A Project Report ON
“A STUDY OF THE INDIAN AVIATION INDUSTRY WITH SPECIAL FOCUS ON ATF TRENDS” SUBMITTED IN PARTIAL FULFILLMENT FOR THE AWARD OF THE DEGREE OF BACHELOR OF BUSINESS ADMINISTRATION UNDER THE GUIDANCE OF
Dr. Amit Gupta Project Co-ordinator SUBMITTED BY:
VIPUL Batch BBA III (A) Enrollment No
STUDENT UNDERTAKING This is to certify that I have completed the Project titled “A STUDY OF THE INDIAN AVIATION INDUSTRY WITH SPECIAL FOCUS ON ATF TRENDS”
in Maharaja Agrasen Institute of Management Studies under the guidance of Dr. Amit Gupta in partial fulfillment of the requirement for the award of degree of Bachelor of Business Administration at Maharaja Agrasen Institute of Management Studies, Delhi. This is an original piece of work & I have not submitted it earlier elsewhere.
VIPUL BBA-3(A) Enrollment no.
CERTIFICATE This is to certify that the project titled A STUDY OF THE INDIAN AVIATION INDUSTRY WITH SPECIAL FOCUS ON ATF TRENDS
is
an academic work done by Vipul submitted in thepartial fulfillment of the requirement for the award of the degree of Bachelor of Business Administration from Maharaja Agrasen Institute of Management Studies, Delhi, under my guidance & direction. To the best of my knowledge and belief the data & information presented by him in the project has not been submitted earlier.
Dr. Amit Gupta PROJECT CO-ORDINATOR
Acknowledgement I would like to thank my Project Guide Dr. Amit Gupta for his immense guidance, valuable help and the opportunity provided to me to complete c omplete the project under her guidance. I would like to thank all faculty members of Maharaja Agrasen Institute of Management Studies for guiding and supporting me in the completion of project from time to time. Last but not the least, my gratitude to great almighty and my parents without whose concerned and devoted support the project would not have been the way it is today.
Vipul BBA-3(A) Enrollment no.
4
EXECUTIVE SUMMARY
Perpetual change in business has made inevitable for every business organization to do environmental scanning, so that it may be able to cope with the latest changes in their respective field of business & to move with
the pace of the industry. The environmental scanning makes it possible for every organization to study their market & to exploit the available
opportunity. The Aviation industry has changed during last five years. The market has been a very high level of competition in the field of Aviation many new players entered into this industry. So it becomes very difficult to aviation
companies to reduce the cost & earn good profit.
Objectives of the project:
To study the trend of the ATF (Aviation turbine fuel) 2. To do the ratio analysis of the company 1. 3.
To do the SWOT analysis of the company and the industry as a whole.
5
TABLE OF CONTENTS TOPICS.
INTRODUCTION o
About Aviation Industry
o
History of aviation industry
o
Market Forecast
COMPANY PROFILE o
Company background
o
Subsidiary Companies
o
Aircraft of Air India
o
Organizational structure
o
Corporate Vision
o
Business Strategy
o
Product Upgradation
o
o
o
Operational Improvement Network & Capacity Expansion Strategic Relationship
Merger of Air India and Indian Airlines
Major Expenditure
ATF – The major cost
o
Type of Fuel
o
Monopoly of PSU’s
o
ATF price movement in India
o
Price Structure in India
o
Expenditure of NACIL NACIL on ATF ATF
6
Staff Cost
Ratio Analysis
SWOT Analysis of AIR INDIA
SWOT Analysis of AVIATION INDUSTRY
Discussion and Conclusion
BIBLOGRPHY
7
INDIAN AIRLINES INDUSTRY- AN OVERVIEW
Defining Aviation sector
The airlines airlines industry comprises passenger air transportation; both scheduled scheduled and chartered, but exclude air freight transport. Industry volumes are defined as the total number of passengers enplaned at all airports within the country or region. Industry value is defined as the total revenue obtained by airlines
from transporting these passengers. The Indian airlines industry generated total revenues of $6 billion in 2006, this representing a compound annual growth rate (CAGR) of 27.6% for the
period spanning 2002-2006. The domestic segment was the industries most successful in 2006, generating total passenger volumes of 36.4 million, equivalent to 90.9% of
the industry's overall volume. The performance of the industry is forecast to accelerate, with an anticipated CAGR of 39.3% for the five-year period 2006-2011 expected to drive the
industry to a value of $31.5 billion by the end of 2011. Airline passenger volumes increased with a CAGR of 25.6% between 2002 2006, to reach a total of 40.1 million million people in 2006. The industry's industry's volume is expected to rise to 205.2 million people by the end of 2011, this
representing a CAGR of 38.6% for the 2006-2011 period. The international segment contributed the remaining passenger volumes of
3.7 million in 2006, equating to 9.1% of the industry's aggregate volumes.
8
History of Aviation Industry in India
The first commercial flight in India was made on February 18, 1911, when a French pilot Monseigneur Piguet flew airmails from Allahabad to Naini,
covering a distance of about 10 km in as many minutes.
Tata Services became Tata Airlines and then Air-India and spread its wings as Air-India International. The domestic aviation scene, however, was chaotic. When the American Tenth Air Air Force in India disposed disposed of its planes at throwaway prices, 11 domestic airlines sprang up, scrambling for traffic that could sustain only two or three. In 1953, the government nationalized the airlines, merged them, and created Indian Airlines. For the next 25 years
JRD Tata remained the chairman of Air-India and a director on the board of Indian Airlines. After JRD left, voracious unions mushroomed, spawned on the pork barrel jobs created by politicians. In 1999, A-I had 700 employees per plane; today
it has 474 whereas other airlines have 350.
For many years in India air travel was perceived to be an elitist activity. This view arose arose from from the “Maharaja “Maharajah” h” syndrome syndrome where, where, due to the the prohibiti prohibitive ve
cost cost of air air tra trave vel, l, the the onl only y peo peopl plee who who
coul could d aff affor ord d it it wer weree the the ric rich h and and
powerful.
In recent years, however, this image of Civil Aviation has undergone a change and aviation is now viewed in a different light - as an essential link 9
not only for international travel and trade but also for providing connectivity to different parts of the country. Aviation is, by its very nature, a critical part of the infrastructure of the country and has important ramifications for the development of tourism and trade, the opening up of inaccessible areas of the country and for providing stimulus to business activity and economic
growth. Until less than a decade ago, all aspects of aviation were firmly controlled by the Government. In the early fifties, all airlines operating in the country were merged into either Indian Airlines or Air India and, by virtue of the Air Corporations Act, 1953; this monopoly was perpetuated for the next forty years. The Directorate General of Civil Aviation controlled every aspect of
flying including granting flying licenses, pilots, certifying aircrafts for flight and
issuing all rules and procedures governing Indian airports and airspace.
Finally, the Airports Authority of India was entrusted with the responsibility of managing all national and international air ports and administering every aspect of air transport operation through the Air Traffic Control. With the
opening up of the Indian economy in the early
Nineties, aviation saw some important changes. Most importantly, the Air Corporation Act was repealed to end the monopoly of the public sector and
private airlines were reintroduced.
10
11
Market Volume
The Indian airlines industry grew by 41.4% in 2006 to reach a volume of 40.1 million passengers. The compound annual
growth rate of the
industry volume in the period 2002-2006 was 25.6%.
12
Market value of the aviation sector
MARKET FORECASTS
1. Market value forecasts In
2011,
$31.5
the
billion,
Indian
an
airlines
increase
industry
is
forecast
to
have
a
value
of
of 425.2% since 2006. The compound annual
growth rate of the industry in the period 2006-2011 is predicted to be 39.3%.
13
14
2. Market Volume Forecasts In 2011, the Indian airlines industry is forecast to have a volume of 205.2 million
passengers,
annual growth
an increase
rate of
the
of 411.8%
industr y
since 2006.
The
compound
volume in the period 2006-2011
is
predicted to be 38.6%. Estimated domestic passenger segment growth is at 12% per annum. 7%
Anticipated growth for International International passenger segment is
while the growth for
International
Cargo
is
likely
to
grow
at
a
healthy rate of
15
16
AIR INDIA
History of Air India
Air India is India’s national Airline. Air India’s history can be traced to October 15, 1932. On this day J.R.D. Tata, the father of Civil Aviation in India and founder of Air India, took off from Drigh Road Airport, Karachi, in a tiny, light single-engine de Havilland Puss Moth on his flight to Mumbai via Ahmedabad. Air India was earlier known as Tata Airlines. At the time of its commencement, Tata Airlines consisted of one Puss Moth, one Leopard Moth, one palm-thatched shed, one whole time pilot, one part-time engineer, and two apprentice-mechanics. Tata Airlines was converted into a Public Company under the name of Air India in August 1946. On March 8, 1948, Air India International Limited was formed to start Air India’s international operations. On June 8, 1948, Air India started its
international services with a weekly flight from Mumbai to London via Cairo and Geneva with a Lockheed Constellation aircraft. In early 1950s due to deteriorating financial condition of various airlines, the Government decided to nationalize air transport. On August 1, 1953 two autonomous corporations were created. Indian Airlines was formed with the
17
merger of eight domestic airlines to operate domestic services, while Air India International was established to operate the overseas services. The word 'International' was dropped in 1962. With effect from March 1, 1994,
the airline has been functioning as Air India Limited. Air India's worldwide network today covers 44 destinations by operating services with its own aircraft and through code-shared flights. Important destinations covered by Air India are Bangkok, Hong Kong, Jakarta, Kuala Lumpur, Osaka, Singapore, Tokyo, Seoul, Dar-es-Salam, Dar-es-Salam, Nairobi, Frankfurt, London, Paris, Birmingham, Abu Dhabi, Al Ain, Bahrain, Dammam, Doha, Dubai, Jeddah, Muscat, Riyadh, Kuwait, Los Angeles, Chicago, Newark,
New York, and Toronto. Air India’s fleet consists of 38 aircrafts. These include 12 Boeing 747-400, 1 Boeing 747-400 COMBI, 2 Boeing 747-300 COMBI, 19 Airbus 310-300, and 4 Boeing 777-200
18
Incorporation
• Establ Establish ished ed in in 1953 1953 unde underr Air Air Corpo Corporat ration ionss Act • Beca Became me Pub Publi licc Limit Limited ed Com Compa pany ny in in 1994 1994 • Regi egister stered ed Office fice
: New Delhi
• Head Office
: Mumbai
• Auth uthorize rized d Capit apital al
: Rs 500.00 Crores
• Paid-up Capital
: Rs 153.84 Crores
Subsidiary Companies
Air India has the following Subsidiary Companies with an Authorized / Paid-up Capital (in Rs. Crores) as under Authorised (a) Hotel Corporation Corporation of India India
Paid-up
41.00
40.00 (b) Air India India Charters Ltd.
30.00
30.00 (c) Air India Air Transport Services Ltd.
100.00
0.05 (d) Air India Engineering Services Ltd.
10.00
0.05
19
Subsidiary Companies
HCI Hotel Corporation of India Ltd
Centaur Hotels at Juhu, Mumbai Airport and Rajgir Sold
Centaur Hotel at Delhi, Chefair-New Delhi and Chefair-Mumbai Under Disinvestment
AICL Air India Charters Ltd
New Airline Air India Express set-up under AICL
All AI Express operations carried out on B-737-800 with a current
fleet strength of 12.
AIATSL Air India Air Transport Services Ltd
Incorporated in June 2003
Set up to undertake ground handling & other allied activities
Being operationalized at all domestic airports
20
AIESL Air India Engineering Services Ltd
Incorporated to undertake engineering and other allied activities
To be operationalized
Cabinet approval required
21
AIRCRAFT OF AIR INDIA The total aircraft on order are 111 (68 from Boeing and 43 from Airbus). Aircraft on order include eight B777-200LRs, 15 B777-300ERs, 27 B787 Dreamliners, 18 B737-800s, 19 A319s, 20 A321s and four A320s. Of the 111 aircraft ordered, 24 Boeing (five B777-200LRs, five B777-300ERs, 15 B737-800s) and 21 Airbus (12 A321s and nine A319s) have been in the fleet so far.
Aircraft
Total
Airbus A 310
8
Airbus A 319
15
Airbus A 320
43
Airbus A 321
12
Airbus A 330
2
Boeing 737-800
22
Boeing 747
6
Boeing 737
5
Boeing 777
14
Airbus A 310 Freighters
4
Boeing 737 Freighters
6
ATR*
7
CRJ 700
3
Total
147
22
ORGANIZATION STRUCTURE
Organization Structure Chairman & Managing Director Chief
Director-
Director-
Director-
Director-
Vigilance
Engineering
Finance
Personnel
Commercial*
Officer ED - Engineering
ED - Finance
ED – Inflight Services
ED - Engine Overhaul
ED – Materials Mgmt.
ED – HRD
ED- Operations
ED – IT
ED - Medical Services
ED - Commercial ED - Public Relations**
ED - Security ED - Ground Services ED - Northern Region
ED – Internal Audit ED - Planning & Intl’ Relations
ED – Air Safety ED - Corporate Affairs ED - Properties & Facilities ** ED - Training * 9 **
* Yet to be appointed Presently in charge in the grade of GM.
ED – Co- ordination Company Secretary
23
Corporate Vision
Vision
To be among top five Asian airlines in terms of Yield, Profitability, Profitability, Productivity, Size and Quality
Mission
Focus on customer satisfaction
Grow with emphasis on sustained profitability
Provide exciting and satisfying work environment to retain and develop employees committed to Corporate Vision
Focus on social responsibility – environment & community
Objectives
Achieve unit revenue, unit cost, profitability, productivity and service level targets, based on benchmarked parameters
24
Business Strategy A Multi-pronged approach
Capacity & Network Expansion – to increase market share & garner competitive strength
Achieve dominance in core markets (USA/UK/Gulf/SEA) (USA/UK/Gulf/SEA)
Increase market access through strategic alliances
Product Upgradation:
Deploy modern aircraft with state-of-art passenger amenities Operate customer friendly schedules with increased network
connectivity
Operations Improvement – to reduce unit costs through
Increased asset (aircraft & manpower) productivity
Out-sourcing/hiving-off Out-sourcing/hiving-off of non-core activities to subsidiaries
Technology upgradation
Benchmarking & adoption of “Best Practices”
25
Product Upgradation
Customer Friendly Schedules Planned
High frequency services with standardized arrival/departures
Network Connectivity
Single aircraft services from source markets
Expanded hub and spoke with own aircraft and from IC, Jet, Sahara
Customer Service Plans to match global standards of customer service through
benchmarking, training & adoption of new technologies Improvements with New Aircraft Product Improvements New/Fresh Interior
State of the art Seats/IFE
Better on time performance
Business Class pitch of 76”
Other Benefits
Better Aircraft utilization
Lower Fuel Consumption
Lower Maintenance Expenditure
26
Operations Improvement Improvement
Increased manpower productivity
Comprehensive HR Policy with focus on
Motivation, Training & Development, Multi-skilling, Scientific
job description & objective performance appraisal Special dispensations obtained from DGCA
Operating Crew – Increased Flight Time Limits
Settlement to be reached with pilots
Cabin Crew - Executive crew to fly as per DGCA time-off
regulations
Computerization of Operating/Cabin crew scheduling
Out-sourcing/Hiving-off Out-sourcing/Hiving-off Non-Core activities
Activities already out-sourced – Prin rintin ting Pre Press ss – Crew Crew/E /Emp mplo loye yeee Tra Trans nspo port rt
Potential for out-sourcing – Medi Medica call Serv Servic ices es – Payr Payrol oll/ l/Re Reve venu nuee Acco Accoun unti ting ng – Canteen – Civil Wo Works
Hiving off to subsidiaries – Maintenance 27
– Groun round d Han Handlin dling g – Info Inform rmat atio ion n Tec Techn hnol olog ogy y – Security – Cargo Technology Upgradation – IT Projects
Revenue Management – PROS implemented Ticketing Time-Limit software implemented
Direct connect with GDS’s
Integrated computerization system for MMD
Disposal of surplus/redundant surplus/redundant inventory
Implementation Implementation of Unit Load Device management system
Disaster recovery site at remote location
Air India Express IT Infrastructure
Data Mart for CRS sales data
Ramp Assistance Billing System for GSD/Finance
Online Financial Information System (FINESS)
28
Network & Capacity Expansion
Identified need for
Non-Stop Operations to New York
– to commence effective
April/May 2007
Services to 12 New Destinations Destinations
San Francisco, Washington, Houston, Manchester, Beijing, Taipei, Sydney, Lagos, Mauritius and South Africa
Increased frequencies on existing routes
New airline subsidiary for distinctive brand positioning
– Air India to offer “premium product” in long/mediumhaul markets – Air India Express to offer “value for money product” in price-sensitive
Gulf/Middle-East/South-East
Asia
markets
Availability of aircraft, pilots and slots could be a constraint
Plan may have to be modified based on developments
29
Strategic Relationships
• Strat Strategi egicc Alli Allianc ancee with with Luftha Lufthansa nsa (LH) (LH)
MOU signed in August 2003
Joint capacity plan till 2007 – Addi Additi tion onal al freq freque uenc ncie iess – AI
: 22 (18 via Frankf Frankfur urtt to USA) USA) - LH: 15
• LH to prov provide ide AI AI comme commerci rciall ally y viable viable slot slotss at Frank Frankfur furtt • 19 slot slot pairs pairs provide provided d till till winter winter 2004 2004 (in (in exchang exchangee for 4 addition additional al frequencies) •
Reciproca Reciprocall World-w World-wide ide Free Flow Code Share Share & FFP Cooperati Cooperation on
under implementation implementation • Specia Speciall Prorat Proratee Agreeme Agreement nt imple implemen mented ted in Nove Novembe mberr 2003 2003 • Cooper Cooperati ation on in IT/MRO IT/MRO/Ca /Cargo rgo being being pursue pursued d • Air India developin developing g relation relationship ship with other Star Alliance Alliance partner partnerss – United Airlines & Air Canada
•
Joint Marketing
Special Prorate Agreement
Reciprocal code share
FFP cooperation
Will pursue pursue FFP FFP cooperat cooperation ion with with other other domestic domestic airlines airlines in in India India to
generate incremental revenue streams •
Will continue continue existing existing code shares shares with existing existing 14 airline airline partners partners &
pursue such relationships with other airlines •
May May also also consid consider er becom becoming ing a full full-fl -fledg edged ed membe memberr of a global global
alliance in the future 30
Awards and Recognitions
• Air India was conferred the ‘Best West Bound Airline from India’ award at the Galileo Express Travel and Tourism awards 2005 function held in Mumbai on 7 December 2005.
• The ‘Most preferred Brand’ Award in the international airlines category by CNBC AWAAZ, a leading Hindi business television channel, was presented to Air India at the AWAAZ consumer awards 2006 function held in New Delhi on 18 July 2006. •
‘Reader’s Digest Trusted Brand Gold’ Brand Gold’ Award Award was presented to Air
India at a function held in Mumbai on 18 May 2006.
31
Amalgamation of Air India Limited and Indian Airlines Limited with National Aviation Company of India Limited
The Government of India, on 1 March 2007, approved the merger of Air India and Indian Airlines. Consequent to the above, a new Company viz National Aviation Company of India Limited (NACIL) was incorporated under the Companies Act, 1956 on 30 March 2007 with its Registered Office at Airlines House, House, 113 Gurudwara Rakabganj Road, Road, New Delhi. Delhi. The Certificate to Commence Business was obtained on 14 May 2007.
Presently, the Board of NACIL consists of: Shri Raghu Menon, Addl Secretary & Financial Advisor, Ministry of
Civil Aviation Shri R K Singh, Jt Secretary, Ministry of Civil Aviation
Shri Rajiv Bansal, Director, Ministry of Civil Aviation
The Scheme of Amalgamation of Air India Limited and Indian Airlines Limited with National Aviation Company of India Limited was approved by the
Board
of
Directors
of
all
the
three
Companies.
Thereafter, the Meetings of Secured and Unsecured Creditors of Air India and Indian Airlines were held in New Delhi on 28 June 2007, in which the Scheme of Amalgamation Amalgamation was approved approved by the Creditors. Creditors. The final hearing of the merger petition was held on 31 July 2007 wherein the last date for submissions of objections was fixed on 8 August 2007 and the Order of the
32
Ministry
of
Corporate
Affairs
is
awaited.
The Authorized and Paid-Up Share Capital of the merged entity will be Rs.1500,05,00,000/Rs.1500,05,00,000/-
and
Rs.145,00,00,000/-, Rs.145,00,00,000/-,
respectively.
It has been decided that post merger, the new entity will be known as “Air India” while “Maharaja” “Maharaja” will be retained retained as its mascot. mascot. The logo of the new
airline will be a red coloured flying swan with the “Konark Chakra” in orange placed inside it. The flying swan has been morphed from Air India’s India’s characteristic logo
“The Centaur” whereas the
“Konark Chakra” was
reminiscent of Indian’s Indian’s logo. The Corporate Office Office of NACIL will will be at Mumbai.
The Government has approved the appointment of Shri V Thulasidas and Dr V Trivedi Trivedi as Chairman & Managing Managing Director and Joint Managing Director, respectively, of the merged entity, with effect from the date of merger.
33
MAJOR EXPENDITURE
1) ATF (AVIATION TURBINE FUEL):- Almost 40% of the total revenue. 2) SALARY:- Almost 20% of the total revenue.
ATF (AVIATION TURBINE FUEL)
Aviation fuel is a specialized type of petroleum-based fuel used to power
aircraft. It is generally of a higher quality than fuels used in less critical applications such as heating or road transport, and often contains additives to reduce the risk of icing or explosion due to high temperatures, amongst other properties. Most aviation fuels available for aircraft are kinds of petroleum spirit used in engines with spark plugs i.e. piston engines and Wankel rotaries or fuel for jet turbine engines which is also used in diesel aircraft engines. Alcohol, alcohol mixtures and other alternative fuels may be used experimentally but are not generally available.
34
TYPE OF AVIATION TURBINE FUEL
1) Duty Paid Fuel: - It is a type of fuel which is used for the operation with in India like a flight from Delhi to Mumbai. This This type of fuel is expensive then the foreign fuel because it includes the sales taxes according to state wise and also the exice duty which will affect to increase the price of ATF. 2) Bonded Fuel: - It is a type of fuel which is used for the operations outside the India in this case fueling is done in India only and flight is moving outside the India like a flight from Delhi to Bangkok. The bonded price applicable for international flights ex-India is higher than the ATF price in
the international markets. 3) Foreign Fuel: - It is a type of fuel which is used for the operation outside India in this case the fueling is done in the foreign station only and flight is coming from abroad to India like a flight is coming from New York to
Delhi. This is the cheapest type of fuel among all of the fuels.
35
Last few years have once again clearly highlighted the highly cyclical nature of the Aviation industry worldwide. ATF consumption has roughly doubled
from 2002 to 2007
Until April 2001 ATF prices in India were determined by Government
through an Administered Price Mechanism (APM).
This was based on a system of cross-subsidy – for socio-
economic reasons prices of some petroleum products such as kerosene and diesel were “subsidized” by setting higher prices for ATF.
In April 2001, the APM was dismantled and the Oil Companies given freedom to price ATF based on input costs and world market prices.
Thereafter ATF prices in India have fluctuated widely depending on movements in world prices.
Despite withdrawal of APM and linkage of ATF pricing with international market prices, price of ATF in India continues to be much higher than the prices prevailing worldwide.
Despite being competitors with possibly differing input and refining costs, the three Government owned oil companies effectively work as a cartel; prices charged by the three oil companies are identical
36
Monopoly of PSU Oil companies:
A major reason for high price even after deregulation of ATF price, is the monopoly of the 3 state owned Oil companies. Because of limited number of suppliers there has hardly been any effective choice for the airline industry, with the 3 state owned oil companies fixing the ATF price on a mutually
agreed
common
formula
between
them.
The government has granted marketing rights to some companies in the oil sector like Reliance, Essar , ONGC etc. None of these companies however, could start supply of ATF as they were not allotted space by the Airport Authority. Recently Reliance has been allotted land at 25 airports in India; and is moving towards setting up Aviation Fuelling stations at some of these
airports. It is hoped that the resultant competition will bring about a reduction in the
unreasonable ATF price levels prevalent in India.
ATF supplied by Indian oil companies is basically from imported
Crude refined by them. There is no direct import of ATF.
Import Duty on Crude is 10% whilst on ATF is 20%.
Oil Companies, however, follow an import parity principle and levy a
20% add-on to the Refinery Transfer Price.
Apart from the import parity principle, the Oil Companies also include a 16%-49% add-on towards marketing margin and
37
contingencies on the Refinery Transfer Price after the addition of the import parity add-on. The add-on varies between the various cities.
On this, the Central Government levies an Excise Duty of 8%. On the resultant price, the various State State Government levy local Sales Taxes ranging from 4% to 39%: which on an average works out to
25% countrywide.
The Government levies thus works out to an add-on of 35%.
A T
Refined ATF
F
Add-on of 20% - Import parity Marketing margin add on 21%
Refinery Transfer Price(RTP)
Government levies of 35% - 8% Central Sales Tax plus 25% State Sales Tax
ATF Price
ATF Price to airlines
Nearly double the world-price
38
Thus, Domestic carriers in India pay nearly double the prices
vis-à-
vis elsewhere in the world. ATF Expenses: Constitute around 40% of the total operating costs for domestic Indian carriers .
ATF upliftment at metros during 2007-08
14000
12000
10000
)
L K( yt
Delhi 8000
Mumbai
it
n a u Q
Kolkata Chennai Bangalore
6000
Hyderabad
4000
2000
0 April
June
A ug
Oct
Dec
F eb
2007-2008
Months
39
The three Governments owned oil companies viz. Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum jointly fix
prices. Also,
Airlines cannot source supply of ATF from any other supplier.
Airlines are offered common terms by the three suppliers, with
no competition amongst themselves.
Government still has a role in determining the applicable prices
even though APM has been abolished.
The infrastructure – Hydrants & Storage facilities– are owned by Oil Companies, who are unwilling to share these facilities with private suppliers e.g. Reliance who as a result export the ATF they produce.
Direct import of ATF by Indian carriers is not permitted.
Common carrier principle not applicable for infrastructure facilities.
Indian carriers are also not permitted to hedge ATF prices – Air India
is permitted to hedge to a limited extent on Fuel uplifted outside India.
Worldwide, airlines have derived significant financial benefits by hedging ATF.
ATF is the most important constituent of the operating cost of airlines in India.
For successful operations of domestic airlines in India, it is imperative that ATF costs / prices be brought down to international levels.
40
Policy makers and aviation specialists have recognized the distortions created in economics of Indian civil aviation industry because of
current high prices of ATF and present pricing policy
A Committee appointed by the Government to review the Indian civil aviation scenario and make recommendations about future civil aviation policy has made several recommendations about ATF in its
report.
ATF price movement in India after deregulation (Rs./KL) Year
Duty paid
Bonded
Average 2001-02
18800
14350
Average 2002-03
19900
16700
Average 2003-04
21000
17800
Average 2004-05
27500
22500
Average 2005-06
35200
26100
Average 2006-07
40500
30500
Average 2007-08
42900
31000
Average 2008-09
49250
38800
01.08.08 (All time high)
74600
53780
01.05.2009 (Current price)
34400
24500
41
60000 50000 40000
Duty Paid
30000
Bonded
20000 10000 0
2001- 2002- 2003- 2004- 2005- 2006- 2007- 200802 03 04 05 06 07 08 09
42
Movement of ATF in last 2 years
Year
2008-2009
2007-2008
Duty
Duty
MONTH
Paid
Bonded Foreign Paid
APRIL
56000 43400
36000
37800 29050
23500
MAY
61150 47350
39200
39150 31750
25100
JUNE(Upto 4th)
72400 52500
41700
38400 31350
25400
JUNE(From 5th)
69300 50300
41700
38400 31350
25400
JULY
72600 52700
46800
39650 31700
25875
AUGUST
74600 54200
47450
41000 33100
26700
SEPTEMBER
63000 47050
39200
40050 31900
25950
OCTOBER
59750 44100
36550
41750 33600
27600
NOVEMBER (1-3) 50100 38050
29500
Bonded Foreign
43450 35050
29350
NOVEMBER (415)
47950 36250
29500
43450 35050
31100
42200 36250
29500
43450 35050
32850
DECEMBER (1-15) 39650 30750
24800
49750 39350
31500
24800
49750 39350
33250
JANUARY
47700 37850
32000
FEBRUARY
46900 37250
31350
MARCH
49400 38750
32750
NOVEMBER (1630) DECEMBER (1631)
35300 30750
43
AT F R AT E S D U R IN G 2 0 0 7 - 0 8 & 2 0 0 8 - 0 9
80000 70000 60000 l
K
50000
/ s
R
40000 30000 20000 10000 0
MONTHS 2 0 0 8 - 2 0 0 9 D u t y P a id
20 08-2009 B onded
2 0 0 8 - 2 0 0 9 F o r e ig n
2 0 0 7 - 2 0 0 8 D u t y P a id
2007-2008 Bonded
2 0 0 7 - 2 0 0 8 F o r e ig n
This chart shows the comparative price fluctuation of ATF in last 2 years2007-08 and 2008-09. The The highest Domestic ATF price during these 2 years is Rs 74600 per KL in august 2008 which is almost 82% high then the last year price of Rs 41000. and the highest Bonded ATF prices during last 2 years is Rs 54200 per KL in august 2008 which is almost 64% high then the last year price of Rs 33100 per KL and the highest international ATF prices during last last 2 years is Rs 47450 per per KL in august 2008 which is almost 78% 44
high then the the last year price of Rs 26700 per KL.
But as the year move
further the ATF price of year 2008 start decreasing and in the month of the December 2008 the ATF price is much lowers then the last year ATF prices. In December 2008 the domestic ATF prices is 35300 which is almost 41% lower then the last year price of Rs 49750 per KL and the bonded ATF price is 30750 which is almost 28% lower then the last year price of Rs 39350 per KL and the international fuel price is Rs 24800 per KL in December 2008 which is almost 34% lower then the last year fuel price i.e. Rs 33250 per KL. Indian carriers bought ATF at Rs 37,800 / kl in April 07, while international carriers paid only Rs 21,800 / kl in Singapore, which is about
73% higher
ATF price structure in India ATF for domestic flights is subject to Excise Duty @ 8%
- Annual impact
- Rs.93
cr. p.a.
- Estimated impact for the aviation industry incl. private airlines - Rs.269 cr. p.a. High Sales Tax on ATF in India
- Average Rate
-
25%
- Gujarat
-
30%
- Tamil Nadu / Bihar
-
29%
- Kerala
-
29.0375%
- Highest
45
- Madhya Pradesh
-
28.75%
-
Nil
- Lowest - Port Blair
- Sales tax Impact for NACIL
- Rs. 286 cr. p.a.
- Estimated impact for the aviation industry incl. private airlines - Rs. 2754
cr. p.a,
ATF a major cost
ATF is a major cost component of NACIL.
High ATF price in India
The ATF prices in India are substantially higher than its price in international markets. Even the bonded price applicable for international flights ex-India is higher than the ATF price in the international markets. Priced 65% higher in India on an average, compared to international benchmarks
46
Average ATF prices in India (As on 1st May’ 2009) (Rs./Kl) Domestic flights
34400
International flights (Ex-India)
24500
ATF prices in international market
20500
As would be seen from above, the ATF price in India is Rs. 34400 per Kilolitre i.e. about 68% higher compared to international price of Rs.20500 per kilolitre. Even the bonded ATF price in India is Rs. 24500 per Kilolitre i.e. about 20% higher compared to international
ATF price. Despite, deregulation of ATF price since, 1 st April, 2002, there has been no major reduction in ATF price as PSU oil companies continue to enjoy virtual monopoly for ATF supply in India. There is almost cartelization amongst PSU oil companies whereby they fix common ATF price as per some non-transparent formula applied by them.
47
The fuel cost of NACIL including Alliance Air has gone up manifold over the years as indicated below: Year
(Rs.Crores)
1999-00
1568
2002-03
2271
2003-04
2588
2004-05
3944
2005-06
5446
2006-07
6331
2007-08
7309
2008-09 (Budget estimates assuming 2007-08 av. price)
7700
2009-10 (Budget estimates assuming Feb’09/Mar’09 price) 5291 2009-10 (Revised estimates based on current price)
5300
Total expenditure on ATF
9000 8000 7000 6000 5000 Total expenditure on ATF
4000 3000 2000 1000
0 1999- 2002-- 2003- 2004- 2005- 2006- 2007- 20082008- 2009-
00
03
04
05
06
07
08
09
10
48
From above, it would be seen that ATF cost for the combined network of NACIL has already gone up for the current year i.e. 2009-10 by Rs. 572 cr. over and above the
budgeted cost.
Need for ATF price rationalization (Suggestions) (Suggestions)
Abolition of Excise Duty. Need for reduction in sales tax on ATF. - ATF may may be categ categori orized zed as ‘Dec ‘Declar lared ed Goods Goods’’ in Centra Centrall Sales Sales Tax Act to limit maximum rate of sales tax to 2% -
Initially, Initially, ATF sold to turbo-p turbo-prop rop aircraft aircraft was categoriz categorized ed as as
‘Declared Goods’ under Central Sales Tax Act since 2001 and the same was extended to cover all small aircrafts with maximum take off mass of less than 40000 Kgs in 2007. - Some Some State State Gover Governm nment entss have have reserv reservati ations ons abou aboutt loss loss of revenue if they reduce sales tax rate on ATF. However, it may be mentioned that their sales tax collection on ATF may just be a fractional percentage of their total sales tax collection and therefore, financial impact of sales tax reduction on ATF would be negligible. - On the the other other hand, reduction reduction in ATF price would would contri contribute bute significantly to their economic, regional & tourism growth
49
- ATF for for dome domesti sticc flight flightss be made made avail availabl ablee at the the same same rate rate (i.e. bonded price) as applicable for international flights. -
There There is is a need need to fix fix ATF ATF pric pricee by PSU PSU Oil Oil comp compani anies es in in a
transparent competitive manner
Reduction in ATF price is necessary to provide level playing field to domestic airlines vis-à-vis foreign airlines getting unfair advantage as they obtain fuel at lower price in their country. A reduction in ATF cost would be a major factor for domestic airlines in significantly improving their competitiveness by lowering cost of operations and provide the necessary financial stability. A booming domestic aviation industry should be seen as a necessary infrastructural requirement to ultimately boost the economy, tourism and all round regional development in the country. An FIA estimate indicates that a reduction in ATF price by 60% (to bring it closer to international benchmarks) has an impact of lowering airline operational
losses by 25%.
50
Fuel Prices and Lack of Efficiencies Causing Airlines’ Losses
According to Research, airline companies in India would continue to incur losses even if crude oil prices decline significantly if they do not quickly undertake a revenue augmentation exercise in conjunction with cost
reduction measures and efficiency improvement initiatives. The sharp increase in crude oil prices in the first half of 2008 has led to a corresponding rise in the price of aviation turbine fuel (ATF) for all airline
companies, due to which they are expected to post heavy losses. Fuel cost as
a percentage of total operating costs has increased by 300-600 basis points. Research has analyzed the movement movement in breakeven breakeven ticket ticket prices of domestic carriers at various prices of crude oil and at varying load factors and concluded that a structural increase in ticket prices is required in the near
term.
51
STAFF COST:
A staff cost constitutes nearly 20% of Air India's total cost. Currently, the carrier runs an annual wage bill of over Rs.3,000 crore. AI is also looking at
improving productivity of employees, elimination of restrictive work practices and reducing wasteful expenditure. The national carrier has around
31,000 employees. The airline was now targeting a reduction in employee cost to the tune of Rs 500 crore per annum. The following efforts were made to reduce the staff cost: - Freezing of external recruitment in non-operational categories; - Freezing of vacancies and abolition 781 vacant posts; - Reduction in staff strength in India through a rolling back of the retirement age from 60 to 58 years; - Implementation of Schemes such as Shorter Working Week(SWW) and Leave Without Pay(LWP); - Redeployment of staff from non-operational to operational areas; - Reduction in temporary postings and duty tours abroad; - Retrenchment of staff at foreign stations through Voluntary Retirement Schemes.
52
RATIO ANALYSIS (As balance sheet available of year 2005-06)
Short Term Solvency Ratio Current Ratio= 1.28 The current ratio of AIR INDIA meets the bare minimum of 1.33, which is considered by banks as the minimum acceptable level for providing working capital finance. The ratio indicates that the company not enjoys a better financial health and would not be able to meet its immediate debts. A ratio under 1 suggests that the company would be unable to pay its debts if they come due at that point. While this shows the company is not in good financial health, it does not necessarily mean it would go bankrupt- as there are many ways to access financing. AIR INDIA dealings consists a major of Letter of Credits and bill of Exchanges. Apart from this the policy of AIR INDIA to issue the ticket only on cash basis has helped AIR INDIA in
maintaining this ratio.
Liquid Ratio= 1.09 The liquid ratio of the company is more than the preferred limit of 1. This is mainly because of the cash transactions which AIR INDIA does. The quick ratio is more conservative than the current ratio, a more well-known
liquidity measure, because it excludes inventory from current assets.
.
53
Working Capital Ratio=0.08
The working capital ratio is an indicator of the efficiency of a company's management of stocks, debtors and creditors. If the working capital ratio is 0.2, this means the company needs 8p of working capital for every Rs1 of annual sales. If annual sales increase by Rs1,00,000 of then the company will have to invest Rs8,000 in working capital to be able to meet this. A
working capital ratio of less than 1 indicates negative working capital.
Fixed Assets Turnover Ratio =2.61297956
Fixed asset turnover is the ratio of sales (on the Profit and loss account) to the value of fixed assets (on the balance sheet). It indicates how well the business is using its fixed assets to generate sales. Generally speaking, the higher the ratio, the better, because a high ratio indicates the business has less money tied up in fixed assets for each rupees of sales revenue. A declining ratio may indicate that the business is over-invested in fixed assets. However, financial analysts claim that such a ratio is inconclusive: companies do not generally cite or reference these figures. The fixed assed turnover ratio of AIR INDIA has been on the lower side. That means it shows that the company has been not effective in using the investment in fixed assets to generate revenue. There is no exact number that determines whether a company is doing a good job of generating revenue from its investment in fixed assets. This makes it important to compare the most recent ratio to both the historical levels of the company along with peer
54
company and/or industry averages. But due to lack of availability of data this could not be done.
Operating Ratio=104.52% It is a ratio that shows the efficiency of a company's management by comparing operating expense to net sales. The smaller the ratio, the greater the organization's organization's ability ability to generate profit if revenues decreases.
An
operating ratio ranging between 75% and 80% is generally considered as standard. This ratio is considered to be a yardstick of operating efficiency but it should be used cautiously because it may be affected by a number of uncontrollable factors beyond the control of the firm. Moreover, in some firms, non-operating expenses from a substantial part of the total expenses and in such cases operating ratio may give misleading results. Operating ratio actually means how much is being spend to earn a rupee. Hence, the
lower the ratio, the better it is.
An operating ratio of 104.52% means Rs 104.52 is being spent to earn a rupee. So it is not a good figure for AIR INDIA. Precautions are to be taken to reduce the operating ratio. One way to combat the effects of a business recession is to work harder by selling ticket and reduce the other overhead expenses. That's fine, and it's certainly important to maximize every business opportunity during a slump. It's much easier to reduce these expenses 10
percent through more effective management
55
Operating profit & expenditure analysis (in crores) Operating Operating Operating revenue expenses profit Years 2006 8439 9870 -1431 2005 8833 9233 -400 2004 7588 7538 50 2003 6146 6113 33 2002 5275 5465 -190 2001 4751 4805 -54 2000 4927 4924 3 1999 4448 4372 76 1998 4135 4139 -4 1997 3837 4029 -192 1996 3533 3945 -412
56
12000
10000
8000 Opeating revenue
6000
Operating expenses
4000
Operating profit
2000
0 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 -2000
Gross Profit Ratio=1.06
The Gross Profit Ratio of AIR INDIA has been just 1.06, mainly because of the fewer profit margins. The only way it can improve its GP Ratio is by increasing its trading margin, or by decreasing its cost of expenditure. Incase of AIR INDIA increasing of trading margin is not possible because of the severe competition they face. Hence they should try to reduce there cost of Expenses.
Debt Equity Ratio = 23.67
A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. If a lot of debt is used
57
to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing.
Revenue passenger carried
A statistical unit in the airline industry; one fare-paying passenger carried one mile. A revenue passenger kilometre (RPK) is a measure of the volume of passengers carried by an airline. A revenue passenger-kilometre is flown when a revenue passenger is carried one kilometre. A passenger for whose transportation an air carrier receives commercial remuneration is called a revenue passenger. This excludes passengers travelling under fares available only to airline employees and babies and children who do not have a seat of their own. The RPK of an airline is the sum of the products obtained by multiplying the number of revenue passengers carried on each flight stage by
the stage distance - it is the total number of kilometres travelled by all passengers.
58
Revenue passenger carried
5000000 4500000 4000000 3500000 3000000 2500000 2000000 1500000 1000000 500000 0
1997- 199 199719988- 19 1999 99-- 2000 2000-- 2001 2001-- 20022002- 20032003- 20042004- 2005 2005-- 2006 2006-98 99 00 01 02 03 04 05 06 07 Revenue passenger carried
Passenger load factor The passenger load factor (PLF) of an airline, sometimes simply called the load factor, is a measure of how much of an airline's passenger carrying capacity is used. It is passenger-kilometres flown as a percentage of seatkilometres available. This is a measure of capacity utilisation. As airlines frequently have heavy fixed costs and are capital intensive, the efficiency with which assets are used is crucially important. This is an important efficiency measure, but it does not consider the pricing and the profitability at which the capacity is sold. It also implicitly assumes that the airline's fleet is fully utilised in terms of the number of kilometres flown.
59
Passenger load factor
74 72 70 68 66
Passenger load factor
64 62 60 58 1997- 1998- 1999- 2000- 2001- 2002- 2003- 20042004- 2005- 2006-
98
99
00
01
02
03
04
05
06
07
60
SWOT ANALYSIS OF AIR INDIA
Air India is the leading airlines in the India. Air India is based on domestic enplaned passengers and scheduled domestic departures. Air India has shown a strong performance in revenues in 2008. Strong operating performance lends financial stability to the company which could be leveraged to seek more growth avenues of growth in future. However, the rising prices of aviation turbine fuel could adversely affect
Air India operating margins.
Strengths
Operational performance Air India registered a strong operational performance for fiscal 2008-09. The company recorded revenues of Rs 15000 Crore during the fiscal year, an increase of 70% over 2005-06. During fiscal year 2008, the
company’s revenue growth was driven by increase in passenger segment revenue and merger with Indian airlines. The increase in passenger revenues primarily was due to an increase increase in capacity, capacity, and and an increase increase in in load factor. In addition the revenue growth is backed by growth in freight and cargo revenues, which was a result of higher rates charged. This
growth was also partly driven by improved efficiency in the company’s operations. Strong operating performance lends financial stability to the company which could be leveraged to seek more growth avenues in the
future.
61
Market leadership
Air India is the leading airlines in the India. The airline has been ranked the top in India’s India’s domestic airline (in terms of number of passengers) by the bureau of transportation statistics (BTS) in 2005. Air India newly orders about 68 from Boeing and 43 from Airbus. Air India dominates the markets it serves, ranking first in market share in India. Its strong market position is driven not just by consistent delivery of low fares but also due to reliable service, frequent and convenient flights, comfortable cabins, in-flight experience, frequent flyer programs, hassle-free airports, and friendly customer service. Strong market position gives the company
the advantage of scale and helps it in strengthening its brand image.
Weaknesses High dependence on passenger revenues Passenger revenues accounted for major part of the Air India total revenue. Cargo services allow airlines to generate additional revenues from existing passenger flights. In addition, cargo revenues are usually counter-cyclical to passenger passenger revenues revenues and have lower demand elasticity elasticity than passenger business, which allows airlines to pass on fuel price hikes to customers. Small cargo business exposes Air India to the demand
fluctuations in passenger business. 62
Lower load factor
Though the overall operating performance has been steady, Air India passenger load factor of 63.2%, which was the company’s record, lags the industry average of 75% in 2006-07.The load factor difference is even greater when compared to other low fares carriers such as Air
Deccan. The company’s load factor is decreasing year by year, in 200506 load factor is 66.2% which is more more than than present load factor. Air Air India India load factor is likely to be low because of the much higher frequency
operated on each route. Lower load factor could decrease the company’s margins.
Opportunities
Growing demand for low cost airlines In mature markets demand for air travel is increasingly being driven by ticket price and consumer confidence. A survey by the US Commerce Department shows that ticket price is the number one criterion for passengers when selecting a flight, well ahead of the availability of a non-stop service. As markets have progressively matured, the GDP elasticity of air travel demand has declined. In the US for example, a 1% growth in GDP will typically result in a 1.2% growth in domestic air travel, compared with a growth of almost 2% in air travel some 20 years
ago. 63
Growth in freight business
The Indian economy is one of the fastest growing in the world, but the boom is not without its stops, starts, and bottlenecks, all of which also
make themselves felt in the country’s freight transport sector. Air India had also launched a major cargo incentive scheme for cargo agents of Air India and erstwhile Indian on the entire network. The scheme, which generated enormous response, entitled top producing agents of each region to become eligible for an all-inclusive incentive trip on Star
Cruise. In January 2008, Air India registered a growth of 6.4% whereas industry showed negative growth of 12% compared to September 2007. In the month of March 2008, industry grew by 24.8% over January 2008 carriage whereas Air India cargo showed an increase of 43.4%. Strong
economic and foreign trade growth is underpinning the freight upturn.
Expanding passenger passenger traffic in Asia Pacific
The demand for air travel to the Asia Pacific is rising driven by increased economic activity in emerging Asian countries such as China and India. Traffic is projected to grow at 7% in China and India combined, above the world average of 5%. Further, the share of Asia Pacific region in world passenger traffic (revenue passenger kilometers) is forecast to rise from 25% in 2003 to 31% in 2023. Against this backdrop, Air India is
64
well positioned to benefit with its increasing emphasis on Asia-Pacific operations.
Threats
Increasing aviation turbine fuel prices The price of aviation turbine fuel (ATF) has soared to record highs in the past few years and continues to hold at that level. Last few years have once again clearly highlighted the highly cyclical nature of the Aviation industry worldwide. ATF consumption has roughly doubled from 2002 to
2007 The ATF prices in India are substantially higher than its price in international markets. Aircraft fuel is a major contributor to Air India
operating expenses. Moreover, the bonded price applicable for international flights ex-India is higher than the ATF price in the international markets. Priced 65% higher in India on an average, compared to international benchmarks. benchmarks. Therefore, this will need stronger revenue growth and greater cost controls in other
areas to overcome the increase in fuel prices.
65
High interest rates
The past few years have seen Central Banks impose higher interest rates to check inflation and the over heating of regional economies. The Reserve Bank of India has led the way raising interest rates. Inflation
fears in the India may see another raise in the short-term. According to Economics times, the India real GDP growth is 9.20% in 2007 to 9.00% in 2008 and this downward trend is also seen in 2009. This in turn could depress consumer spending and offset some of the
positive trends in the India for the company.
Year
GDP, constant price
Percentage Change
2003
6.88%
50.54%
2004
7.89%
14.99%
2005
9.13%
15.79%
2006
9.75%
6.75%
2007
9.21%
-5.47%
2008
7.90%
-14.25%
66
GDP real Growth Rate
12.00% 10.00% 8.00% GDP real Growth Rate
6.00% 4.00% 2.00% 0.00%
2003
2004
2005
2 0 06
2007
2008
Intensifying competition AIR INDIA is now competing against more credible low cost carriers such as Spice jet, Go air, Indigo Airline, and Jetlite etc. Indigo Airlines remains Air India strongest competitor because of its competitive cost structure, strong brand name and ambitious growth plans over the next seven years. Air India also faces increased competition from Air Deccan low-fares subsidiary, Song. Moreover, major legacy airlines have been
focusing
on
restructuring
costs,
which
has
improved
their
competitiveness. With costs restructured, the legacy airlines are becoming more formidable competitors in terms of increasing capacity, matching prices and leveraging their frequent flier programs. Increasing
competition could adversely affect the company’s margins.
67
SWOT Analysis of Aviation Industry
Strengths Liberal Environment: Environment: India's airlines operate in a liberal environment in both the domestic and international spheres. With three major airline groups and four smaller carriers all operating domestic routes, there is no shortage of competition, although this factor combined with excess capacity has tended to depress yields. Nevertheless, carriers are free to operate any domestic routes without seeking permission from the government, and without restriction on pricing. One condition that airlines find onerous however, is the requirement to operate a proportion proportion
of ASKs to remote and underdeveloped regions of the country. On the international front, the Indian government has pursued an increasingly liberal approach to bilateral air services agreements with key overseas markets, resulting in greater access for foreign carriers.
Emirates for example, the largest foreign carrier by capacity into India, will operate 185 weekly frequencies to ten cities across the country by the end of 2009. India's carriers have a combined international capacity share of just over 36% but face strong competition from foreign carriers,
both full service and low cost. Modern Fleet: In light of the fact that much of the growth in Indian aviation has occurred in the last five years, the country's airlines operate a
68
relatively young and modern fleet, ensuring a high quality passenger experience, improved safety and good operational reliability.
High Quality: India's airlines offer a good quality product in each of the operating models in existence. existence. Jet Airways and Kingfisher Airlines are competitive in terms of their in-flight service against the leading carriers in the world. Kingfisher for example is one just half a dozen global carriers such as Singapore Airlines and Cathay Pacific , with a Skytrax 5 star rating. In fact it could be argued that the full service product on domestic routes is excessive for the sector lengths involved and results in a higher cost structure, which the passenger does not necessarily see
value in paying for. The LCC’s too, by and large, offer a comfortable, efficient and reliable service. Until a couple of years ago, Air Deccan was one carrier that had developed a reputation for poor on-time performance, flight cancellations and overbooking, however since being acquired by Kingfisher, most of these operational issues appear to have
been resolved.
Economic Growth: Economic growth has historically been the primary
driver of air traffic, and the relationship has generally been even stronger in developing countries. Between 2004 and 2007, India enjoyed four years averaging 9% per annum GDP growth. This slowed to 6.5% in 2008, however against the background of a global economic recession, this was a creditable performance. The increased business confidence following the general election result in May 2009 has eased concerns that growth may slow further. The stock market has soared 25% in the last 69
month and the outlook for growth and consumption has improved, which is a positive for the aviation industry.
Political Stability: The re-election of the Congress Party, with a stronger
majority is expected to allow the new administration to push ahead with further economic reforms, which had to date been blocked by coalition partners. The prospect of a government which has the ability to last its full term and pursue its agenda is extremely encouraging. In addition, Minister Praful Patel, who was the architect of the dramatic transformation of the aviation sector, has retained the portfolio, which
brings experience and stability to the aviation industry.
Weaknesses Airport Infrastructure: The rapid growth in air traffic over the last few
years exposed the deficiencies of airport infrastructure across the country. After decades of neglect, many of India's airports were forced to operate well above design capacity. The resulting congestion in the terminals and on the runways delivered a poor experience for the passenger and a costly, inefficient operating environment for the airlines. However, although a weakness today, it is also fair to say that it is becoming less
so, as the airport modernisation program starts to deliver results, with new airports in Bangalore and Hyderabad, and improving facilities at Delhi and Mumbai. The upgrade of non-metro airports remains behind schedule so it may be another 3-4 years before we see good quality
facilities across the country, but there are tangible signs of improvement. 70
Airways Infrastructure: Although congestion on the ground is
relatively visible, another current area of weakness is the limited investment that has has taken place in improving improving infrastructure for for air traffic management. This too results in expensive aircraft holding patterns,
indirect flight paths and sub-optimal use of runways.
National Carrier: The state-owned carrier, Air India, is in a dire
situation. The carrier is estimated to have posted losses of close to USD1 billion in 2008/09, and morale within the bloated workforce is at a low.
With no clear direction, management instability at the top and continuing issues with the integration of Air India and Indian Airlines, the carrier is in need of radical restructuring. It is imperative that the government
develops a turnaround strategy for Air India as an urgent priority.
Deep Pockets: Over the last three years, India's carriers have
accumulated billions of dollars in losses and debt. Ironically, a characteristic characteristic that would normally be considered a strength - namely deep pockets - has resulted in carriers remaining afloat that would perhaps in other circumstances have failed. With the backing of either the government or large corporations, several carriers have been able to access funding that they might have been denied on a strictly commercial basis as standalone airlines. As a result of the intense competition which has been perpetuated, airlines have struggled to raise fares to break even
levels.
71
High Cost Structure: India's airlines operate in a relatively high cost
environment, primarily due to the punitive taxation structure. The greatest impact is felt in the area of sales taxation on fuel, which can increase the cost to 60% above the international benchmark. The limitations of airport infrastructure also increase costs due to the fact that carriers are unable to schedule fast turnarounds, resulting in reduced aircraft utilisation. In addition, the fact that high quality ancillary services such as MRO and training are not currently available in India, means that
aircraft and personnel have to be sent overseas.
Skilled Resources: Domestic air traffic in India tripled in the five years
to 2008, while international passengers doubled. This rate of growth far outstripped the capacity to develop skilled technical and management personnel. The gap was partly addressed by employing expatriates, particularly as pilots, and by learning on the fly. This means there is a lack of in-depth experience and knowledge at all levels. Furthermore, there is an absence of high quality training infrastructure in-country to deliver the resources to support future growth. This lack of personnel affects the government as well and the FAA has expressed its concern at the shortage of qualified safety inspectors within the Directorate General of Civil Aviation (DGCA). India has been put on notice that unless this issue is addressed, it may be relegated to a Category II nation, which would mean that Indian carriers would not be permitted to increase
services to the US.
72
Opportunities
Market Growth: Despite the rapid expansion of recent years, India has only just scratched the surface of the potential for the aviation sector. Trips per capita remain low even by the standards of other developing countries. China's domestic market is more than four times the size of India's 40 million passengers. Even, Australia, a country with a population of just 21 million, compared with India's 1.1 billion, has a market 25% larger. Similarly on the international front, less than 1% of Indians travel overseas each year. Inbound visitor nunbers at 5.4 million in 2008 for the entire country, were less than for Dubai or Singapore. It is not difficult to see the expansion potential from such a low base as
economic growth continues apace.
Geographic Location: India is ideally positioned as a major aviation hub at the crossroads between Europe, Europe, the Middle Middle East and Asia Pacific. The The fact that aviation was a neglected sector for so long has allowed airports such as Dubai and Singapore to effectively establish themselves as offshore hubs for Indian passengers, and they now have a significant head start. However, as India's airports improve, and its airlines receive international awards for their service, there may be an opportunity to leverage its huge home market to compete with these longer established
hubs.
Lower Costs, Higher Quality: India has already managed to develop a dynamic aviation sector despite, and not because of, its environment. The 73
improvements in airport and airspace infrastructure, the development of indigenous training training and maintenance maintenance facilities facilities and the potential for fiscal reform, all point to the potential for Indian aviation to increasingly operate in a lower cost, higher quality and more efficient manner. This could in due course lead to an opportunity for India to develop as a global outsourcing hub in areas such as aerospace manufacturing, MRO and
training.
Threats
Middle East Aviation: The carriers of the Gulf are aggressively
expanding in India, with high frequencies from multiple destinations to their hubs, from where passengers can access extensive global networks. The ability for a passenger for example to travel one-stop from Ahmedabad to Hamburg, or multiple daily frequencies from Mumbai to London, connecting at an attractive hub, is a strength which Indian carriers simply cannot match at present. It will take time and the question
is how far ahead will the Middle East carriers be by that stage.
Terrorism: India has seen frequent terrorist activity in recent years. The
country has shown great resilience in bouncing back after each attack; however inbound international traffic in particular is sensitive to such events. Similarly the potential for India to develop as a global traffic and services hub is contingent upon it being seen as a safe and attractive
destination. 74
DISCUSSION
Cash-strapped Air India-Indian Airlines has sought an immediate loan of about Rs 10,000 crore from the government along with an annual equity infusion of Rs 2,500-3,000 crore for the next four to five years, which will be linked to the induction of new aircraft into its fleet. In all, the tottering airline projected a requirement of almost Rs 20,000 crore, roughly the size of Delhi state's annual budget, over the next five years. Aviation minister Praful Patel told that the initial equity infusion would be kept low and would be limited to Rs 2,000-2,500 crore. The government may make only a partial contribution. The balance will be raised from from the market via the IPO route at a later date. AI is also learnt learnt to be looking at an immediate soft loan of about Rs 10,000 crore from the government. The airline currently has an equity base of Rs 145 crore. The merged airline, National Aviation Company of India Ltd (NACIL), accumulated losses of Rs 7,200 crore till March 2009. The AI-IA combine is to receive 111 new aircraft worth $11 billion (list price) to replace decades-old planes in its fleet. Until now, 51 new planes worth $4 billion have joined the fleet. But the slowdown, which has hit all airlines, has affected the already struggling AI particularly badly and it needs a
massive cash infusion to stay in the skies. However, it was made abundantly clear to NACIL that any financial help from the government will come, if and only if, NACIL is able to convince it about two things — it has a plan, and more importantly, that 75
it can implement it. Also, any assistance from the government would have to be matched by an aggressive cost reduction, including a drastic cut on salaries, and a better revenue management by NACIL and that it
must
come
up
with
a
concrete
cost
reduction
proposal.
On the salary front, AI and IA give their 31,000-odd employees performance-linked performance-linked incentives (PLI), (PLI), which comprises almost almost 60-80% of their overall pay package at senior levels. NACIL has an annual wage bill of Rs 3,100 crore for its 31,000 employees, with PLI accounting for almost half the salary expense. Now, AI is trying to cut the PLI but reaching an agreement with unions could be more difficult than pruning some
staff
through
leave
without
pay
or
VRS
routes.
The idea is to save money on lease dole outs and, instead, use that for paying for the new planes that would also be very fuel efficient unlike the old rented ATF guzzlers. But getting the companies to take the planes back is going to be a huge challenge. A leased Boeing 777, for instance, has a monthly rental of $9 lakhs. The airline also told the panel that it needed new aircraft to phase out the old ones in its fleet in order to compete.
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Other remedial costs measures taken to improve operating results include:- Focus on cost reduction and rationalization of costs in major areas of Company's functioning; - closing down uneconomical offices and the down sizing of foreign offices; - More economical hotel accommodation for operating and Cabin crew; - Introduction of measures of all stations in India and abroad to curtail use of hotels for staff on duty tours by encouraging them to return to the base the
same day; - A cut of 10% in daily outstation allowance payable at all foreign stations
and 25% at Indian stations; - Reduction of meal wastage and the rationalization of catering on board; - Curtailment of Cash Publicity Budget; - Curtailment of overtime, temporary posting and a substantial reduction in costs in respect of controllable heads viz. Communication, Printing and
Stationery, General Charges etc; - Outsourcing of staff transport and redeployment of drivers to operational
areas.
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BIBLOGRPHY www.airindia.co.in www.wikipedia.org
http://search.ebscohost.com Business India Economics Times I M Pandey
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