"AIRLINE INDUSTRY – CHANGING TIMES”          Guide : Prof N.S.Shetty               Submitted By           SHREEKALA SHAH  ...
ACKNOWLEDGEMENTI would like to place on record my sincere thanks toProf. N.S.SHETTY, my guide, for his guidance whichhelpe...
TABLE OF CONTENTS1.   INTRODUCTION                                     …….012. INDIAN AVIATION HISTORY                    ...
1. IntroductionThe airline industry is one of the fastest growing sectors in the world, boosted byderegulation, open marke...
In an increasingly global society, the economic and social contribution of this industryto the world is highly significant...
2. Indian Aviation HistoryNevill Vincent, a former RAF pilot came to India from Britain in 1929, on abrainstorming tour to...
The operation of scheduled air transport services was under the monopoly of thesetwo Corporations and the Act prohibited a...
3. The Indian Aviation IndustryThe civil aviation activities can be broadly classified into three areas: Operational,Infra...
3.1    Indian Aviation Industry – Operational :Let’s take a look at what is happening in the Domestic & International fron...
Another airline, called Crown Express, has very recently got an approval from thegovernment to start domestic operations. ...
3.2   A-1) Indian AirlinesIn 1953, a new dream took shape - to airlink the vast South Asian subcontinent by asingle, moder...
Indian Airlines is presently fully owned by the Government of India and has a totalstaff strength of around 22,000 employe...
3.3 A-2) Jet AirwaysIn eight years, Jet Airways’ marketshare has rocketed from 6 per cent to 42 per cent.In barely eight y...
Jet Airways Milestones - from the time of its inception can be listed as follows:   o 1st April 1992 – Jet Airways India i...
5. JetMobile offers automated flight schedules over the cell phones.Table reflecting the growth of Jet Airways in terms of...
Comparison of some of the major differences in the Domestic front betweenJet Airways and Indian Airlines       Jet Airways...
Some of the factors which has lead to the survival of Jet Airways:Jet has the finest business model of the three airlines....
Aviation turbine fuel (ATF) costs, which typically make up a quarter of operatingexpenses, were kept in check because, it ...
regulated. The thought behind this service quality is to keep passengers happy, whowould in turn keep them in business.Par...
In the beginning of the year 2001, Jet was contemplating to cancel the lease on fourATR turbo-prop aircraft because the 62...
and although the proposed new aviation policy is likely to recommend that soundprivate airlines be allowed to ply such sec...
3.4 Concept of Yield management (Tackling Fare wars):In the coming competition Airlines have resorted to cutting fares to ...
The coming competition, will be unlike anything Jet has seen so far. Indian Airlines isawaiting a buyer, and should the ne...
yield management determines the load level to try to maximize revenue, Airlines canbenefit from such a technique.Airlines ...
The argument for this strategy was that the margins available on the premiumsegment were many folds higher. But first clas...
3.5 Indian Aviation Industry – Operational :B) International AirlinesIn the international sector, Air India is the sole In...
In addition, Air India has a so-called code sharing arrangement with a number offoreign airlines. These include Swiss Air,...
3.6 Indian Aviation Industry – Infra Structural :Airport InfrastructureThere are a total of 449 airports/airstrips in the ...
Airports Authority of IndiaThe Airports Authority of India (AAI) was formed after the merger of InternationalAirports Auth...
non-resident Indians, banks, users (airline firms) and contractors. Term loans andshort-term borrowings for working capita...
4. Indian Aviation Industry – Regulatory :Civil Aviation policyThe Ministry of Civil Aviation is the main central agency r...
•   Total capacity requirements in the air transport sector are being projected for a    period of at least five years on ...
5. Recent developmentsThe government has given the final nod for the divestment of Air India. It has beenproposed that the...
6. Future trendsConsidering the forecasts made by different organizations and taking a reasonablypragmatic view, the traff...
2010-2011   36.54        7   24.62   5.52011-2012   39.09        7   25.97   5.52012-2013   41.44        6   27.24   4.920...
7. Conclusion:The ageing fleet of Indian Airlines and Air India has dampened returns and valuationbut they don’t have the ...
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  1. 1. "AIRLINE INDUSTRY – CHANGING TIMES” Guide : Prof N.S.Shetty Submitted By SHREEKALA SHAH MFM III B ROLL NO. 136NARSEE MONJEE INSTITUTE OF MANAGEMENT STUDIES, VILE PARLE, MUMBAI. 2001-2002. 1
  2. 2. ACKNOWLEDGEMENTI would like to place on record my sincere thanks toProf. N.S.SHETTY, my guide, for his guidance whichhelped me to select and focus my study on thissubject.I would also like to thank Ms. Gautami Kad, mycolleague for her invaluable assistance during thecourse of this project.SHREEKALA SHAHNMIMSMFM-III ‘B’Roll No: 136 2
  3. 3. TABLE OF CONTENTS1. INTRODUCTION …….012. INDIAN AVIATION HISTORY …….033. INDIAN AVIATION INDUSTRY …….05 Operational - Domestic …….06 Indian Airlines …….07 Jet Airways …….10 Yield Management – Fares War …….19 Operational – International (Air India) …….23 Infra Structural …….254. REGULATORY …….285. RECENT DEVELOPMENTS …….306. FUTURE TRENDS …….317. CONCLUSION …….33 3
  4. 4. 1. IntroductionThe airline industry is one of the fastest growing sectors in the world, boosted byderegulation, open markets, technological advances and a quest for travel. Economicliberalisation has wrought radical changes in Indias civil aviation sector. Among themost significant of these are a rapid increase in capacity and a dramatic improvementin service quality. Aviation has a highly significant role as a driver of globalisation,with an impact of the airline industry on the world economy. At the start of a newmillennium, airline industry has a role to play, in encouraging the fullest flowering ofthe freedom to travel and ship goods everywhere in the world, to the greatest benefitof mankind, and to ensure that all the forces that are essential to making it happen aremoving in the same direction!But before reaching to a conclusion it may be appropriate for us to review briefly,where the airline industry came from, where it is, and how we see it growing andcontributing to the economy. This is the objective of this study.The Indian aviation industry can be broadly classified into two main segments -civil and cargo. In fact, the birth of civil aviation is attributed to air cargo and mail. Inthe beginning, mail and air cargo were the important elements of air carrier servicesthan passengers. The major players today, in the Indian context are Air India in theinternational segment and Indian Airlines, Jet Airways and Air Sahara in the domesticsegment.Over the years, the aviation sector in India has evolved and today it is on the thresholdof a major shake out with the divestment of the Indian governments stake in Air Indiaand Indian Airlines on the cards. A number of domestic and foreign parties haveevinced interest in the divestment process. Recently, foreign airlines like VirginAtlantic of Britain and Singapore Airlines have also entered the Indian skies.The Indian aviation sector till recently was highly regulated by the government. Asrecently as the eighties saw the introduction of some new initiatives like the air taxischeme, whose main objective was to boost tourism. 4
  5. 5. In an increasingly global society, the economic and social contribution of this industryto the world is highly significant and continues to grow. Contribution by the airlineindustry to the world economy is as follows: - By the year 2010 aviations economic growth impact could exceed USD 1,800 billion and provide the basis for over 31 million jobs. - During the next 20 years, airlines are likely to buy 16,000 aircraft, worth USD 1,200 billion, and that infrastructure providers - airports and air traffic services will need to spend USD 350 billion to accommodate the growth in air traffic. - International aviation is the prime engine of travel and tourism, which presently contributes more than USD 3,500 billion to the world economy or nearly 12 percent of the total. - More than 192 million jobs will be generated, 8 percent of the total. - Capital investment for travel and tourism is at present USD 733 billion a year and this represents more than 11 percent of the world total.How does the future for Indian industry look like?Domestic and international passenger traffic in India is projected to grow annually at12.5 per cent and 7 per cent respectively over the next decade. At the same time,domestic and international cargo traffic is expected to grow at 4.5 per cent and 12 percent respectively. By the year 2005, Indian airports are likely to handle 60 millioninternational passengers and 300,000 tons of domestic and 1.2 million tons ofinternational cargo. 5
  6. 6. 2. Indian Aviation HistoryNevill Vincent, a former RAF pilot came to India from Britain in 1929, on abrainstorming tour to survey a number of possible routes. It was through providencethat he met JRD Tata, the first Indian to secure an A-license within the shortestnumber of hours. Vincent worked out a scheme, secured JRDs approval and togetherthey presented it to Mr. Peterson, the director of Tata Sons and also JRDs mentor. SirDorab Tata, the then chairman of Tata Sons, pleasantly surprised all by giving thescheme his okay. So they went ahead and drew plans for the operation for the firstflight from Karachi to Mumbai with a single stopover at Ahmedabad.All that they asked was a guarantee from the government for a year for the sum ofRs.100,000. This, however, was turned down. The Tata-Vincent combine wasnaturally disappointed but not dismayed. A second scheme was prepared. This timethe guarantee asked was Rs.50,000 for the first year, Rs.25,000 for the second yearand no guarantee at all from the third year onwards. This scheme was rejected too.The team then tried a third time. This time they offered to donate an air service to theGovernment of India with no strings attached. The Government finally agreed andthus was born Tata Airlines that later became Air India.On 28th May 1953, consequent to the coming into force of the Air Corporations Act,1953, the Government of India nationalized the airlines industry as a result of therecommendations of the Air Transport Inquiry Committee headed by ShriRajadhyaksha. Nationalisation took place to make further and better provision for theoperation of Air transport services in India.In accordance with this Act, the two air corporations, viz. Indian Airlines Corporationand Air India International, were established and the assets of all the then existingairline companies like Air Services of India Ltd; The Himalayan Aviation Ltd; TheBharat Airways Ltd; The Indian National Airways ltd; The Kalinga Airlines; TheDeccan Airways (nine) were transferred to the two new Corporations, since, the Airtransport inquiry committee felt that the existing private operators were running underheavy losses. 6
  7. 7. The operation of scheduled air transport services was under the monopoly of thesetwo Corporations and the Act prohibited any person other than the Corporations ortheir associates to operate any scheduled air transport services from, to, or acrossIndia.However, after 40 years, in 1994, the wheel had turned a full circle as the AirCorporation Act, 1953 was repealed with effect from 1st March 1994. That ended themonopoly of the Corporations on scheduled air transport services. Air transport inIndia is now open to any carrier who fulfills the statutory requirements for operationof scheduled services. 7
  8. 8. 3. The Indian Aviation IndustryThe civil aviation activities can be broadly classified into three areas: Operational,Infra-structural and Regulatory-cum-developmental. On the operational front, AirIndia provides international air services while Indian Airlines is involved in the fieldof domestic air services. Pawan Hans supplies helicopter support services, primarilyto the petroleum sector. Air India, Indian Airlines and its subsidiary Alliance Air,which also provides domestic services, and Pawan Hans are government-owned.Indian Airlines Ltd had a monopoly in domestic air services, but since the opening upof this area to private operators, it has been joined by several private airlines. Infra-structural facilities are supplied by, Airports Authority of India (AAI), which wasformed in April 1995 through the Airports Authority of India Act, by merging theseparate national and international airport authorities that existed earlier.In terms of size, the Indian aviation industrys turnover was approximately Rs.40billion in FY99. 14 million passengers traveled using its services in FY99. Thegrowth profile of the industry in the last three decades is given below.Year Aircraft (mn km Passengers flown Passengers (mn km flown) flown) (000 nos)1970-71 37.8 2,123 1,559.01980-81 41.2 4,850 3,917.21990-91 58.7 7,912 7,028.11995-96 88.8 10,356 9,249.31996-97 112.5 12,312 11,047.31997-98 109.4 11,549 10,702.91998-99 117.2 12,017 10,820.3From the above table, it is clear that the aviation industry in the country has grown byleaps and bounds in terms of kilometers flown and also number of passengersserviced. However, as compared to the previous decades, the rate of growth has fallenin recent years. In fact, in the period FY97 to FY99, the number of passengers hasfallen and so has the length of passenger kilometers traveled. 8
  9. 9. 3.1 Indian Aviation Industry – Operational :Let’s take a look at what is happening in the Domestic & International front for India.A) Domestic AirlinesTill recently, Indian Airlines had a monopoly in the sector. However, in 1993 theskies were opened for private participation and 8 airlines got the nod to commenceoperations like East West Airlines, Jet Airways, NEPC, ModiLuft, Damania, ArchanaAir. Of these, two major operators who have survived are - Jet Airways and SaharaAirlines.A government survey conducted in 1990, which predicted an increase in air traffic by5% per year, was the basis on which the open sky policy was initiated by thegovernment. Though the number of seats offered by the airlines grew, the expectedrate of growth of the industry as predicted did not take place. Instead the industrygrew by 0.05%, which saw suddenly, for the first time after nationalization a situationwhere supply exceeded demand. Seats on many of the airlines started going empty.The seat factor of Indian Airlines, which till then was 100%, started declining as seatsstated going vacant. As many operators vied for a share in the pie, the buyers startedputting in their own demands. Fare wars and discounts were the order of the day.During the period from 1991 till date there has been a lot of changes in the aviationscene. From carrying 8 million passengers in 1995 which amounted to approximately22,000 passengers per day slowly the amount fell and by 1997-98 Indian Airlines wascarrying approximately 17,000 passengers a day. Its market share fell to 37.69 inFebruary 2000. 9
  10. 10. Another airline, called Crown Express, has very recently got an approval from thegovernment to start domestic operations. The promoter is Ms Neera Radia. Of thetotal investment of Rs1.11 billion, family and friends will bring in 60%, while FIIsand Venture capital funds will contribute the rest. Modiluft, which is planning to re-enter the sector, will be renamed as Royal Airways in its new form. It proposes tocome out with a public issue to raise funds from the public.The market share of Indian Airlines vis-à-vis private players is given below.Airlines Market Share Aircrafts OwnedIndian Airlines 47% 55Private Airlines* 53% 35* - Represents all private airlines operating in the country viz. Jet, Sahara andothers.Over the past few years, Indian Airlines has lost market share and is currently secondto private operators. Its market share has fallen from 50.5% in 1999 to 46.8% in 2000.The major gainers are the two domestic operators Jet and Sahara, the majorbeneficiary being Jet Airways. The combined market share of both of them has risenfrom 49.5% in 1999 to 53.2% in 2000. In terms of plant load factor too IA lagsbehind. While the average for all domestic operators was around 63.4%, IndianAirlines clocked a performance of 61.9%. Jet had the highest plant load factor ofaround 71.8%. 10
  11. 11. 3.2 A-1) Indian AirlinesIn 1953, a new dream took shape - to airlink the vast South Asian subcontinent by asingle, modern, and efficient airline. The Airline was Indian Airlines. Today, IndianAirlines, together with its fully owned subsidiary Alliance Air, is one of the largestregional airline systems in Asia with a fleet of 56 aircrafts, 11 wide bodied AirbusA300s, 30 Fly-by-wire Airbus A320s, 11 Boeing 737s and 3 Dornier D-228 aircrafts.Indian Airlines has been setting the standards for civil aviation in India since itsinception in 1953. It has many firsts to its credit, including introduction of the wide-bodied A300 aircraft on the domestic network, the fly-by-wire A320, DomesticShuttle Service and Walk-in Flights.The network of Indian Airlines spans from Kuwait in the west to Singapore in theEast and covers 75 destinations - 59 within India and 16 abroad. The Indian Airlinesinternational network covers Kuwait, Oman, UAE, Qatar and Bahrain in West Asia,Thailand, Singapore, Yangon (Rangoon) and Malaysia in South East Asia andPakistan, Nepal, Bangladesh, Myanmar, Sri Lanka and Maldives in the South Asiansubcontinent.Indian Airlines flight operations centers around its four main hubs- the main metrocities of Delhi, Mumbai, Calcutta and Chennai. Together with its subsidiary AllianceAir, Indian Airlines carries a total of over 7.5mn passengers annually.At present, Indian Airlines has a fleet strength of 55 aircrafts. Out of them, are 11Airbus A300, 30 Airbus A320, 11 Boeing B737 and 3 Dorniers D0228.Indian Airlines has developed state-of-the art facilities for all aspects of maintenance,including engine overhaul. These facilities are used not only by Indian Airlines butalso by other airlines from time to time. The training facilities for Pilots are integratedat Hyderabad where Commanders and Captains are trained in all types of aircraft inthe Indian Airlines fleet. State-of-the-art full flight simulators are available for A300,A320 and B737. Several international airlines also avail of these training facilities.Indian Airlines technology upgradation, also extends to other areas such asReservations, Passenger Handling Systems and Customer Service. 11
  12. 12. Indian Airlines is presently fully owned by the Government of India and has a totalstaff strength of around 22,000 employees. Its annual turnover, together with that ofits subsidiary Alliance Air, is over Rs.40 billion. 12
  13. 13. 3.3 A-2) Jet AirwaysIn eight years, Jet Airways’ marketshare has rocketed from 6 per cent to 42 per cent.In barely eight years, Jet Airways has become India’s most successful private airlinewith total assets worth Rs.2,000 crore. It operates the youngest fleet of 33, racked upUS $ 542 million (Rs.2547 crore) in revenue and flew 5.9 million passengers for FY2001 - a 42 per cent share.Of the dozen or so airlines that took wing soon after the industry was privatized in1992, Jet is just one of the two that have survived. Better still, it’s the only privateairline to make profits; the only other Sahara Airlines, still loses money and trails waybehind with a negligible share on a fleet of nine. And the leader, Indian Airlines,slipped back into the red last year, as a result of a sharp rise in fuel prices. The details:Jet’s profits for the year ended March 31, 2001, were Rs.12.50 crore as compared toIndian Airline’s loss of Rs.17 7 crore.But the fact remains that Jet has been through two big round of borrowings. In 1997,it raised $380 million or Rs.1,786 crore (85 per cent from Barclays Bank and the restfrom Grindlays) and at the beginning of 2001 it finalized a deal to raise $358 million(Rs. 1,683 crore) from Stan Chart through an innovative securitised deal. (Jet andNaresh Goyal will chip in with about Rs.240 crore.) Both the loans have beenguaranteed by, the US Exim Bank. 13
  14. 14. Jet Airways Milestones - from the time of its inception can be listed as follows: o 1st April 1992 – Jet Airways India is incorporated as a privately owned company. o 5th May 1993 – Takes off with four first for India Boeing 737-300s. Establishes Mumbai as the base for operations. o 4th April 1994 – Adds 737-400 to its fleet; again, first in the industry. o 20th July 1994 – Launches “Frequent Flyer” programme o 14th Jan 1995 – Gets the scheduled airline status, allowing it to print flight schedules o 15th Oct 1997 – 20% stake of Kuwait Airways & Gulf Air each given up o 29th Oct 1997 – Buys its own aircraft from the Exim Bank Guarantee o 26th Sep 1998 – Introduces new generation Boeing 737-800 o 28th Nov 1998 – Launches Boeing 737-700 o 12th Aug 1999 – Establishes bonded warehouse to handle international cargo o 6th Oct 1999 – Introduces ATR 72-500 to service feeder routes o Dec 1999 – Average fleet age touches 2.8 years (maintained at that since) o July 2000 – Intorduces Jet Mobile for mobile flight schedule delivery o Sept 2000 – Launches co-branded credit card with Citibank o 12th Jan 2001 – Strikes innovative financing deal for purchase of 10 aircraft o 5th Feb 2001 – Wins the prestigious ATW’s Market Development Award o 28th Feb 2001 – Turnover crosses the $ 500 million mark o 15th May 2001 – Launches Jet Mail, India’s first in-flight mail order shopping o June 2001 – Commissions its own flight simulator and training device o June 2001 – Welcomes 25th million passenger on boardOne of the factors for the survival/success of Jet Airways can be attributed to itsService Innovations like: 1. Cabin bag – only passengers can check in at any city counter 2. Returning passengers can get two boarding passes at one check in 3. Business class passengers can customize their meal and drinks 4. In-flight mail-order shopping offering premium products at a discount 14
  15. 15. 5. JetMobile offers automated flight schedules over the cell phones.Table reflecting the growth of Jet Airways in terms of itsFleet Size & Market Share: Fleet Size Marketshare Year Numbers Year % 1993-94 4 1993-94 6.6 1994-95 6 1994-95 11.0 1995-96 8 1995-96 12.7 1996-97 12 1996-97 19.0 1997-98 19 1997-98 25.6 1998-99 25 1998-99 32.8 1999-2000 29 1999-2000 38.4 2000-01 30 2000-01 41.9 Current 33* Expected to go up to 38 by the end of 2002 covering additional stations 15
  16. 16. Comparison of some of the major differences in the Domestic front betweenJet Airways and Indian Airlines Jet Airways Jet Vs IA Indian Airlines 33 Number of aircraft 57 (June 2001) 5.9 million Passengers carried last 8.0 million year (2000-01) 71.7% Average seat factor 67.0%10 hours per day/aircraft Aircraft utilization 7.5 hours per day/aircraft 163 Number of employees/ 397 Aircraft 215 Number of flights/Day 208 2.8 years Average age of fleet 13 years 17,200 Passengers/Day 22,000 Rs.2,547 crore Turnover Rs.177 crore (Loss) Rs.12.50 crore Profits/Loss Rs.177 crore (Loss) 42% Marketshare 51%Turnover, Profits & Marketshare for the year ended March 31, 2001 16
  17. 17. Some of the factors which has lead to the survival of Jet Airways:Jet has the finest business model of the three airlines. Back in 1992, even before Jetwas formally incorporated, the founders were focused for the long term. This isevident from the basis of their model selection. When the question of what kind ofaircraft to lease came up, the answer should have been the Boeing 737-200s. Not onlywere they cheaper and popular, but there also was a ready pool of personnel(engineering and flight) available for poaching from Indian Airlines. They, however,decided to go for the 737-300s. The rationale: although the 300s were twice moreexpensive to lease, they were more fuel-efficient (consumed 8 per cent less fuel) andcost as much less to maintain. Besides, these were new generation CFM 3B engines,and they had a feeling that a young fleet would help pull in customers.This decision was bang on target. Even as the new competitors such as DamaniaAirlines, East West and Modiluft struggled with older 737-200s, Jet created a newstandard for in-flight service. By the middle of 1996, when Modiluft, the last ofserious competitors, broke up with Lufthansa and subsequently went down, Jetalready had a 13 per cent marketshare.Jet Airways had a core team of professionals from Air India, Malaysia Airlines,Singapore Airlines right from its launch. Having experienced hands on board (a lot ofthem foreign nationals), also meant that Jet ran its operations better that itscompetitors.With respect to addition to its fleet, Jet would initially dry lease aircraft instead ofbuying them. (Today, Jet owns half of its 28 737s; the five ATRs are all leased). Theeconomics worked out better that way, since Jet could expand faster by using itsprecious funds to lease more aircraft than put it all in buying one or two. For example,buying a Boeing 737 could cost anywhere between US $ 40 and US $ 50 million(depending on the configuration), whereas a monthly lease could be as low as US $400,000. The decision to go in for one type of aircraft also meant that operationalglitches were minimized because of the engineering and flight crew’s familiarity withthe aircraft. 17
  18. 18. Aviation turbine fuel (ATF) costs, which typically make up a quarter of operatingexpenses, were kept in check because, it flies the favoured high-altitude air corridos(30,000 feet), resulting in better fuel efficiency and flight schedules are planned andadhered to with manic zeal. The result: an average on – time performance of 90 percent. The primary reason for this is because officials at Jet believes, that: “In theairline business, delays and the resulting increase in operating costs can make thedifference between survival and death”.Within three months of its launch, Jet managed to swing membership of theprestigious International Air Traffic Association (IATA), quickly followed by anadmission into the IATA Clearing House. The memberships brought with them thelucrative “interlining” arrangement – for carrying passengers and cargo within India –with International carriers. Today, Jet has 120 interlining arrangements, whichaccount for nearly 28 per cent of its revenue. Interlining is especially lucrativebecause the fares are in dollars and cost 35 to 40 per cent more.To ensure it wooed and retained the right kind of passengers, Jet focused on thebusiness traveler, who historically has accounted for a third of all passengers. But thedecision entailed offering superior service. Ironically, Jet picked up rival IndianAirline’s service module for the framework and then borrowed a few ideas from KLMfor managing systems. The customer interface format was devised by Speedwing, asubsidiary of British Airways, partly because they had seen how putting customersand employees first had helped the British carrier turn the corner.Today, with more than 17,000 passengers flying Jet everyday, the airline has had tokeep a close watch over its customer service. On all its flights more than 20 minuteslong, light refreshments are served. But on longer flights, passengers are pamperedwith non-alcoholic drinks, cold towels and a three-course meal. The 16,500 servicemonitor questionnaires (SMQs) that Jet receives every month are analysed at variouslevels to plug service loopholes.Every new flight attendant is put through at least three months of training in the firstyear, and thereafter several more hours of in-flight and classroom training. Even theshade of nail polish, the length of hair, and what deodorants to use are carefully 18
  19. 19. regulated. The thought behind this service quality is to keep passengers happy, whowould in turn keep them in business.Part of Jet’s spectacular success, was ensured by Indian Airlines itself. The fact that itwas government owned, long operated in a captive market, was not allowed to expandits fleet, and had to get the ministry’s approval for everything, made it a poorcompetitor. Therefore, while IA served 70 stations with a fleet of 57, Jet plied its 33aircraft among, until recently, 30 key stations. Even today Jet operates more flightsthat IA out of a lucrative station like Bangalore.Over the recent years, however the national carrier has been pulling itself up by thebootstraps. For instance, its 737s were flying 1,600 hours a year in 1995. Today, theydo 2,900 hours. Similarly, it’s 320’s are doing 3,100 hours a year, compared to 2,300hours earlier. By the end of the year 2001, IA plans to have four more A-320s inservice to consolidate its presence in the trunk routes, and also bring in six ATRs (50seaters) to do short hauls and thing routes. 19
  20. 20. In the beginning of the year 2001, Jet was contemplating to cancel the lease on fourATR turbo-prop aircraft because the 62-seaters, brought in to fly feeder routes, provedto be unviable. But obviously growing traffic and the need to strengthen presence insmaller stations have prompted Jet to try and rework the ATR equation. By the end ofFY 2001, it hopes to rack up $6.38 million in revenue. Jet is trying to put into placesystems that should result in a qualitative jump in performance. An externalconsultant, has been appointed to access managerial expertise and help optimizeperformance. Simultaneously, serious investments are being made on the trainingfront. An aviation academy, housing the state-of-the-art Boeing 737 700/800 flightsimulator and a flight training device for 737-400s has been set up at a cost of $10million.Not surprisingly, Jet’s immediate goal is to consolidate its market share by furtherimproving its service levels, and adding more routes to its network. By the end of thisFY 2002, Jet plans to have three more ATRs and one 737 in its fleet. That shouldincrease the number of stations it serves to 45 or so and a satisfied customer may bethe best defence against the threat of new entrants.The dough to plough into infrastructure and fleet is to come from private placement.Jet has already tied up a Rs.1,600 crore loan for the purchase of 10 Boeing 737s to bedelivered over the next two years. The innovative deal minimized Jet’s foreignexchange exposure, since the repayments are to be made in Indian rupees.Five years after Jet put in an application with the Government to fly nearbyinternational routes, the proposed new aviation policy could finally bring it the go-ahead. (Indian Airlines, which could get revitalized following its proposed sale to aprivate bidder, already flies to some Middle-east and Far East destinations.) Moreimportantly, Jet has been scouting for an investor with whom the shares could beplaced as closely-held company. The money will help Jet consolidate its marketshareand acquire bigger aircraft to fly more destinations in India.All this could help when Jet begins flying neighbouring countries. It has alreadyapplied for permission to fly countries such as Malaysia, Singapore, and the U.A.E 20
  21. 21. and although the proposed new aviation policy is likely to recommend that soundprivate airlines be allowed to ply such sectors. IA and AI may be given the first rightof refusal. But that clause could go in the wake of their privatization. Still, it will takeJet at least a year from the date of approval to get a set up in place. Not only will itneed bigger aircraft, it will have to train its pilots and engineers to handle the newfleet.There is little doubt that it’s a totally new kind of competition that Jet will face in theinternational arena. Apart from AI and IA, which deploys 22 per cent of its capacityon international routes to get 30 per cent of the revenue, there are international biggiessuch as United Airlines, Singapore Airlines, Lufthansa, British Airways, and CathayPacific to reckon with. Besides, in an industry prone to downcycles, Jet’s relativelyshallow pockets and overwhelming dependence on passenger business could provefatal, since unlike 1992, what Jet has at stake is not a few million of dollars, but anairline. 21
  22. 22. 3.4 Concept of Yield management (Tackling Fare wars):In the coming competition Airlines have resorted to cutting fares to lure customersleading to a situation of Fare War. How does this work? As an example – In 1999,Indian Airlines announced low fares on the Mumbai-Delhi route. The airline hadsufficient reason to want to continue with the discounts as in the months of July andAugust 1999, not only did the airline make a small profit on its lower fares, it hasregistered higher load factors -- over 70 per cent in July and 80 per cent in August 99With this rivals Sahara and Jet Air also seemed to be determined to continue the pricewar. Sahara announced that it will charge fares that are lower than those of IndianAirlines or Jet Airways, and Jet Air flexing its marketing muscle offered discounts atmajor hotels across India to passengers, and Indian Airlines continued to play safe bykeeping fares low on the Delhi Mumbai route.The main antagonists in this fare war were Indian Airlines and Jet Airways. IndianAirlines could easily take on the five-plane Sahara Airlines even if the lattercontinued with its low fares and Indian Airlines revises its fares upwards. But in thisdogfight over fares Jet Airways found it hard to hike its fares upward unless Saharadid it first since Jet had been adversely impacted by the smaller carrier’s aggressiveair fare slashing and freebies like hotel stays and gifts.In a price sensitive market, the biggest threat to Jet could come form IA’s decision togo in for flexi-pricing of fares. Towards the end of the year 2000, when Jet increasedits fares, IA had to hold onto its own because it had crashed one of its 737s at thePatna airport. By maintaining fares, IA had hoped to lure passengers away from Jet.But the 9W (Jet’s flight code) did not register any fall in numbers, although its rate ofgrowth slowed.With flexi-pricing, IA, which flies one out of every two passengers, may be able tomake further inroads. For example, an afternoon Delh-Mumbai flight may be cheaperthan the morning flight on the same route, with the difference in fare could be asmuch as 15 per cent. The idea is to even out passenger load and grab customers fromJet, which-not taking any chances-has also decided to drop its prices by 10 to 15 percent on all the key sectors. 22
  23. 23. The coming competition, will be unlike anything Jet has seen so far. Indian Airlines isawaiting a buyer, and should the new owners (the government will continue to own40 persent, though) prove to be somebody like Tata-Singapore Airlines, Jet’s USP ofsuperior service and on-time flights will be hard to defend. Then, there is RoyalAirways (formerly ModiLuft) threatening to take wing, besides Crown Air and NorthStar Aviation. New entrants in the market would certainly hurt Jet. The growth maynot fall in absolute terms, but the rate of growth could be affected.Almost airlines have cut routes and are discounting heavily to retain the share of adwindling customer base. Such differences in prices are due to the airlines wanting tomaximize its revenue or its profits. This is termed by some as revenue managementwhile some experts call it yield management. The strategy appears to be rathersimple: sell the right seat to the right type of customer, at the right time and for theright price. The key is to find the tradeoff between selling discount ticketing in orderto fill up the plane totally, and selling full fare tickets and only filling up a portion ofthe plane.The reason for this characteristic is very simple. If capacity were flexible, there wouldbe no need for a tradeoff. If airlines could add or remove seats or aircraft at will, therewould be no reason to try to manage capacity. Unfortunately, the plane cannot beenlarged and the only flexibility allowed is to schedule the passenger on a later flight.Airlines should be able to segment their market. Since one of the purposes of yieldmanagement is to smooth the distribution of passengers, to be effective, the airlinemust be able to segment its market into different passenger categories. Keeping inmind that a tradeoff between maximum load factor and highest paying passengers issought, a very good example is the comparison between the time-sensitive businessperson and the price-sensitive customer. One is willing to pay a higher fare inexchange for flexibility (open return, cancellation option, schedule change, etc.) theother is willing to give-up some flexibility for the sake of a cheaper ticket (stayovernight Saturday and return on Sunday non-working day - which is a peak day).Such a strategy allows airlines to fill seats that would otherwise be empty.In the airline industry, plane seats are referred to as inventory. If the plane leaves thegate with empty seats, this inventory cannot be stored and is lost. If an airline canminimize the inventory spoilage, then it will operate much more efficiently. Since 23
  24. 24. yield management determines the load level to try to maximize revenue, Airlines canbenefit from such a technique.Airlines should determine their pricing also on the basis of the demand. Yieldmanagement is a tool that can be used to smooth the demand pattern. In peak season,the airline can increase its revenues by increasing the fare on its tickets and in lowseason, it can increase capacity utilization by offering low prices. Past years data canoffer the manager a way to forecast when these peek and low seasons occur. In termsof characteristics, the aviation industry is seasonal in nature. In the period April toMay and again from November to December, demand is high. However, in the June-July period demand falls. Demand fluctuates seasonally and also gradually (there is anincrease in the demand for reservation until a few days prior departure).Airlines have fixed capacity. In order for yield management to work optimally,additional capacity should be expensive to acquire. In this situation, the cost of aplane is high, moreover, the lag between the order and delivery is significant. On theother hand, the cost of an additional passenger should be low (in fact, airlines havevery high fixed costs), such as the negligible cost of drinks and food for a customer.In fact, if there were low capacity change costs, it would be easy to adapt quickly bystoring a few airplanes in reserve ie. It should manage between low marginal salescosts and high capacity change costs.In the global scenario, one needs to look at the past three decades when majortechnological advances like wide bodied aircraft (Boeing 747 was introduced in thelate sixties) and fuel efficient jet engines changed the entire cost structure in theairline industry.It has been found that yields have reduced by 2.1 per cent per year since 1960 and isexpected to continue to reduce. This has primarily been responsible for thetremendous growth in air traffic during this period.However, in the past decade, many major carriers have shifted focus and haveconcentrated on the ‘icing on the cake’ rather than the cake itself by promoting firstclass and business class travel at the expense of the economy class. 24
  25. 25. The argument for this strategy was that the margins available on the premiumsegment were many folds higher. But first class and business class seating reducesdramatically the number of passengers an aircraft can carry.Published information suggests that the load factors among all airlines, whether lowcost or not, hovers around 70 per cent. It can be speculated that the higher marginsfrom premium passengers have probably not contributed significantly to the bottomline of the major airlines while their expenses are much higher.Examination of the performance of the low cost carriers versus the major internationalcarriers shows that the major carrier’s operating costs per available seat mile is muchhigher in comparison to low cost carriers while average while average yields perrevenue passenger mile are nearly at the same level.Low cost subsidiaries promoted by the major international carriers like BritishAirways, Virgin in the West and Alliance Air promoted by Indian Airlines in Indiahave not shown the same agility and performance as compared with excellent resultsof SouthWest, Ryan Air or Easy Jet of the US.Evidence seems to suggest that low cost carriers have learnt important lessons fromthe decades of spectacular air traffic growth where the primary reason for the growthwas constant reduction in yields driven by passenger volumes and a dynamic yieldmanagement system. They have also developed the right focus in terms ofmanagement structures to handle the customer, costs and even turnaround at theairport gate and probably will ride the present difficult phase unlike the major carriers,several of them are expected to vanish as consolidation and restructuring takes place.This can be also applicable to the Indian scenario with the Government owned AirIndia & Indian Airlines going for privatization. 25
  26. 26. 3.5 Indian Aviation Industry – Operational :B) International AirlinesIn the international sector, Air India is the sole Indian service provider. However, inthe international market, the share Air-India is negligible compared to that of the likesof British Airways and Emirates Air.B-1) Air IndiaAir-India International was registered on March 8, 1948 and it inaugurated itsinternational services on June 8, 1948, with a weekly flight from Mumbai to Londonvia Cairo and Geneva with a Lockheed Constellation aircraft. Later on in 1962, theword International was dropped. Effective March 1, 1994, the airline has beenfunctioning as Air-India Limited.At present, Air India has a fleet strength of 23 aircrafts. Out of them are 6 Boeing747-400, 4 Boeing 747-200, 2 Boeing 747-300 Combi, 8 Airbus 310-300 and 3Airbus 300-B4. The airlines has plans to induct 4 more A-310-300 aircraft on drylease effective December 2000.From a total of three stations served at the time of nationalisation, Air-Indias networktoday covers 44 destinations. The companys network is as follows - • India: Ahmedabad, Amritsar, Bangalore, Calcutta, Chennai, Delhi, Goa, Hyderabad, Kochi, Kozhikode, Mumbai, Thiruvananthapuram; • UK: London; • Europe: Paris; • Asia Pacific: Tokyo, Osaka, Bangkok, Hong Kong, Kuala Lumpur, Singapore and Jakarta; • Gulf & Middle East: Doha, Abu Dhabi, Bahrain, Jeddah, Kuwait, Muscat, Riyadh, Dhahran and Dubai; • USA & Canada: New York and Chicago; • Africa: Nairobi and Dar-es-Salaam. 26
  27. 27. In addition, Air India has a so-called code sharing arrangement with a number offoreign airlines. These include Swiss Air, Bellview Airlines, Austrian Airlines, AsianaAirlines, Air France, Virgin Atlantic, Scandinavian Airlines, Singapore Airlines,Aeroflot, Air Mauritius, Kuwait Airways and Emirates.Air India carried a total of 3.35mn passengers in FY2000 as against 3.17mn in FY99.This made for a plant load factor of 70.3%.FinancialsAir-India has posted an operating profit of Rs 760 million in FY 2000. This is good,given the fact that the airline had recorded its highest operating loss of Rs 4.13 billionthree years prior i.e. in FY97. The airline had made its last operating profit in FY95.The net loss has been contained at Rs370 million partly due to an additional payout ofRs.1.78 billion during the fiscal due to a hike in global and domestic fuel prices. Air-Indias total turnover during the year was Rs.46.62 billion as compared to Rs 42.36billion last year - a growth of 10 per cent.While PBIDT (Profit before interest, depreciation and tax) was a negative Rs 6.48billion, the firm succeeded in raking in a cash profit of Rs. 4.12 billion during theyear. Air-India has also achieved a positive return on its investments of over 5 percent in FY 2000 on capital employed in the business as compared to a negative returnin the last couple of years. 27
  28. 28. 3.6 Indian Aviation Industry – Infra Structural :Airport InfrastructureThere are a total of 449 airports/airstrips in the country. Airports are presentlyclassified as international and domestic airports.International Airports: These are available for scheduled international operations byIndian and foreign carriers. Presently, Mumbai, Delhi, Chennai, Kolkatta; Kochi andThiruvananthapuram fall into this category.Domestic Airports: In this category fall those airports, which have custom andimmigration facilities for limited international operations by national carriers and forforeign tourist and cargo charter flights. These include airports Bangalore (CE),Hyderabad, Ahmedabad, Calicut, Goa (CE), Varanasi, Patna, Agra (CE), Jaipur,Amritsar, Tiruchirapally, Coimbatore, Lucknow.Yet another type of airports are known as Model Airports. These have a minimumrunway length of 7,500 feet and are capable of handing A320 type Airbuses. They cancater to limited international traffic, if required. These airports are in Bhubaneswar,Guwahati, Nagpur, Vadodara, Imphal and Indore.There are 71 domestic airports, which fall in the category of Other DomesticAirports. There are also 28 civil enclaves (CE) in Defence airfields. Twenty of themare currently in operation.Mumbai airport is the busiest in India and handles about 30% of the total passengertraffic in the country. The Chhatrapati Shivaji International Airports share of thecountrys international traffic is around 40%. 28
  29. 29. Airports Authority of IndiaThe Airports Authority of India (AAI) was formed after the merger of InternationalAirports Authority of India and the National Airports Authority by way of theAirports Authority Act (No.55 of 1994). It came into existence on 1st April 1995. AAImanages 5 international airports, 87 domestic airports and 28 civil enclaves. Itprovides air traffic services over the entire Indian airspace and adjoining oceanicareas.The AAI also undertakes assignments like airport feasibility studies, airport designproject implementation, project supervision and manpower training. The AAI hasundertaken consultancy projects in Libya, Algeria, Yemen, Maldives, Nauru andAfghanistan.Recent infrastructure developmentsPrivate sector is now allowed in building airports. Among the private sector-aidedairports to be developed in the next five years are Hassan (Karnataka), Mumbai, Goaand Bangalore. These airports are capital-intensive projects that have to be runefficiently to make them commercially profitable. The Mumbai project, for instance,will cost an estimated Rs.16 billion (US $ 457 million). The Government has alsodecided to concentrate on developing existing airports rather than on new airports.The AAI is investing Rs.4.4 billion (US $125.7 million) to develop model airports in12 cities, with state-of-the-art equipment.Part financing of facilities through a tax paid by embarking international airpassengers is an idea being tried out at Kozhikode, which generates large West Asia-bound traffic. A similar method may be adopted for development of airports inRajasthan and Goa that are popular tourist destinations.Among airport construction projects with private participation undertaken is theKochi International Airport. The equity will account for Rs. 640 million (US $ 18.3million), 26% of which the government of the State of Kerala holds, and the rest by 29
  30. 30. non-resident Indians, banks, users (airline firms) and contractors. Term loans andshort-term borrowings for working capital from banks funded rest of the project.The AAI has also drawn up a Rs. 40 billion (US $ 1.1 billion) plan to modernize andexpand its airspace infrastructure to meet the demand growth projected for the comingfive years. The growth strategy envisages not only better passenger facilities but alsoimproved navigational and communication systems. The first phase will involveupgradation of conventional communication, navigational and surveillance systems asan immediate measure. The second will be a transition from the present ground-basedATS systems to satellite-based CNS/ATM by the year 2000.The internal resources generated at present being inadequate, the AAI plans toenhance revenues through rationalization of the tariff structure, as well as fromcommercial, cargo and duty-free shops. 30
  31. 31. 4. Indian Aviation Industry – Regulatory :Civil Aviation policyThe Ministry of Civil Aviation is the main central agency responsible for theformulation of national policies and programs for development and regulation of CivilAviation and for devising and implementing schemes for orderly growth andexpansion of Civil Air Transport. Its functions also extend to overseeing theprovisions of airport facilities, air traffic services and carriage of passengers andgoods by air.The Government recently approved a new policy to promote private investments inthe Aviation Sector. The highlights of the policy are as follows. • Foreign equity upto 40% and investment by non-resident Indians (NRIs) or overseas corporate bodies (OCBs) upto 100% will be permitted in domestic air transport services. • Equity from foreign airlines will not be allowed directly, or indirectly, in domestic air transport services. Existing companies in which equity is held by foreign airlines will be advised to disinvest this equity. • Entry and exit barriers have been removed. There will be a scrutiny of applications to verify financial soundness and maintenance, security and safety aspects of operations. • The choice of aircraft type and size is left to the operator. • To achieve economies of scale, the minimum fleet size for a scheduled operator has been raised from the existing three aircraft to five. Also the minimum amount of shareholders funds has been increased from the existing Rs.50 million (US$ 1.4 million) to Rs100 million (US $ 2.9 million) for aircraft of all-up weight below 40,000 kg and from Rs100 million (US$ 2.9 million) to Rs.300 million (US$ 8.7 million) for all-up weight exceeding 40,000 kg. 31
  32. 32. • Total capacity requirements in the air transport sector are being projected for a period of at least five years on an annual basis, to help the developer make investment decisions.• In the distribution of this capacity, while preference will be given to Indian Airlines according to its fleet augmentation plan, private operators proposals to induct new capacity will be considered, based on the demand, load factor, past track record and financial soundness.• All scheduled operators are required to deploy 10 per cent of their capacity in NorthEast, Jammu and Kashmir, Andaman and Nicobar Islands and Lakshadweep. 32
  33. 33. 5. Recent developmentsThe government has given the final nod for the divestment of Air India. It has beenproposed that the government will not fix any price for sale but will let the marketdecide the price. The government has put up 40 per cent of the equity in the airline forsale. The strategic partner, which the airline has been scouting for, will take up 40 percent stake with only a 26 per cent cap to foreign airlines. The line up of suitors isformidable with a combine of British Airways and Jet Airways, Singapore Airlinesand the Tatas, a consortium led by Air-France and Delta, Reliance and ITC. Thencame British steel baron Laxmi Mittal who has decided to take the plunge along withKotak Mahindra, British Airways and Qantas of Australia.As far as Indian Airlines is concerned, the Tata group has bid for it in addition to itsbid for Air India. The Hindujas, the SkyTeam comprising of Air France and Delta,Emirates and the Indian Pilots Guild have also submitted their expression of interest.Reliance had earlier pulled out from the race.The Disinvestment Minister Arun Shourie has said that the end of FY01 will see thecompletion of the privatization process for Air-India. The government is sadly wayoff the target (Rs100 billion) as far as the program for disinvestment goes. It remainsto be seen whether the proposed divestment in Air India does come about by the setdate. 33
  34. 34. 6. Future trendsConsidering the forecasts made by different organizations and taking a reasonablypragmatic view, the traffic scenario to be expected upto the year 2010-11 has beenprojected by the Foundation for Aviation and Sustainable Tourism. The AirportsAuthority of India has extended these projections to the year 2016-17. Year Domestic %age Inter Passengers %age Passengers increase increase (in mn) (in mn)1996-97 12 10.5 10.89 7(Actual)1997-1998 13.26 10.5 11.65 71998-1999 14.65 10.5 12.47 71999-2000 16.2 10.5 13.34 72000-2001 17.57 10.5 14.14 72001-2002 19.06 8.5 14.99 62002-2003 20.68 8.5 15.89 62003-2004 22.44 8.5 16.84 62004-2005 24.35 8.5 17.85 62005-2006 25.05 7 18.84 5.52006-2007 27.87 7 19.87 5.52007-2008 29.82 7 20.96 5.52008-2009 31.91 7 22.16 5.52009-2010 34.15 7 23.33 5.5 34
  35. 35. 2010-2011 36.54 7 24.62 5.52011-2012 39.09 7 25.97 5.52012-2013 41.44 6 27.24 4.92013-2014 43.93 6 28.58 4.92014-2015 46.56 6 29.98 4.92015-2016 49.35 6 31.45 4.92016-2017 52.32 6 32.99 4.9 35
  36. 36. 7. Conclusion:The ageing fleet of Indian Airlines and Air India has dampened returns and valuationbut they don’t have the money to buy new airplanes. Neither does the government, forthat matter. Ergo all fleet renewal plans had to be put on hold till a white knight camealong and snapped up the two airlines at the dis-investment altar.After going through the various factors influencing and trends prevailing in theindustry and the various challenges faced by the Airlines – especially the Maharaja, itis essential that PRIVATISATION and a huge injection of funds can only be the keyto Indias International Flag carrier Air-Indias (A-Is) survival. This, unfortunately isagain stalled by the Government, who, should be actually taking the lead in promotingthe industry.Now once again, after months of indecision, policymakers seem to be coming aroundto the idea of new acquisitions because Air India’s suitors dropped out one by one andthere is not much interest forthcoming for Indian Airlines either, and now with aircraftmanufacturer being more flexibile in terms of deliver and pricing this will be the besttime to lease more aircraft and civil aviation ministry needs to extend their consent tothe airlines. Since providing an atmosphere of healthy competition will ultimatelybenefit the consumers and society. 36

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