for many airlines. An upward spike can destabilize the business model. A plague or terrorist attack anywhere in the world can negatively affect air travel. Government intervention can result in new costly rules or unexpected new international competition. Porters 5 Forces Analysis Threat of New Entrants Initially, people might think that the airline industry is pretty tough to break into, but that‘s not true. One needs to look at whether there are substantial costs to access bank loans and credits. If borrowing is cheap, then the likelihood of more airliners entering the industry is higher. The more new airlines that enter the market, the more saturated it becomes for everyone. Brand name recognition and frequent fliers point also play a role in the airline industry. An airline with a strong brand name and incentives can often lure a customer even if its prices are higher. Power of Suppliers The airline supply business is mainly dominated by Boeing and Airbus. For this reason, there isnt a lot of cutthroat competition among suppliers. Also, the likelihood of a supplier integrating vertically isnt very likely. In other words, probably it wont be seen that suppliers starting to offer flight service on top of building airlines.PGDM-Exec 2012 6
  8. 8. Term III - Business Environments Power of Buyers The bargaining power of buyers in the airline industry is quite low. There are high costs involved with switching airplanes, but also look at the ability to compete on service. Is the seat in one airline more comfortable than another? Probably not unless a luxury airline is compared with an LCC. Availability of Substitutes The likelihood that the passenger will drive or takes a train to his/her destination depends on the distance of the destination. For regional airlines, the threat might be a little higher than international carriers. When determining this one should consider time, money, personal preference and convenience in the air travel industry. Competitive Rivalry Highly competitive market of an industry generally brings low returns because the cost of competition is high. This can spell disaster when times get tough in the economy and sudden turmoil may also add to its effect. Overview of Industry in India Aviation Industry in India is a significant one among those industry segments that have experienced a phenomenal growth across the globe over the past years. The open sky policy of the Indian government is one of the key factors that have allured international players into the aviation industry in India. Since long, the aviation industry in India has been growing in terms of number of air travel firms and number of aircrafts. Today, private airlines alone bear the burden of not less than 75% of the domestic aviation requirements. Indian aviation industry is the 9th largest in the world. As per the statistics released by the Ministry of Civil Aviation, in the year 2008 alone not less than 29.8 million people travelled to and from India which was a 30% surge from 2007. Industry experts have predicted that not less than 50 million passengers will be served by the India aviation industry by 2015. Growth Drivers The factors contributing to the air traffic growth can be broadly classified into economic and policy factors. Economic Factors  Liberalisation and economic reforms undertaken by the government  Fast expansion of industries in consonance with economic reforms  Emergence of service sector  Average GDP growth of around 8.9% during the last 5 years  Increase in inbound and outbound tourists and medical tourism  Over 300 million strong middle class  Disposable incomes expected to increase at an average of 8.5% p.a. till 2015  Emergence of low cost airlinesPGDM-Exec 2012 7
  9. 9. Term III - Business Environments  The organised retail boom that would require the need for timely delivery thus contributing to the growth in the air cargo segment  Corporate showing increasing preference for private jets and air charter services Policy Factors  Modernisation and setting up new airports across country  City side development of non-metro airports  Providing international airport status to major tier I and tier II cities  Open sky policy  Policy of license to new scheduled operators  Permission to acquire new aircrafts  Permission of private operators to operate on international sectors  Encouraging private investments in airlines and airport infrastructure  Facilitative foreign direct investment norms  Liberal bilateral service agreements  Emphasis on development through PPP mode Market Share The Indian aviation market is majorly owned by the below given companies and their market share is as depicted below. The Jet Airways is in the premium class of the industry and dominates the market. Go Air is the low cost airline and being new (started operation in 2005) in the industry owns a pretty substantial amount of the market share. The state owned Air India also owns around 17% of the market share.PGDM-Exec 2012 8
  10. 10. Term III - Business Environments Factors Impacting the Industry Fuel Cost Aviation Turbine Fuel (ATF) prices in India are higher than the international market. The airline industry‘s operational cost component is dominated by the cost of the (ATF). The ATF price accounts for nearly 45% of the operational expenses. A 10% increase in fuel price would push up costs by atleast 4%, thus causing a damper on the financial health of an airline business. 240000 220000 ATF Price (Rs/KL) 200000 180000 160000 140000 120000 100000 80000 60000 40000 20000 0 2005 2006 2007 2008 2009 2010 2011 Prices in Delhi Prices in Mumbai Prices in Chennai Prices in Kolkata Source: CMIE The industry has also been consuming fuel as a huge rate and its increasing at a steady pace. The total annual consumption rose to more than double than what was being consumed 10 years back (from 2200K tonnes in 2000 to 5100K tonnes in 2011). Aviation Turbine Fuel Consumption (000 tonnes) 6000 5000 4000 3000 2000 1000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: CMIEPGDM-Exec 2012 9
  11. 11. Term III - Business Environments Employees & Manpower The Civil Aviation Sector is facing acute manpower shortage, especially in the technical cadre. As per estimates on the Human Resource Development for the Civil Aviation Sector, India would need 5,400 pilots by the end of the 2012. Similarly the demand for Aircraft Maintenance Engineers and Air Traffic Controllers would rise with the increasing number of flights and the new airports. Given a population of more than one billion plus, the requirement for the technical manpower appears inconsequential, but the low supply churn out rate of quality technical grade personnel might perpetuate an undermanned Indian aviation sector. There are around 40 approved flying training institutes in the country out of which 17 are functional. The training of commercial pilot is a time consuming process. At present, only 100 pilots graduate from these flying schools every year. On the short term demand basis there would be a requirement of at least 150 pilots per year as replacements for retirements and normal attrition. For the airlines, shortage of pilots would result in higher pilot salaries putting pressures on their revenue margins. However out of 100 applicants, airlines barely get 15-20 pilots who meet their requirements. The rejection rate at the CPL level is high because most of the courses of pilot trainings institutes (both Indian and overseas) are not recognized by the Directorate General of Civil Aviation (DGCA). DGCA has permitted the foreign pilots to fly aircrafts on domestic circuits to mitigate the shortage of trained pilots in India. However, that is not the long term solution, given the growth of Indian aviation sector. Similar is the case with the Aircraft Maintenance Engineers (AME) institutes. They produce about 5000 students every year, but they only provide basic training for issuance of basic licence. The candidates passing out of the AME institutes need to undergo a minimum one year experience on the heavy aero planes and pass DGCA examination to get type rated licence. Due to shortage of type rated licence holders, the aviation industry faces scarcity of engineers. Currently, foreign engineers are being inducted in Indian civil aviation to bridge this gap. Also, there is a huge vacancy in the Air Traffic Management, but the institutes in India are not able to fulfil the demand. Passengers Worldwide air travel, measured by the number of passenger kilometres flown, rose 7.5% following a 1.9% decline in 2009. International air travel grew 8.3% after a 2.5% fall the year before, while domestic air travel was up 6.1% following a 0.9% decline. By the end of 2010, most markets had exceeded their prerecession peaks and the expansion was on-going in the early part of 2011. According to IATA annual report 2011, there is an average annual growth rate of 5.2% worldwide in the number of passenger from 2006 to 2011. With the introduction of Air Deccan as a Low Cost Carriers (LCCs) in 2003, the face of the industry has changed. The air travel became more affordable of all class of passengers. The passengers who would travel in III/II class AC rail considered option of LCCs beneficial due to marginal cost difference as compared to rail travel. This visible benefit helped in increase of passenger traffic by many folds and helped the industry in running a profitable business. This also brought in a number of otherPGDM-Exec 2012 10
  12. 12. Term III - Business Environments LCCs like SpiceJet and IndiGo to join the business. The competition in the industry further brought down the travel cost for the passengers. In India, top 5 airports handle 70% of the passenger traffic of which Delhi and Mumbai together alone account for 50% of the traffic. Passenger and cargo traffic has growth at an average of about 9% over the last 10 years which is the highest growth rate in the world. ―The sector is slated to cruise far ahead of other Asian giants like China or even strong economies like France and Australia. The number of passengers who will be airborne by 2020 is a whopping 400 million‖. The growth rate of the passenger traffic is an indication of the growing demand of air services in India. Summary 2000 2011 AAGR International Passengers 1,32,93,027 3,79,07,548 10.1% Domestic Passenger 2,57,41,521 10,55,22,176 14.5% Total Passengers 3,90,34,548 14,34,29,724 13.1% Growth in domestic markets varied greatly in 2010 because of structural changes as well as economic cycles. India as an emerging market saw continued expansion of almost 20.2%. The number of passengers traveling economy class was above prerecession peaks. Conversely, the size of the premium international air travel market was still 10% below its prerecession peak owing to the extent of that market‘s collapse during the recession that began in 2008. Scheduled Air Transport Service / Domestic Scheduled Passenger Airline - FDI up to 49% and investment by Non-resident Indians (NRI) up to 100% allowed under the automatic route. 120000000 160000000 Passenger Traffic 140000000 100000000 120000000 80000000 100000000 60000000 80000000 60000000 40000000 40000000 20000000 20000000 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Domestic Passenger Traffic International Passenger Traffic Total Passenger Traffic Source: CMIEPGDM-Exec 2012 11
  13. 13. Term III - Business Environments Jet Airways SpiceJet Kingfisher Operating Parameters (India) 2011 2010 2011 2010 2011 2010 Available Seat Kilometres (ASKMs) Lakh 3,43,230 2,92,420 1,04,670 87,700 1,61,660 1,48,010 Change in ASKM (YoY) 17.4% 19.4% 9.2% Revenue Passenger Kilometres (RPKMs) Lakh 2,69,720 2,26,400 86,390 68,070 1,31,010 1,06,250 Change in RPKM (YoY) 19.1% 26.9% 23.3% Direct Operating Cost (Rupees Lakh) 11,13,585 9,20,595 2,81,232 2,14,968 5,28,934 4,74,751 Operating Revenue (Rupees Lakh) 12,77,683 10,46,964 2,87,951 2,18,108 6,23,338 5,06,792 Cost per ASKM (CASKM) Rupee 3.24 3.15 2.69 2.45 3.27 3.21 Revenue per ASKM (RASKM) Rupee 3.72 3.58 2.75 2.49 3.86 3.42 Passenger Load Factor (%) 78.6 77.4 82.5 77.6 81 71.8 Cargo/Freight Air cargo operations generates additional revenue for airports and provides better utilisation of the airport facilities as majority of these services are undertaken during the non-peak hours. Summary (Tonnes) 2000 2011 AAGR International Cargo 5,31,844 14,96,164 10.1% Domestic Cargo 2,65,570 8,52,198 14.5% Total Cargo 7,97,414 23,48,362 13.1% While the amount of cargo freighted via air is growing steadily, the infrastructure related to air cargo handling and evacuation is not. India already has an open-sky policy for air cargo as well. The domestic cargo traffic grew at an AAGR of more than 10% within the period of 2000-11; while the international cargo traffic grew by 14.5%. The overall traffic grew by more than 13%. At present India contributes over 1% of the world air cargo traffic. The Government of India has acknowledged the need for development of cargo related facilities and is taking the necessary steps to address the situation with consistent and coherent application of policies. For a developing country like India, with its natural challenges in terrestrial transportation, a well networked air cargo system will go a long way in addressing the problem of networking the remote areas and creating a proper international market access to them. Air cargo remains a vital mode of transport for India‘s international trade especially for products with high value or value addition. The five major airports (Mumbai, Delhi, Kolkata, Chennai and Bangalore) account for around 88% of the total air cargo handled in India. Growth in cargo / freight volumes is an outcome of macro-economic factors such as domestic consumption, exports and imports. The infrastructure needed to cater to the growth remains a major challenge. However, the international and domestic cargo volumes have shown a steady growth despite inadequate capacity and infrastructure.PGDM-Exec 2012 12
  14. 14. Term III - Business Environments Some of the cargo service providers include Blue Dart, FedEx, Air India, Gati etc. The major commodities being air freighted out of India are garments, pharmaceuticals, dyes, chemicals and perishables such as fruits, vegetables, flowers, fish and meat. The increased usage of IT applications in cargo handling is likely to enhance the efficiency of movement of cargo traffic. With the opening of the economy, buoyant trade, new low cost carriers, up-gradation of the airports across the country, the cargo handled by air is expected to grow more rapidly in the next decade. This will require not only better connecting transportation infrastructure, but also quality, standard warehouses, and speedy operations through automation. As per the FDI guidelines of the Government of India, a 74% FDI is allowed and an NRI investment of up to 100% is allowed under automatic route. Foreign airlines are allowed to participate in the equity of companies operating cargo airlines. The AAI is also planning to develop airports dedicated to the movement of cargo and logistics. Cargo Traffic 2500000 2000000 1500000 1000000 500000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total Cargo Traffic Domestic Cargo Traffic International Cargo Traffic Source: CMIE Accidents Aviation safety has come a long way in over one hundred years of implementation. In modern times, two major manufacturers still produce heavy passenger aircraft for the civilian market: Boeing in the United States of America and the European company Airbus. Both have put huge emphasis on the use of aviation safety equipment, now a billion-dollar industry in its own right, and made safety a major selling point—realizing that a poor safety record in the aviation industry is a threat to corporate survival. When measured on a passenger-distance calculation, air travel is the safest form of transportation available. When compared against all other modes of transport on a fatality per mile basis air transport is the safest — six times safer than traveling by car and twice as safe as rail. But, the perception of the passengers changes immediately after any accident or mishap that occurs in the industry which causes cost to the industry in the form of low passenger count.PGDM-Exec 2012 13
  15. 15. Term III - Business Environments Date Flight Number Operator Fatal Location 22 May 2010 812 Air India Express 158 Mangalore 21 Jun 1982 403 Air India 17 Bombay 1 Jan 1978 855 Air India 213 Bombay 17 July 2000 7412 Alliance Air 60 Patna Saudi Arabian/ 12 Nov 1996 763/1907 Kazakhstan Airlines 349 Charkhi Dadri 19 Oct 1988 113 Indian Airlines 130 Ahmedabad 26 Apr 1993 491 Indian Airlines 55 Aurangabad 14 Feb 1990 605 Indian Airlines 92 Bangalore Currency Exchange 0.028 0.026 0.024 0.022 0.02 0.018 0.016 0.014 0.012 0.01 0.008 Jan-08 Jan-00 Jul-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-09 Jan-10 Jan-11 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 INR/USD INR/EUR INR/GBP Source: oanda.com Most airlines operate in a multicurrency environment. In the past few years budget airlines have expanded to include bases outside their home countries. The industry has a huge impact in the revenue and profitability due to exchange rate movement. From an accounting standpoint, the risk of changing exchange rates is captured in what is called translation exposure. While translations of foreign operations from the foreign to the domestic currency, there are two issues we need to address. The first is whether financial statement items in a foreign currency should be translated at the current exchange rate or at the rate that prevailed at the time of the transaction. The second is whether the profit or loss created when the exchange rate adjustment is made should be treated as a profit or loss in the current period or deferred until a future period. The major aspects of the business that is impacted due to the currency exchange is the fuel price which can be overcome to some extent by hedging and the cost and revenue from the international operation.PGDM-Exec 2012 14
  16. 16. Term III - Business Environments Government Policies The regulatory body of civil aviation in India is the DGCA (Directorate General of Civil Aviation) under the Ministry of Civil Aviation, Government of India. The various activities of DGCA are to formulate and implement the regulations related to the below –  Aircrafts  Medical  Operators  Licencing  Aerodromes  Surveillance & Enforcement  International cooperation  Statistics The other regulations of the industry are as below –  Aircraft Act, 1934  Aircraft Rules 1937  Air Corporations Act, 1953 & 1994  Bureau of Civil Aviation Security (BCAS) The Ministry of Civil Aviation has the following public sector undertakings /companies /autonomous bodies under its administrative control for facilitating the industry in the country –  National Aviation Company of India Limited (NACIL)  Airports Authority of India (AAI)  Pawan Hans Helicopters Limited (PHHL)  Indira Gandhi Rashtriya Uran Akademi (IGRUA) Taxation Income, property, and fuel, even equipment: aviation taxes know no bounds in the eyes of government. More recently, taxes for social and economic purposes such as development aid, climate change, and tourism expansion have made the headlines. Taxing the sale of air tickets is, from a government perspective, an ‗easy grab‘. The collection mechanism is already in place at no cost to the government and the airline just passes on the money to the treasury. But this is a simplistic viewpoint because, while taxes provide a tangible short-term revenue boost to the government‘s coffers, increased taxes in the long term can be outweighed by the cost to the underlying economy. This tax is a major pinch to the consumers and also a major setback for the industry as well. Profitability The profitability of the industry highly depends on the factors mentioned above. Each of the factors has simultaneous impacts on the industry. Top three of the five companies in the aviation sector reported a robust sales growth of over 20% each. Higher passenger volumes coupled with improved realisations enabled the industry post healthy sales growth. Net profit margin (net profit to sales ratio) dippedPGDM-Exec 2012 15
  17. 17. Term III - Business Environments marginally to 3.3% in December 2010 quarter due to a more than proportionate increase in net sales vis-à-vis profit. Profits were lower due to deferred tax adjustment made by the company. Although sales of Kingfisher Airlines surged by a big margin, it continued to record a loss at the net level. Appreciation of Indian Rupee vis-à-vis USD enabled a number of companies to recover losses and also reduce their costs. Sales growth in the last quarter of 2011 was driven by both, higher volumes and better yields. Higher fuel consumption due to an increase in the scale of operations, and a rise in ATF prices resulted in a sharp growth in fuel expenses. Rent expenses fell year-on-year, due to an appreciation in the rupee. However, the industry recorded net losses for the year ending 2011. Jet Airways Kingfisher Airlines SpiceJet Airlines in Rs Crore 2011 2010 2011 2010 2011 2010 Sales 12,782.52 10,438.57 6,233.38 5,067.92 2,879.51 2,181.08 Power & Fuel Cost 4,366.70 3,151.65 2,274.03 1,802.99 1,226.23 814.22 Employee Cost 1,342.19 1,226.55 680.54 689.38 231.45 168.39 Manufacturing Expenses 2,375.85 2,114.04 1,192.80 1,108.82 599.79 465.45 Selling and Admin Expenses 1,809.12 1,482.68 997.34 996.85 258.87 252.72 Miscellaneous Expenses 373.87 354.93 87.94 108.58 57.73 50.57 Operating Profit 2,514.79 2,108.72 944.04 320.41 505.44 429.73 Net worth 2,604.34 2,641.98 -2,951.19 -3,898.45 321.11 -342.18 Total Debt 13,480.39 13,896.98 7,057.08 7,922.60 85.76 438.29 Interest 1,872.72 1,824.74 2,340.32 2,245.59 439.68 409.7 It has been observed and stated that, the LCCs (SpiceJet, IndiGo) of India are performing better than premium class airlines (Jet, Kingfisher) in terms of profitability and resource utilization. The LCCs has more efficient utilization of their operating costs that eventually increases the profitability.PGDM-Exec 2012 16
  18. 18. Term III - Business Environments Aviation Industry in United States The aviation industry is a vital part of the US economy. Despite the lingering effects of the past recession, there is cautious optimism in the air transport sector of the U.S. economy. The industry continues to be flexible, developing new, innovative ways to lower costs and increase revenues. For example, as the price of jet fuel climbs, air carriers are finding innovative ways to conserve fuel and lower costs. Investment in air transportation infrastructure leads to smart growth and job creation. The American Recovery and Reinvestment Act of 2009 provided funding to invest $200 million in FAA facilities and equipment and $1.1 billion in grants-in-aid for airports. The 2011 FAA Aerospace Forecast expected a 4.9 per cent increase in RPM between fiscal years 2010 and 2011, and projects average annual growth rates of 3.8 per cent per year through 2031 for U.S. airlines. Despite the dramatic slowdown of the economy and impact on the aviation industry, the U.S. economy produced $14.1 trillion in value-added economic activity and sustained 140 million jobs. At the same time, civil aviation economic activity: Supported 10.2 million jobs; Contributed $1.3 trillion in total economic activity; Accounted for 5.2 per cent of total U.S. GDP. As commonly stated in 1950s and 1960s economic literature, every time America sneezes, the rest of the world catches pneumonia. This old adage can also be applied to today‘s aviation industry‘s relationship with the overall U.S. economy. However, after September 11, 2001, the link between the economy and the airline industry decoupled and the impact on the demand for air travel is again exhibiting an increase in sensitivity to economic and global events. The economy grew 1.1 per cent in 2001, but after the events of September 11, the demand for air travel fell 6.2 per cent. The subsequent years continue to exhibit a similar pattern. Air travel demand increased 11.6 per cent in 2004, just over three times the growth rate of the economy (3.6 per cent), whereas in 2009, air travel demand dropped by 5.3 per cent, twice that of the economy (-2.6 per cent). The aviation industry has shown flexibility and ingenuity, adopting innovative resource- saving and revenue-enhancing techniques during these challenging economic times. Transportation Statistics (BTS), the average round trip air fare (including taxes) increased 5.2 percent from $320 in the fourth quarter of 2009 to $337 in the fourth quarter of 2010. FAA.com US have an advantage that it has a domestic aircraft manufacturer Boeing. This reduces a lot of import cost for the industry. The highly volatile price of fuel continues to be a major concern for the airline industry in US as well along withPGDM-Exec 2012 17
  19. 19. Term III - Business Environments other economies. Oil market speculators usually drive the fluctuation along with the U.S. crude petroleum field production, cuts in U.S. refining capacity, declines in Strategic Petroleum Reserve stocks, decreases in Organization of Petroleum Exporting Countries (OPEC) production targets, and political uncertainty in the Gulf countries. The industry saw the lowest price of $53 per barrel for last couple of years in February 2009—a 68 per cent decline. This decrease was mainly due to the delayed impact of falling overall demand for oil as a result of the recession. With the upturn in the economy, the price of jet fuel has slowly risen. The recent growth in the economy has led to increases in airline operating revenues and RPM, but not industry employment. The employment trend has fallen since reaching a peak in 2000 at over 557,000 employees, before the onset of the U.S. recession in 2001 and the ensuing terrorist attacks on September 11. It fell sharply to about 376,000 employees by the third quarter of 2010 (Figure 7), a decrease of 32.5 per cent over 10 years, or approximately 3.9 per cent per year, whereas the RPM rose by 1.4 per cent per year, from 710.6 billion to 811.4 billion over the same period. The decline in employment is majorly due to the airlines replacing directly employed workers with workers supplied through contracts with outside firms. According to annual data from BTS, maintenance employment fell 33 per cent from 64,248 in 2000 to 42,774 in 2009. Another reason of the fall in employment was the introduction of LCCs which employ far fewer maintenance employees per aircraft and outsource a higher percentage of maintenance expenses. LCC‘s maintenance activity is lower because these carriers utilize newer aircraft. According to calculations using the Aircraft Inventory data from BTS, the average age of LCC‘s aircraft was 9.4 years versus 14.8 years for network carriers in 2009. Also noteworthy is the increase in LCC industry share of domestic flight operations. According to BTS, the annual number of domestically scheduled flights by network airlines fell from 4.2 to 2.5 million between 2000 and 2009, while the number of flights among LCCs increased from 1.3 to 1.8 million. The third reason for the fall in industry employment is the substitution of technology for tasks previously handled by employees. For example, more travellers are using the Internet instead of contacting airline ticket agents to book, price-compare or check in for flights. Digital technology also has brought about greater efficiencies in handling airline activities. Decline in Aviation EmploymentPGDM-Exec 2012 18
  20. 20. Term III - Business Environments Aviation Employment Data 2000 2008 2009 Passenger Airlines Maintenance employees 64,248 46,075 42,774 Maintenance employees per aircraft 13 8.9 7.9 Percent maintenance expenses outsourced 29.6 45.2 43.1 Low-Cost Airlines Maintenance employees 3,630 3,015 3,300 Maintenance employees per aircraft 5.7 3.2 3.2 Percent maintenance expenses outsourced 52 54.6 55.6 Economic Impact Summary Summarizing the economic impacts of the aviation industry on US economy are as below – Primary Impacts: The primary impacts of aviation are a summation of direct and indirect impacts of civil aviation on the U.S. economy and include:  Air transportation and supporting services  Aircraft, aircraft engines and parts manufacturing  Travel and other trip-related expenditures by travellers using air transportation Direct: Direct impacts of civil aviation are created through manufacturing and air-transportation activities measured by the employment, payroll and sales/output associated with the following industries/entities:  Scheduled and non-scheduled airlines and air couriers  Airport and aircraft service providers  Air cargo service providers  GA (non-commercial) aircraft operators (including flight schools)  Aircraft and components manufacturing Indirect: Indirect impacts result from the expenditures of air passengers, other than airfares and charges paid directly to airlines or travel agent. Visitor expenditures translate into sales, payroll and employment for:  Traveller accommodations (hotel, motel, etc.)  Food and beverage (restaurants, bars, fast-food outlets and stores)  Arts, entertainment and recreation (museums, theatres, parks)  Visitor travel services (sightseeing, tourist services, travel agencies)  Ground transportation (to and from airports)  Other on- and off- airport purchases of goods and services (souvenirs) Secondary Impacts: Induced impacts result from expenditures made by industries identified in the measurement of primary impacts to supporting businesses and entities, as well as the spending of direct and indirect employees. Induced impacts capture the secondary impacts to the economy as direct/indirect sales, and payroll impacts are circulated to supporting industries through multiplier effects.PGDM-Exec 2012 19
  21. 21. Term III - Business Environments Measures of Economic Impacts Direct and indirect expenditure estimates are input into RIMS II to estimate the secondary effects of those expenditures on the U.S. economy. The output of RIMS II includes the secondary effects on economic output, earnings and jobs. Output: The current dollar production of goods or services by a production unit and measured by total sales or receipts of that unit, plus other operating income, commodity taxes (sales and excise taxes) and changes in inventories. Earnings: Wages and salaries, other labour income, benefits and proprietor‘s income paid to all employed persons who deliver final demand output and services. Jobs: The number of people employed in the industry that provide civil-aviation services, manufacture aircraft and aircraft engines, or work in other industries that are indirectly affected by activity in the civil air transportation sector.PGDM-Exec 2012 20
  22. 22. Term III - Business Environments Aviation Industry in China China‘s aviation industry has advanced at an impressive rate over the past decade. While some of this progress can be attributed to rapidly growing governmental support for China‘s aviation sector, China‘s aviation capabilities have also benefited from the increasing participation of its aviation industry in the global commercial aviation market and the supply chains of the world‘s leading aviation firms. This monograph assesses China‘s aviation capabilities and the extent to which China‘s participation in commercial aviation markets and supply chains is contributing to the improvement of those capabilities. Specific areas assessed include China‘s commercial aviation manufacturing capabilities, its commercial and military capabilities in space, efforts of the Chinese government to encourage foreign participation in the development of the aviation industry, transfers of foreign aviation technology to China, the extent to which U.S. and other foreign aviation firms are dependent on supplies from China, and the implications of all of these issues for U.S. security interests. China is already the world‘s second-largest national air travel market, trailing only the United States. This market, moreover, is likely to grow rapidly over the next two decades—an estimated 4,000 new passenger aircraft are expected to be purchased by Chinese airlines over this period. This represents approximately one- eighth of the total world demand during the next 20 years. The markets for cargo aircraft, general aviation, and helicopters in China, although significantly smaller than that for passenger aircraft, are also expected to grow rapidly in the coming years. In 2007, China‘s major airlines booked more than 230 billion RPK, or almost 31 billion tonne-kilometres, flown. For comparison, China‘s RPK is about 20 per cent that of U.S. about 6.7 per cent of all world traffic in 2007. To support that level of air transport, Chinese airlines used a fleet of roughly 1,350 large commercial aircraft and 60 regional jets in 2010. The large commercial aircraft fleet comprises 55 per cent Boeing airplanes and 43 per cent Airbus airplanes. The Chinese commercial fleet is approximately 20 per cent thePGDM-Exec 2012 21
  23. 23. Term III - Business Environments size of the North American–based large commercial aircraft fleet and just over 7 per cent of the world fleet. China‘s commercial aviation market is dominated by the ―big three‖—Air China, China Eastern, and China Southern. These airlines were created by the Civil Aviation Administration of China (CAAC) in 2000 and 2001 to rationalize the air transport market. They are all effectively controlled by the central government. Hainan Airlines is the largest private start-up airline. Domestic versus International Traffic China‘s airlines deliver three-fourths of their service on domestic routes. China is a large geographic area similar in size to the United States, but its population density is both higher and much more concentrated, with more than 90 per cent of the population living in the eastern half of the country. However, alternative transportation methods, rails and roads, are not as developed, leaving Chinese citizens more dependent on air transport. China‘s continuing development of rails and roads is likely to increase their competitiveness with air transport, which will limit the growth of domestic air transport. On the other hand, given China‘s vast expanses, rail travel is unlikely to replace air travel to the same extent as in other countries, and increasing per-capita income will likely result in more Chinese citizens traveling both domestically and abroad. Thus, the net effect is that, in PPP terms, China‘s RPK/GNI ratio will likely increase to a level somewhere between those of the United States and Japan; and over the next two decades, China‘s air transportation market may continue to grow at a rate somewhat faster than the economy in PPP terms, but projections extrapolated from U.S. figures are likely to be overstated. Chinese Airlines Benefiting from Chinas steady economic growth, China aviation industry took the lead in the global recovery. In 2010, it completed an RTK of 53.845 billion ton-km, up 26.1% year on year. In Q1 2011, due to the rising international oil prices, the instability in the world and Japan‘s earthquake, the RTK of China aviation industry only grew by 8.0% year on year, much less than the growth rate of 32.2% in Q1 2010. In 2010, by average monthly passenger traffic and fleet scale, China Southern Airlines, China Eastern Airlines and Air China International ranked top 3, with average monthly passenger traffic of 5,814,800, 4,926,500 and 4,350,700 respectively, and fleet scale of 422 aircrafts, 348 aircrafts and 393 aircraftsPGDM-Exec 2012 22
  24. 24. Term III - Business Environments separately. Other airlines occupied very small shares in both passenger traffic and fleet scale in the industry. China Southern Airlines: It has the most aircrafts and annual passenger traffic in China aviation industry. In 2010, its passenger traffic ranked first in Asia and third in the world. In 2010, it achieved net profit of RMB5.805 billion, up 1521.5% from RMB358 million in 2009. China Eastern Airlines: In 2010, China Eastern Airlines and Shanghai Airlines merged, so that the operation scale was larger. Coupled with the driving force of Shanghai World Expo, the transportation revenue gained by China Eastern Airlines in 2010 grew by 81.49% to RMB68.47 billion. However, in Q1 2011, the transportation revenue only grew by 16.63% year on year. Air China International: It has the most assets and traffic in China aviation industry. In 2010, it achieved net profit of RMB12.208 billion, up 142.75% year on year; in Q1 2011, it achieved net profit of RMB1.671 billion, down 23.04% year on year. In 2010, the throughput of Chinese airports touched a record high level. The passenger throughput reached 564,312,000, up 16.1% from last year; cargo and mail throughput was 11.29 million tons, up 19.4% from last year. Chinese airports are divided into three categories: first, three hub airports, including Beijing Capital International Airport, Shanghai Pudong Airport and Guangzhou Baiyun Airport; second, 17 major airports in Chengdu, Kunming, Xian, Urumqi, Wuhan and other cities; third, other types of airports. In 2010, the number of airports in China increased. The passenger throughput of three hub airports accounted for 27.6% of the total throughput, declining slightly. The passenger throughput of Beijing Capital International Airport accounted for the highest 13.1%, while Guangzhou Baiyun Airport 7.3 % and Shanghai Pudong Airport 7.2%.PGDM-Exec 2012 23
  25. 25. Term III - Business Environments International Expansion of Indian Aviation Industry India‘s airlines handled 1.3 million international passengers, for an 8.5% year-on- year increase, according to the DGCA. Air India is still the largest Indian carrier in the international market, with a 38.2% seat share and a 46.6% capacity (ASKs) shares. This international network strength provides the struggling national carrier with international connectivity from its still-sizeable domestic network. In this sense, Air India has benefited from access to all the main markets, with 140,675 weekly seats across its international network. However, according to a damning Comptroller and Auditor General (CAG) report released last week, all international routes of the carrier were loss making by 2009/10. For every one international seat, Air India operates 2.2 domestic seats, although it operates 2.3 more ASKs internationally than in the domestic market. Jet Airways is the second largest operator of international capacity (seats and ASKs) to/from India, and the largest by frequency, and is quickly catching up to Air India. Indian Aviation is undergoing a massive expansion at present. India is one of the fastest growing aviation markets in the world. Growth in the sector was instigated by the liberalisation of the Indian aviation sector through the 1990 open sky policy adopted by the government. The industry has changed significantly as privately owned full-service airlines and low cost carriers have entered the market. In 1991 private carriers accounted for 0.4% of the market, now they hold about 75% of market share. The sector has grown rapidly compared to other aviation markets around the world; the Indian aviation market is the 9th largest globally up from 12th in 2006. The expansion has been accompanied by increased competition with many new players joining the market. Other LCCs like IndiGo and SpiceJet are trying to get into international market, but the government policies and macroeconomic factors are hindering the opportunity for the airlines. The state owned Air India always gets the priority and that is stopping the other airlines in getting the international operation licence. Factors Macroeconomic Factors • Level of growth in the economy, population, incomes etc. • Airline market factors, including fares, flight frequency, and schedules; • Air transport production costs and technology; • Regulatory factors; • Infrastructure constraints and improvements; • Substitutes for air travel. Economic Factors The various economic factors that need to be considered for the expansion are –  New investments The expansion of the industry in the international market would require huge investment in terms of new and bigger airplanes, additional employees to serve the new load of passengers, new parking hangars at international airports, slot booking at the airport and ATC, space for kiosks, employee halt arrangements etc.PGDM-Exec 2012 24
  26. 26. Term III - Business Environments  Right destinations for expansion For the expansion of the industry the airlines need to choose the destinations which can get the maximum utilization of employed resources. These resources can be the maximum RPK, employee utilization etc. This means the companies need to choose the destinations with maximum passengers. As per the CAPA Sept-2011 report (Center for Aviation and Innovata) the maximum numbers of passenger destined to and from India are from Dubai, Qatar, Singapore, Sri Lanka, New York, UK, Thailand etc. So, as per the data above, the recommendations of initial expansions are Dubai, Thailand, Singapore and UK.  Right type and number of employees For the international expansion, the airlines will need more employees and as per the targeted destination, they would need different skillset forPGDM-Exec 2012 25
  27. 27. Term III - Business Environments the employees like language training, etiquette training etc. These requirements will bring cost to the company. Also, the employee halt arrangement at the destined locations will also add up to the operational cost for the airlines.  Achieving right revenue-profit structure for sustainability The airlines will have to decide on the right revenue and cost pattern in order to sustain in a particular country. It has to look into various monetary factors in the destined country like tax structure, currency exchange fluctuation, ATC charge, airport cost etc. to decide on the right cost and revenue structure for the profitability of the company. Future Prospects and Speculation In this section we are going to discuss the prospects of expansion of the Indian Aviation Industry in international market. For this, we will be using historical data for future data analysis. We are using multiple growth stats for the analysis. These assumptions are based on growth rate in 2011 and some changes around the last change seen. Aircraft Traffic (number) Passenger Traffic (number) Cargo Traffic (tonnes) YoY Growth Growth Growth Growth Growth Growth Growth at Growth at Growth Growth as 2011 as 2011 as 2011 at 5% at 10% 5% 15% at 15% at 20% (6.36%) (10.3%) (17.74%) 2009 270345 270345 270345 31584001 31584001 31584001 1149923 1149923 1149923 2010 282204 282204 282204 34367929 34367929 34367929 1270712 1270712 1270712 2011 300145 300145 300145 37907548 37907548 37907548 1496164 1496164 1496164 2012 319234 315152 330160 41812025 39802925 43593680 1761583 1720589 1795397 2013 339537 330910 363176 46118664 41793071 50132732 2074088 1978677 2154476 2014 361132 347456 399494 50868886 43882725 57652642 2442031 2275479 2585371 2015 384100 364829 439443 56108381 46076861 66300538 2875247 2616801 3102445 2016 408529 383070 483387 61887544 48380704 76245619 3385316 3009321 3722934 2017 434511 402224 531726 68261961 50799739 87682462 3985871 3460719 4467521 2018 462146 422335 584899 75292943 53339726 100834831 4692965 3979827 5361025 2019 491538 443452 643389 83048116 56006712 115960056 5525497 4576801 6433230 2020 522800 465625 707728 91602072 58807048 133354064 6505720 5263321 7719876 2021 556050 488906 778501 101037085 61747400 153357174 7659835 6052819 9263851 Profit & Loss Details Equipment for Operation: Airbus A321-200 Fuel Details Flying Distance to Bangkok 2917 KM Fuel Consumption 0.022 L/PKMPGDM-Exec 2012 26
  28. 28. Term III - Business Environments Employee Details Number Avg. Salary Flight/Month Cost/Flight Pilot 2 150000 120 2500 Cabin Crew 6 40000 120 2000 Ground Staff (Avg) 20 32000 120 5333PGDM-Exec 2012 27
  29. 29. P & L Statement of one Flight 2012 2013 2014 2015 2016 2017 2018 2019 2020 Business Class 26000 28600 31460 34606 38067 41873 46061 50667 55733Ticket Price Growing at a rate of 10% Economy Class 13000 14300 15730 17303 19033 20937 23030 25333 27867 Business Class 16 16 16 16 16 16 16 16 16Available Seat Economy Class 169 169 169 169 169 169 169 169 169 Business Class 30.00% 33.00% 36.30% 39.93% 43.92% 46.12% 48.43% 50.85% 53.39%Load Factor Economy Class 40.00% 44.00% 48.40% 53.24% 58.56% 61.49% 64.57% 67.80% 71.18% Business Class 124800 151008 182720 221091 267520 308985 356878 412194 476084Revenue Economy Class 878800 1063348 1286651 1556848 1883786 2175773 2513017 2902535 3352428Total Revenue Round Trip 1003600 1214356 1469371 1777939 2151306 2484758 2869896 3314729 3828513 Avg Barrel Growth rate of 3% as planeFuel Cost Consumption 101 104 107 111 114 117 121 124 128 grows old Cost 666312 686302 706891 728097 749940 772438 795612 819480 844064Employee Cost 9833 10325 10841 11383 11952 12550 13178 13836 14528 Rises by 5% every yearAdmin & SellingCost 10000 10500 11025 11576 12155 12763 13401 14071 14775 Rises by 5% every yearMisc Expenses 100360 121436 146937 177794 215131 248476 286990 331473 382851 10% of RevenueTotal Cost 786505 828562 875694 928851 989178 1046227 1109180 1178860 1256218Operating Profit 217095 385794 593677 849088 1162127 1438531 1760716 2135869 2572294 Straight Line : 103 million * 48 /Depriciation 115111 115111 115111 115111 115111 115111 115111 115111 115111 30 * 12 *120 Interest on 50% Loan for buyingInterest 122000 122000 122000 122000 122000 122000 122000 122000 122000 airplanePBT -20016 148683 356566 611977 925016 1201420 1523605 1898758 2335183Tax @ 30% of PAT 0 44604.86 106969.76 183593.07 277504.92 360425.99 457081.48 569627.43 700554.92PAT -20016.50 104078.01 249596.10 428383.83 647511.48 840993.98 1066523.45 1329130.67 1634628.16
  30. 30. References - Indian Aviation - Scaling New Heights, Deloitte Report - IATA - ICAO - http://www.foolonahill.com - http://www.entrepreneurswebsite.com - CMIE - en.wikipedia.org - www.wocu.com - http://dgca.nic.in/ - http://industrytracker.wordpress.com - bts.gov - FAA Economic Impact Report 2011 - researchinchina.com

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