Bargaining Power of Suppliers and Airline Industry

Great Lakes

Bargaining Power of Suppliers and Airline Industry Effects of Bargaining Power of Suppliers This document deals with an analysis of the Bargaining Power of Suppliers, one of the five forces of the Porter Porterss Five Forces Model, on the Airline Industry

Prepared by - Priyank Sinha, Purnendu, Rachna Saini, Rahul Jain, Rahul Raj H4G9 Great Lakes Institute of Management

Bargaining Power of Suppliers and Airline Industry

Contents Overview of

Aviation Industry........................... ................................ ....................... ................................ 3

Porters 5 forces ....................................................................................................................................... 4 Bargaining power of Customers Customers .............................................. .......................... ............................ ....... 4 Force of Substitutes Substitutes .............................. .............................. ...................... ................................ ........... 4 Competition Rivalry ............................................................................................................................. 4 Threat from New Entrants Entrants ............................ ................................ ...................... ................................ . 5 Bargaining power of Suppliers............................................ Suppliers............................................ ............................. .............................. ....... 5 Porters Porters Five forces working on Airline Industry ............................... ...................... ................................ .. 6 Impact of Bargaining Power of Suppliers on Airline Industry .................................... ....................... ......... 7 High Aviation Turbine Fuel (ATF) Prices ........................ ................................ ...................... .................. 7 Monopoly of PSU Oil companies .......................................................................................................... 8 Power of Suppliers of Aircrafts and Spare parts ........................... ........................... ........................... ... 8 Factors causing Threat from Suppliers on Airline Industry .............................. ....................... ................... 9 Airplane ........................................................................................................................................... 9 Labour ........................................................................................................................................... 10 Aviation fuel .................................................................................................................................. 13 References............................................................................................................................................. 27

Great Lakes Institute of Management

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Overview of Aviation Industry The aviation industry in India is one of those sectors that saw a constant pace of growth among the other industries in the world over the past many years. The open sky policy of the government has helped a lot of overseas players entering the aviation market in India. From then, it has only been growing in terms of players and the number of aircrafts. At present, private airlines account for around 75% portion of the domestic aviation market. The 9th largest aviation market in the world is India. Taking the help of the statistics from the Ministry of Civil Aviation, approximately 29.8 million passengers travelled to/from India in 2008, showing a surge of 30% from 2007. The prediction stated that international passengers will touch 50 million by 2015. More opportunities in the aviation industry in India are likely to make way for about 69 foreign airlines from 49 countries.


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Porters 5 forces Industry analysis is a type of investment research that begins by focusing on the status of an industry or an industrial sector. Porters 5 forces framework identifies the strength of all five market levers (Suppliers, Customers, Competition Competition Rivalry, Substitutes and New Entrants) of an industry. Understanding each of these market forces allows businesses to make wise decisions which can maximize return in any industry.

Bargaining power of Customers These are potential buyers. Using Porters framework a business can determine how much control Customers can have on the business. For example, luxury market customers are fewer in number and more demanding but willing to pay higher prices. In contrast, common market customers may be huge in number, be less demanding but more thrifty. How much can customers afford? What medium they will use to pay? After making a deal with the company what is the probability that they will do business with the same firm. What are the characteristics of an existing customer as well as prospective customers? How important is that characteristic to the success of the industry. Knowing answers to these will help to determine if the market is profitable. Also, additional information for pricing, marketing becomes very useful.

Force of Substitutes Businesses must understand the difference in price between their own product and substitute product as well as the susceptibility for customers to use available substitutes. People can readily substitute a frozen pizza for a delivered one, however they are less ready to substitute the bus for a used car, or substitute substitute industrial parts due to the reengineering that might be involved.

Competition Rivalry Businessman must understand the industry itself and the strength of the variables that comprise it. How many competitors exist? Is it a growing industry? Do competitors have strong brands? Are there any barriers to a weak competitor closing its doors? Is there legislation in effect or pending regarding the industry? Highly competitive market might result from:  Many players in the market. No dominant firm  Little differentiation in the product among competitors  Saturated industry with less projected growth Great Lakes Institute of Management

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Threat

from New Entrants

The easier it is for a new company to enter in the market, more competitive is that market. Barriers to entry can decrease the threat of new entrants. Few examples include:  Loyal towards major brands  High fixed costs  Scarce resources  High cost of switching  Government regulations and legislation

Bargaining power of Suppliers Suppliers provide resources to the business. For example, consider opening a restaurant. Owner will look at suppliers of food noting their reliability, quality, pricing and whether they can offer credit terms whenever asked. He will also find fi nd out if there are many suppliers or a single supplier. Multiple suppliers will compete for business and therefore will offer better service on a reasonable price, whereas a single supplier can have an advantage and hold business on hostage. He will also look at real estate resources. There is switching cost if he will try to move the business from one location to another. Some reasons why suppliers might be powerful:  Few suppliers for a product  No substitutes  Switching to another product costly  Product important to the buyers  Suppliers are more profitable than the buyers  Customers are price sensitive


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Porters Five forces working on Airline Industry


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Supplier power

Few aircraft makers, Bulky aircraft purchases, labor unions with negotiation power, threat of bankruptcy, Aviation fuel

Entry Rivalry

Substitutes Number of close substitutes

Price competition is intense, fixed cost is high, low marginal cost, excess capacity

High barrier to entry, High barriers to exit, Minimum efficient scale for profitable entry small, Brand not important

Buyer Power Airlines have pricing power in monopoly and duopoly markets, customers are highly price sensitive and have lot of power.

Impact of Bargaining Power of Suppliers on Airline Industry High Aviation Turbine Fuel (ATF) Prices Aviation Turbine Fuel prices constitute around 80% of the total operating costs of Airline Industry. The industry has lately been plagued with high ATF prices which have demonstrated demonstrated the inverse relationship between airline profitability and fuel prices. In India, ATF prices are priced at 65% more than the world average and have almost doubled over the last year. Almost all Indian carriers reeling under the Great Lakes Institute of Management

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Bargaining Power of Suppliers and Airline Industry pressure and are resorting to desperate measures like cutting routes, increasing fuel surcharge, promoting the use of e-tickets and charging for food items to reduce their losses. Rising ATF prices, depreciating rupee added with global recession has directly impacted the Indian Airline Industry. The industry reported a loss of $10.4 billion in 2009-10. Increasing air fares has resulted in decreased air traffic. It is estimated that a reduction in Rs 1000/ KL will save Rs 500 crores for the industry annually.

Monopoly

of PSU Oil companies

A major reason for high ATF price even after deregulation is the monopoly of the three state owned Oil companies. Because of limited number of suppliers, there is hardly any alternate choice for the airline industry, with these state owned oil companies fixing the ATF price on a mutually agreed common formula among them. The government has given licenses to some companies in the oil sector like Reliance, Essar, ONGC etc. However, none of these companies could start supplying ATF due to logistic issues till recently. Now Reliance is moving towards setting up Aviation Fuelling stations at some of these airports. It is hoped that healthy competition competition will bring about a reduction in the unreasonable ATF price levels prevalent in India.

Power of Suppliers of Aircrafts and Spare parts The airline supply business is mainly dominated by Boeing (US) and Airbus (EU). For this reason, there isn't a lot of competition among suppliers. Also, the likelihood of a supplier integrating vertically isn't very likely. In other words, we are not going to see Boeing and Airbus starting their own airlines in the foreseeable future. Similarly the suppliers of spare parts do have some impact but it is not very significant as compared to the combat aircraft sector where the unavailability of spare parts is affecting the performance to a greater extent. Great Lakes Institute of Management

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Factors causing Threat from Suppliers on Airline Industry The primary inputs to airline industry are



Airplane Labour



Fuel



Airplane  There are only two major manufacturers for large commercial aircraft. Airbus and Boeing .Both these hold a different view about the future f uture of Aviation industry.  Boeing focuses on medium capacity long haul aircrafts because it expects demand growth for smaller aircrafts which can fly more frequently offering wide number of options.  Airbus is investing in large capacity-long range jumbo as it expects that there will be a high demand for fuel efficient and luxurious aircrafts that can accommodate accommodate more number of people. investmen t in the form of trained mechanics, existing  Also, airlines make relationship specific investment stock of aircraft aircraft etc, which which gives aircraft manufacturers some supplier power  One opposing factor for this supplier power is the slow nature of aircraft sales, because the high value order placed by the industry i ndustry can take several years to be delivered.

Boeing and Airbus For decades, Boeing and Airbus based in US and EU respectively have been the major suppliers of

Aircrafts to the Airlines over the world. For past few years, both the companies have been going all guns blazing in delivering aircrafts at a relentless pace without pause, notwithstanding the problems with major aircraft programmes and the effects of the global economic slowdown on commercial aviation. The total deliveries in 2009 were close to 1000, with a record 979 aircrafts delivered by the two aircraft majors. Other than a two and a half month strike at Boeing in 2008 which upset production in the fourth quarter of the year, the deliveries have been increasing steadily in the current decade. Although there have been cancellations in the orders of Airbus after the financial crisis in Dubai, the overall scenario looks optimistic. For Boeing alone, there is a 9 year backlog in the order book. The smaller manufacturers have not been exercising the output increase at Airbus and Boeing. The slowdown has hit them harder and they do not enjoy the same luxury of a 6-7 year order backlog. On

one hand the

Order

books are bulging, much to their glee, Airlines, especially the ones which have

been planning expansions in the recent future are feeling the pinch. Order books for some airlines like IndiGo Airlines have been stretched to as far as 2025. This supply side crunch is also hurting the fleet renovation plans of many airlines. Production Production delays are also plaguing the Aircraft majors causing further backlogs. For example, Airbus has delayed the delivery of Malaysian Airlines A380 order by two years, due to delays in aircraft production. Similar delays have happened to the Korean Airlines too and are attributed mainly to the strikes happening in France in which workers stopped access to the A380 sites at many places. Great Lakes Institute of Management

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Labour

 



Labour unions are suppliers who have significant power Labour such as pilots, cabin crew, ground personnel, gate agents etc have a bargaining power which is due to the labour agreements at the time of industry regulation that left them with little flexibility. flexibility. This force remains a significant factor in successful performance in the industry.

Employee as Supplier of Skill: The Dearth of skilled employees in Indian Aviation is being exposed increasingly as the industry is growing at a ever increasing pace. Consequently the power of the union representing the employees is also increasing. The aviation Industry Like any other industry has trade union. There are currently 4 union prominent unions, AIEG (Aviation Industry Employee Guild) and NAG (National Aviation Guild), Commercial Pilots Association (ICPA) and the Indian Pilots Guild (IPG). The power of employees would be evident by the below set of reasons 1.

Skilled Employees Demand and supply

The way the airline industry grew was too fast for the other peripheral sectors to catch up along with it, lack of infrastructure and proper planning act as a hurdle the smooth flow of new talents in the aviation sector. The stringent and demanding requirement of domestic pilot (According to DGCA norms, 200 hours of flying are required for pilots to qualify.) is making it difficult for the industry to cope with the increasing demand in pilot, crew cabin or Ground S taff. As per a study India currently has about 3,500 pilots and the industry is expecting to grow by another 400 airplane. Each plane will need more than 10 pilots and 20 engineers which come to as many as 4000 pilots and 8000 engineers. Thus giving very strong pull power to its current employee. A study done by Boeing shows the forecasted demand to be 12,000 pilots by the year 2025 2 025


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Another factor increasing the employees is that the Aviation industry is walking on a tight rope in terms of budget. The average domestic pilot salary is about $8000 as compared to the $14000 for foreign pilots. Therefore the percentage of Foreign Crew is reducing and consequently relying more and more on its Indian crew What could change in the

future?

The below set of points could change the equation towards the industry: y

Infrastructure Infrastructure needs to be developed to train talent at a much faster pace.

y

Relaxing the required norm a little for commercial flying

y

Standard syllabus for preparation for pilot Exam and more clearly from where a student can get his/her license from. Right now its very distorted and disorganized..

Conclusion:

With limited skilled employee and growing demand of the industry, it puts them in

drivers seat as far as the bargaining power

2.

Industry Vs Employees relation :Rise of t he

Unrest unions

The balance in a equation is always lost when there is disharmony among the employer and employee. There are currently two union prominent unions, AIEG (Aviation Industry Employee Guild) and NAG (National Aviation Guild). Aviation industry from the offset has always been Great Lakes Institute of Management

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Bargaining Power of Suppliers and Airline Industry perceived as a high paying industry. As trend is changing so is the need of the hour. Airline is no more a luxury and low cost carrier has become a trend setter as the passenger travelling by airline have increased from 25 million to close to 75 million in a decade. As result of which the Industry is trying cope up with all the losses having a tight string budget by measure like by right sizing and restructuring the higher salary. On

the other end due to the same measure there has been as increasing unrest between the

employee and also the rise of the power of the union like AIEG and NAG. The union has an upper hand as employee replenishment is very tough due to minimal reserve talent pool and the Indian Law is more pro-employer than employee. In the last two year two air carrier Air-India and Jet airways saw mutiny sort of a strike where the employer stopped to work for 10 days in case of Air-India and 5 days in case of Jet airways. Both these incident cumulatively lost ` 800-900 Crore of revenue. Conclusion:

All this only further prove the power the employee and their union hold. So, it all

depends on how airlines handle the employee issues and how they maintain industrial relationship after the national union formation


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Bargaining Power of Suppliers and Airline Industry The unions have their political agenda or any

vested interest.

As the union power is increasing there is always a chance of misusing it in favor of political agenda or a vested interest. Although this factor had not emerged out as yet that is because the unions are coming in to the picture now as the unrest among the employees is increasing. Given the political scene in India It is still a possibility as the industry industry internal rivalry is also intense. If driven by an agenda or any malice intention the union holds string hand to hold the company/industry at ransom as the Indian Labour laws are not very stringent and are very Labour biased. Though this is possible but less probable. The government should proactively tweak some labour law so as to keep the union in check. And also there should be only one national guild which the AIEG is working toward. Conclusion. This Reason as the supplier power is would be weak as its only an assumption

Aviation fuel geopolitical factors  Fuel is a commodity and its prices are decided by market forces and existing geopolitical  High cost of fuel accounts for about 35% of the total cost and increasing cost is a threat to the companys profits

Aviation Turbine Fuel (ATF) ATF is a major cost component for the Airlines in India. It is about 40% of the operating cost of the domestic carriers.

ATF rates for domestic operations in India are priced about 70% higher than international benchmarks. benchmarks. It is often used to cushion the subsidies that the government gives for the more commonly used petrol and diesel. The estimated annual fuel bill for domestic airline industry in India is around $2.5 billion based on rates prevailing in August, 2010. ATF prices

in India (Aug 2010)

Domestic Flights

International Internationa l Flights (ex India)

International Internation al Price

Rs. 44,697 44,697 / kilolitre

Rs. 35,050 35,050 / kilolitre

Rs. 32,449 32,449 / kilolitre


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Comparison of domestic and international ATF prices (above) Source: Frost & S ullivan

In India the high ATF rates over the years have hurt the financial health of the domestic airlines and are contributing contributing to their accumulated losses. This high ATF cost leads to high air ai r ticket prices, which in turn slows down the passenger market expansion. Also the increasing losses of Indian carriers are steadily making them unattractive and uncompetitive for debt or equity financing. The chart below compares the fuel prices at various airports in the Asia Pacific region. It is based on April 2006 average fuel price data, by 5 internatio i nternational nal airlines with operations to India, submitted to IATA. The comparison is on the portion excluding the Platts marker (Mean of Platts Singapore or M OPS)  referred to as the "differential". For April 2006, the differential differential at Indian airports is about 7 times higher than that in Singapore. This has contributed to substantial additional costs for the Indian airlines.


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The Indian Aviation Turbine Fuel (ATF) market is highly controlled controlled and one that is the monopoly of State Oil marketing companies. Additionally, across states, the ATF

market (otherwise also known as Aviation Jet Fuels), has a high variable tax structure. ATF pricing in India has traditionally been determined determined by the Government under the Administered Price Mechanism (APM). APM typically meant that the Government fixed the price of the products and ensured that the oil companies achieved a fixed level l evel of profitability subject to their achieving their specified capacity utilization. In April 2001, the Government dismantled the APM and oil companies were given the freedom to price ATF based on input costs and world market prices. However, despite the withdrawal of APM, the price of ATF in India continues to be much higher than the prevailing p revailing international international prices. There are a host of factors responsible for the high ATF prices in India like irrational tax structure, cartelization cartelization of oil PSU's and monopoly of pricing, existing ATF pricing mechanism in India.


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Two major factors are explained below1) Monopoly

of PSU Oil companies

A prime reason for high price even after deregulation of ATF price, is attributed to the monopoly of the 3 state owned Oil companies viz. Indian Oil Corporation Ltd., Hindustan Petroleum and Bharat Petroleum. Because Because of very limited number of suppliers there has never been any effective choice for the airline industry, with these three state owned oil companies fixing the ATF price on a mutually agreed common formula between them. The Indian Govt. has granted the marketing rights to some s ome companies in the oil sector-Reliance, sector-Reliance, ONGC, Essar etc. However none of these companies could start the supply of ATF as they were not allotted space by the Airport Authority of India. Reliance was allotted land at 25 airports in India recently and it is moving towards setting up Aviation Fuelling stations at some of these airports. The resultant competition competition will bring about a reduction in the excessive ATF price levels prevalent in India. 2)

Sales Tax in different states in India The levels of sales tax on ATF by the states s tates are currently in the region of 20-35 %. The Sales Tax on ATF for Indian airlines flying on international routes has already been withdrawn. However the situation needs to be addressed for the domestic flights as well.

The VAT rates on inputs and final products for the different states have been set at 4 % & Great Lakes Institute of Management

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Bargaining Power of Suppliers and Airline Industry 12.5%.But the the VAT act also allows special rates to be charged for ATF under Schedule-III of the state VAT Acts. This allows states to charge sales tax on ATF at excessively high levels. Comparitive information information regarding the sales tax rate on ATF in different states in India has been shown below region wise.

Sales Tax Rate on ATF

Northern States

Eastern States

Western States

Southern States

Rajasthan

28% Bihar

29% Gujarat

30%

Andhra Pradesh

33%

Himachal

25% West Bengal

25% Maharashtra

25%

Tamil Nadu

29%

UP

21% Chhattisgarh Chhattisga rh

25% Madhya Pradesh

28.75%

Karnataka

28%

Delhi

20% Assam

22% Goa

20%

Kerala

28.75%

Punjab

20% Nagaland Nagala nd

15%

Andaman

0%

Mizoram

0%

The last 5 years data for domestic and international prices for ATF are mentioned below (source-Indian Oil Corporation Ltd.).

ATF Domestic Prices ATF is the fastest growing petroleum product for oil companies. Its sales more than doubled between 2003 and 2006. ATF prices (in Rupees/KL) at 4 Metros including Sales Tax for domestic airlines are mentioned in the table below-

Month

Delhi

Kolkata

Mumbai

Chennai

September 01, 2010

40138.06

48461.83

41388.27

44397.44


Page 17


August 16, 2010

41852.58

50261.32

43187.76

46254.51

August 01, 2010

41177.17

49584.82

42484.2

45542.4

July 16, 2010

40099.1

48460.47

41361.21

44333.83

July 01, 2010

41488.9

49927.12

42808.92

45841.83

June 16, 2010

40191.96

48574.12

41469.45

44459.49

June 01, 2010

39503.56

47843. 5

40752.36

43705. 5

May 16, 2010

42556

51010

43932

46973

May 01, 2010

42452.01

50914.81

43823.67

46875.09

April 16, 2010 April 01, 2010

42179

50634

43540

46548

40841.4

49294.36

42159.48

45151.97

March 16, 2010

40268.25

48586.74

41561.45

44400.77

March 01, 2010

39307.07

47531.4

40546.7

43325.63

February 16, 2010

37982.22

46164.87

39166.64

41901.41

February 01, 2010

38956.38

47166.09

40181.39

42948.63

January 16, 2010

41216.43

49533.84

42535.61

45378.18

January 01, 2010

38696.6

46908.52

39910.79

42683.33

December 16, 2009

39318.57

47557.96

40560.23

43353.55

December 01, 2009

39968.01

48220.93

41236.73

44037.74

November 16, 2009

40422.62

48680.95

41710.28

44526.44

November 01, 2009

39474.44

47679.73

40722.59

43493.18

October 16, 2009

36188.27

44248.25

37299.5

39965.52

October 01, 2009

37084.5

45235.94

38246.6

40956.89

September 16, 2009

37896.83

46101.86

39098.99

41850.52

September 01, 2009

39118

47401

40384

43191


Page 18


August 16, 2009

38585.24

46818.95

39829.61

42604.52

August 01, 2009

36922.67

45060.05

38097.77

40789.33

July 16, 2009

36338.18

44410.82

37475.39

40163.82

July 01, 2009

38557.56

46710.92

39789.02

42523.56

June 16, 2009

36251.51

44289.05

37367.15

40024.2

June 01, 2009

32302.92

40230.05

33260.8

35821.34

May 16, 2009

32199.01

40121.81

33139.03

35723.61

May 01, 2009

31614.51

39512.96

32530.18

35094.04

April 16, 2009

31926.24

39800.58

32854.9

35443.11

April 01, 2009

29925.97

37744.02

30784.81

33306.77

March 16, 2009

27274.95

34996.08

28023.34

30470.9

March 01, 2009

27106.1

34847.25

27860.98

30317.31

February 16, 2009

29158.33

36989

29985.19

32524.54

February 01, 2009

30288.35

38233.76

31175.83

33781.21

January 16, 2009

31496.31

39511.15

32447.65

35096.32

January 01, 2009

30457.21

38469.34

31378.78

34007.2

December 16, 2008

32691.28

40823.56

33719.47

36436.76

December 01, 2008

36899.65

45247.87

38103.19

40988.67

November 16, 2008

39380.51

47805.04

40687.42

43641.64

November 04, 2008

44965.7

53663.53

46518.85

49673.64

November 01, 2008

47017.93

55823.33

48656.59

51893.76

October 01, 2008

56447.8

65677.52

58479.37

62050.6

September 01, 2008

59650.07

69005.9

61834.81

65499.44

August 01, 2008

71028.26

80763.47


73673.56

77661.18

Page 19


July 01, 2008

69097.19

78641.65

71630.53

75505.25

June 05, 2008

66226.66

73473.19

68626.89

72363.58

June 01, 2008

69227.08

76625.68

71759.06

75602.99

May-08

58387.92

64824.82

60468.28

63227.62

Apr-08

53309.3

59610.15

55191.58

57821.62

Mar-08

47048.86

53087.34

48655.23

51090.08

Feb-08

44716.49

50611.35

46233.36

48548.82

Jan-08

45495.82

51382.56

47045.16

49372.63

Dec-07

47444.14

53371.47

49061.13

51425.19

Nov-07

41417.33

47161.2

42796.74

44986.26

Oct-07

39767.75

45537.6

41105.49

43298.75

Sep-07

38163.23

43886.99

39441.3

41595.26

Aug-07

39059.45

44834.09

40388.4

42572.67

Jul-07

37799.54

43508.15

39062.46

41204.3

Jun-07

36746.53

42263.34

37973.3

40068.7

May-07

37421.94

43020.79

38690.39

40836.61

Apr-07

36149.04

41708.38

37364.45

39482.19

Mar-07

34618.56

39916.41

35740.85

37743.74

Feb-07

33982.95

39237.94

35078.99

37046.1

Jan-07

37746.92

43127.99

39013.31

41120.27

Dec-06

36150.47

41492.08

37363.88

39418.07

Nov-06

37059.02

42519.59

38323.79

40450.55

Oct-06

40303.82

45837.72

41703.79

43928.37

Sep-06

43989.91

49609.8

45529.95

47821.15

Aug-06

42367.51

47691.07

43826.43

46063.12

Jul-06

41303.58

46564.46

42731.31

44905.05

Jun-06

40408.02

45616.28

41784.91

43940.32

May-06

39642.24

44940.28

41027.79

43209.21

Apr-06

35826.36

40465.16

36863.63

39232.71

Mar-06

34,995.36

39,458.84

35,957.79

38,214.16

Feb-06

35,228.99

39,736.88

36,214.67

38,493.22

Jan-06

34,099.80

38,628.24

35,065.47

37,349.10

Dec-05

31750.56

35978.32

32564.27

34664.1

Nov-05

35,761.14

40020.8

36714.91

38863.85

Oct-05

36410.1

40764.4

37417..95

39611.81

Sep-05

34748.76

39085.07

35687.39

37867.73


Page 20


Aug-05

32321.65

36516.28

33145.64

35230.69

Jul-05

31750.56

35907.87

32550.75

34602.81

Jun-05

29920.5

34000.6

30644.44

32635.49

May-05

33035.51

37258.93

33889.24

35984.12

Apr-05

30608.39

34811.8

31388.03

33458.69

Mar-05

25833.08

29929.51

26414.03

28367.38

Feb-05

25923.94

30115.65

26535.7

28548.76

Jan-05

25859.04

29939.9

26414.03

28381.34

In August 2008 the ATF prices touched an all-time high of Rs71028.26 per kl (in Delhi). This proved to be a major jolt for the aviation industry that was not doing too well in the then prevalent recession hit scenario.

ATF International Prices Prices (in Dollars/KL) at 4 Metros excluding Sales Tax for international airlines are mentioned belowSales Tax is not applicable to international airlines.

Month

Delhi

August 01, 2010

Kolkata

683.59

Mumbai

720.96

Chennai

677.27

679.82

July 01, 2010

689.2

728.14

684.36

687.04

June 01, 2010

702.07

741.32

697.23

700.33

May 01, 2010

749.95

788.07

744.85

747.61

April 01, 2010

694.62

733.61

689.78

692.63

March 01, 2010

656.32

694.6

651.48

653.25

February 01, 2010

684.03

722.4

679.19

681.09

January 01, 2010

659.27

697.45

654.43

656.07

December 01, 2009

677.13

715.31

672.29

673.93

November 16, 2009

948.18 948. 18

1001.22

987.69

1033.26

November 01, 2009

637.77

675.93

632.93

634.54

October 01, 2009

614.32

651.9

609.48

610.3

September

638

676

634

634

01, 2009

August 01, 2009

July 01, 2009

601.78 618.38

642.98 659.79


595.8 612.4

597.36 614.25

Page 21


June 01, 2009

524.22

565.62

518.31

519.89

May 01, 2009

506.33

547.35

500.42

501.47

April 01, 2009

458.44

499.19

452.53

453.22

March 01, 2009

460.19

501.06

454.28

455.05

February 01, 2009

505.52

546.72

499.61

500.83

January 01, 2009

510.78

552

504.87

506.12

December 01, 2008

622.31

663.12

616.33

617.28

November 04, 2008

740.59

780.33

734.37

734.93

November 01, 2008

776

816.18

769.84

770.66

October 01, 2008

969.3

1010.1

962.95

965.01

September

1085.31

1126.57

1078.83

1082.01

01, 2008

August 01, 2008

1290.58

1331.68

1284.39

1286.28

July 01, 2008

1248.9

1292.71

1242.46

1245.32

June 05, 2008

1193.99

1236.29

1187.32

1189.47

June 01, 2008

1248.32

1291.08

1241.77

1244.04

June 01, 2008

1248.32

1291.08

1241.77

1244.04

May-08

1121.98

1158.14

1115

1104.42

Apr-08

1023.4

1023.4

1016.67

Mar-08

911.76

949.64

904.68

894.98

Feb-08

874.05

911.39

867.05

856.49

Jan-08

888.92

925.47

881.92

871.12

Dec-07

918.54

953.99

911.36

900.14

Nov-07

809.79

846.9

802.79

791.97

Oct-07

772.78

811.46

766.33

756.59

Sep-07

712.07

749.59

706

696.89

Aug-07

741.59

780

735.66

Jul-07

708

745.67

701.91

692.76

Jun-07

697.89

733.37

691.85

682.37

May-07

707.12

743.4

701.36

692.42

Apr-07

643.59

678.02

638.16

Mar-07

601.24

631.5

595.45

586.44

Feb-07

588.95

618.91

583.18

573.96

Jan-07

648.22

677.37

642.73

633.83

Dec-06

620.62

650.21

615.35

606.45

Nov-06

629.96

660.6

624.97

616.83

Oct-06

675.3

704.48

670.39

662.2

Sep-06

728.69

756.44

723.62

714.66

Aug-06

697.58


721.53

692.32

1006.81

726.39

629.97

683.42

Page 22


Jul-06

685.41

709.26

680.32

670.91

Jun-06

677.8

701.66

672.44

663.11

May-06

675.68

701.93

670.9

662.22

Apr-06

615.79

645.19

645.19

Mar-06

604.67

631.88

595.98

591.02

Feb-06

611.22

639.12

602.72

597.97

Jan-06

577.73

606.09

569.88

565.9

Dec-05

530.25

554.94

521.63

516.08

Nov-05

609.32

632.27

600.09

593.1

Oct-05

634.59

659.19

625.6

618.82

Sep-05

609.74

635.39

600.69

594.55

Aug-05

569.2

594.27

559.88

Jul-05

559.07

583.9

549.75

543.12

Jun-05

527.32

552.18

517.99

511.35

May-05

580.26

605.25

570.97

564.36

Apr-05

536.45

562.89

527.63

Mar-05

452.5

480.39

443.68

438.68

Feburary 2005

454

483.49

445.64

441.56

Jan-05

452.34

479.91

443.07

438.31

604.23

553.48

521.95

Government Intervention

Oil subsidy

Ballooning subsidies has been threatening to bankrupt state-run oil marketing companies versus the need to bring double digit inflation under control. India is forced to import 74% of its burgeoning demand for oil at international prices (an annual price of Rs 270,000 crore), Indias approach towards dealing with volatile oil prices has few parallels anywhere in the world. Besides India, only Sri Lanka and Bangladesh have combated volatility by transferring huge subsidy burdens to their national oil companies in an ad hoc manner and that too more as an exercise in end of year accounting and fiscal management.


Page 23


Indias very high import dependence prevents any free lunches. Study by expert groups says, even at a crude price of $80 the subsidy bill for diesel alone would be Rs 71,000 crore by 2020. Should crude oil touch $150 the bill would swell to Rs 3,38,000 crore. The agricultural sector with a mere 12% share in diesel consumption is protected far more effectively by increasing support prices. As far as the transport sector is concerned, with fuel costs accounting for a mere 1.5% of the total price of goods any hike in diesel

prices

would

have

a

marginal

impact.

At the end subsidies eventually deviate scarce resources from development and infrastructure and affect social sector spending by reducing the outlay available for clean water, education, health care and rural employment.

Bail

out for Air India

Air Indias request for a bailout of Rs. 20,000 crores made the headlines an year ago. A decade ago, when IA approached the Finance Ministry for a couple of hundred crores bailout, we were told that the government would only consider the request if a detailed study by experts is produced, which shows light at the end of the tunnel. We read of heads rolling, retrenchment, retrenchment, downsizing and closures, but do these alone add up to a solution? Does not retention or capture of markets depend also on sound professional management, superior service and maintenance of employee enthusiasm? Indian Airlines registered profits in 2003-04, 2004-5 and 2005-06, (44.17, 65.61 and 49.5 crores respectively). respectively). In 2006-07 it suffered a loss l oss of Rs. 234 crores; and in 2007-08 the loss of the merged airline Air India was Rs. 2,226 2,226 crores. What is the reason for the almost ten-fold increase in losses? Two major decisions that shook employee morale and therefore may, have been responsible for the losses, are the change of name from Indian Airlines to Indian and the merger of Air India and Indian Airlines. Prime Minister Manmohan Singh has assured Air India that the government would put its entire weight behind it but with a condition that airline should undertake a full restructuring restructuring and shape up by becoming leaner and trimmer. Government Government bailout, said Air India has been asked to give its restructuring restructuring plans at the earliest.

Beleaguered carrier Air India has prepared the ground to seek release of the second instalment of the earlier approved Rs 5,000-crore 5,000-crore bailout package from the government. The company is set to approach the Centre following its board meeting last month (July, 2010) to seek another Rs 1,200-crore 1,200-crore infusion. Airline has stated that without fresh funds, its projected accumulated losses would be around Rs 17,000 crore by 2013, from the present Rs 12,000 crore. Great Lakes Institute of Management

Page 24

Bargaining Power of Suppliers and Airline Industry The government has already provided Rs 800 crore as equity to the airline in February. It lost about Rs 5,200 crore crore in the 2009-10 mainly due to weak demand, low yield yi eld and under utilisation of resources. The companys board, which is meeting in Mumbai over the weekend, has drawn a grim picture of its financial position, thus preparing the case for immediate relief. Further, since since the government has linked further release of funds to the airlines efforts to cut costs, a set of revenue-generating measures has also been prepared.

Allowing Aviation majors to open Supply centres

At present, carriers like Air India, Jet Airways, Spice Jet, Go Air, IndiGo and Kingfisher have to either import spare parts in bulk and stock them or get into lease agreements with various manufacturers. manufacturers.

Depending on the fleet size and its age, airlines buy 30-50 per cent of the components that they need, and take the rest on lease. Expenditure on spares and components components is a considerable part of engineering and maintenance, which account account for over 9-10 per cent of the total operating expense of an airline.

Leading aviation companies like Boeing subsidiary Aviall, Lufthansa Technik, Singapore-based Singapore-based STAerospace, France-based France-based ATR, and KLM are planning to set up supply centres for aircraft components in the country. Once these supply centres are set up in India, airlines will have a common facility to shop for spares any time. This will decrease the transportation time. The ready availability of components will also decrease the need to stock spares in bulk. The capital spent on this can be used elsewhere. Since most airlines are getting new aircraft now, they will require major overhaul and change of spare parts by 2011, and that is when the spares market in India will start booming.

Low-cost airlines like ours do not import a large chunk of spares and mostly get into agreements with various companies. Since we have to respect the existing agreements, only 5-10 per cent of our total expense on spares and components will be eligible to be converted into agreements with suppliers in India. But this chunk will be enlarged once the market expands.


Page 25


Conclusion From the study, we can see that the effect of the Suppliers and their Bargaining power is quite significant on the Airline Industry today. While the suppliers of aircrafts and spare parts have some effect on the industry, it is not no t significant when compared to the power which the suppliers of ATF have on the sector. A slight rise in ATF can impact the industry very harshly and bring down the margins to a great extent. Therefore considering the effect of the Oil Companies, it can be concluded that the Bargaining power of the Supplier is quite significant on the Airline Industry.


Page 26


References 1. Meeting on Rationalization on ATF Prices  Ministry of Civil Aviation 2. http://bcs.solano.edu/workarea/mgarnier/MGMT%2050/Southwest%20Porters%20%20Brief%202.pdf 3. Airline Turbine fuel  MCX 4. Economic Times 5. PEST and Porters Five Forces analysis of the Global Airline Industry - P/B/463 6. C/B/2772. C/B/2772. Pressures on airline industry: case of BA 7. http://www.centreforaviation.com/news/2010/03/23/boeing-and-airbus-raising-output-willdeliveries-top-1000-airc deliveries-top-1000-aircraft/page1 raft/page1


Page 27

Bargaining Power of Suppliers and Airline Industry 8. http://www.centreforaviation.com/news/2010/05/03/more-a380-delays-plague-airbus-suppliers-share-wrap/page1 9. http://www.bloomberg.com/news/2010-08-06/airbus-order-book-shaved-by-cancellationsfrom-dubai.html

10. http://www.hindu.com/2009/08/19/stories/2009081956020900.htm 11. http://www.ndtv.com/news/india/govt_plans_bailout_for_air_india.php 12. http://timesofi http://timesofindia.indiatimes.com/biz/india-business/Govt-to-bail ndia.indiatimes.com/biz/india-business/Govt-to-bail-out-a-leaner-trimmer-out-a-leaner-trimmerAir-India/articleshow/4698022.cms 13. http://www.indianexpress.com/news/air-india-seeks-a-second-lifeline-of-rs-1-20/650901/ 14. http://www.business-standard.com/india/news/aviation-majors-plan-supply-units-inindia/320509/ 15. http://www.fiaindia.in/Oil-cos-told-to-consider-new-jet-fuel-discounts.htm 16. http://www.iata.org/pressroom/Documents/IATAAnnualReport2009.pdf 17. http://www.fiaindia.in/Cost_of_ATF.htm 18. http://www.iata.org/worldwide/asia_pacific/india/Pages/index.aspx 19. http://news.outlookindia.com/item.aspx?661953 20. http://www.dancewithshadows.com/aviation/aviation-%20turbine-fuel-prices-up-by-67-percent-in-india/ 21. http://www.hindustanpetroleum.com/En/UI/hp-aviation-PLATTS-based-pricingindia.aspx?Type=2 22. http://www.dnaindia.com/money/report_we-ll-import-atf-save-rs-800-crore_1171440 23. http://www.iocl.com/Products/AviationTurbineFuel.aspx 24. http://www.iocl.com/Products/ATFInternationalPrices.aspx 25. http://www.iocl.com/Products/ATFDomesticPrices.aspx


Page 28


Prepared by Priyank Sinha [FT11441] Purnendu [FT11442] Rachna Saini [FT11443] Rahul Jain [FT11444] Rahul Raj [FT11445]


Page 29

Bargaining Power of Suppliers and Airline Industry

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