Week 1:
Overview of the
Aviation Industry
PGDM (Semester 1)
For class discussion at NDIM
1
Service sector in India: Key Statistics
The service sector in India constitutes roughly 57% of our
national wealth. i.e. about USD 1.1 Trillion
Key segments include:
1. Banking and Financial Services
2. Organized Retailing
3. Education Sector
4. Health Care Sector
5. Hospitality Sector – accounting for 6% of India’s GDP
and this includes the contribution of the airlines
business estimated at USD $ 6 Billion.
6. Independent Services
For class discussion at NDIM
2
Aviation sector
• Duopolistic Market with Two aircraft manufacturers :
– Boeing; and
– Airbus
• Aircraft engines typically supplied by
– Rolls Royce
– General Electric; and
– Pratt & Whitney
• Outsourcing of activities leads to cost rationalization and
focus on key areas
For class discussion at NDIM
3
Aviation in India and Rest of the World
In terms of Air traffic, India will be the fastest
growing country for air travel for the next 10 years.
World
India
2010-2018
12.2%
2019-2028
20-Year
Growth
2010-2018
6.6%
7.3%
4.6%
For class discussion at NDIM
2019-2028 20-Year
Growth
4.8%
4.7%
4
Aviation sector: Profitability factors
Profitability Drivers in aviation sector
Aviation Turbine Fuel (ATF) estimated at USD 1200/ KL
constitutes – 45% - 50% of total cost of operations.
(ATF prices are increasing on rupee devaluation against a
basket of foreign currencies)
Government allowing import of ATF prices which are much
lower than domestic prices due to low tax incidence and this
would provide some breather
For class discussion at NDIM
5
ATF
• ATF – Aviation Turbine Fuel
• Aviation Turbine 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
• ATF contains additives to reduce the risk of
icing or explosion due to high temperature,
among other properties.
For class discussion at NDIM
6
Aviation sector: Profitability factors
Profitability Drivers in aviation sector
Manpower and administration costs accounts for 22% of
the total cost as foreign pilots and technical staff demand
high salaries
Profitability hinges on seat load factor, usage of fuel
efficient aircrafts, High turnaround rate, other non ticket
incomes, outsourcing of key services, etc
LCCs are emphasizing on reducing manpower engagement
and cutting costs to the extent possible to recover profits
For class discussion at NDIM
7
Aviation sector: Concern Areas
• Highly competitive industry due to entry of private players
• Leasing of aircrafts a preferred option – but need to generate
sufficient cash flows to retire debt obligations
• Rising fuel costs and erratic fluctuations due to crude oil prices
being volatile and rupee depreciation adding to the woes
• Outsourcing non core activities and productivity of manpower
critical for profits.
• Overstaffing and operations in non viable routes for national
carriers create profit pressures
• Airlines willing to invest mainly in fuel efficient aircrafts like Boeing
737 600 (South West Airlines) A – 320 (Indigo) and B 787/ 777 by
JAL and AirIndia for long overseas routes
For class discussion at NDIM
8
Low Cost Carriers: Success Factors
1. Low cost implies low fares and minimum facilities and
in-flight entertainment and support services
2. No Frills, ancillary revenues are important
3. Hidden charges, pay extra for not being attentive
(Printing of Boarding Pass, Check in, Meals etc)
4. Operation of standardized fuel efficient aircrafts
5. High utilization of aircrafts – quick turn around times
6. Short distances, high frequency
7. Avoiding overstaffing, achieving high seat load factor
8. Operate out of less busy, smaller, cheaper airports
For class discussion at NDIM
9
Southwest Airlines - Low Cost U.S. Carrier
• Started operations in 1971, HQ-Dallas, Texas, USA – pioneer in low
cost air travel
• Easy jet & Ryan air follow Southwest’s strategy in Europe
• World’s largest low-cost carrier.
• Reputed for innovative advertisements
• FORTUNE listed it for the 10th year as among America’s top 10 most
admired corporations
• Peculiar features:
– No Assigned Seats!
– No Travel Agents, can book only on its own website, saves $50 Million
(Rs 300 Crore) annually
– Turn around time 15-25 mins, US industry Average 55 minutes
– Only one type of aircraft, helps train better and build operational
efficiencies
For class discussion at NDIM
10
Ryan Air - European Low Cost Airline
• Started operations in 1985, HQ-Dublin, Ireland
• CEOs maniacal focus on being the lowest cost producer
– Even encouraged staff to steal stationary from hostels & banks to save costs!
– 25 Minutes turn around time, to get maximum aircraft utilisation
– Often operate from smaller, less congested airports with lower costs
• Branded itself as the Bad Boy of the Aviation Industry
– Often use provocative & Misleading ads that get the attention at a low cost
– Enormous charges for small mistakes:
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€ 70 per passenger if you forget to print your Boarding Pass in Advance
€ 100 per passenger, if you want to check in luggage at the airport and not online
– Rated among the worst in customer service – almost being rude
• Over 20% revenue from ancillary products (ie other than ticket sales)
example print boarding pass, inflight sales, airport baggage checkin, etc
• Successful despite public opinion of being mean, uncaring & money
grabbing – offers the Lowest price tickets – 37% lower than the Easy
Jet (the Second best low cost European carrier)
11
Ryan Air – Lowest cost per Passenger in Europe
Ryanair Easy Jet Norwegian Air Berlin Spirit
Southwest
Staff
5
8
15
14
16
33
Airports & Handling
8
18
8
26
15
22
Route Charges
6
6
13
8
-
-
Aircraft O’ship &
Maint.
6
8
17
20
16
17
Sales & Marketing
2
6
12
31
4
2
Total
27
46
65
99
51
74
-
+67%
+137%
+262%
+86%
+170%
% vs Ryanair
Cost per Passenger (excluding fuel) is lower by 67% compared to the
Second Low Cost European Airline
Source: CAPA - Centre for Aviation and latest available accounts via Ryanair presentation 28 January 2013
Air Asia - Malaysian Low Cost Airline
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Started operations in 1996, HQ-Kuala Lumpur, Malaysia
Largest Low Cost Carrier in Asia (Both in Fleet Size & No. of Passengers)
Often Awarded as Best Asian Low Cost Carrier
Air-Asia India Launch Planned for October 2013
India JV Partners Include
– Air Asia
– Tata Sons
– Telstra
• Key people in Air Asia India include
Tony Fernandes;
Group CEO for Air Asia
Ratan Tata, Chief Advisor to the Board;
Chairman Emeritus -Tata Sons
Arun Bhatia Owner of Telstra;
Son Married to LN Mittal’s only Daughter
• To start operations soon from Southern India and expand internationally
• Innovative Fares (Free/999/1999 so on) and steep introductory discounts
at the initial stages
13
Evolution of Aviation in India
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1953 : 9 Airlines including IA & AI
1953 : Nationalization of private airlines
1994 : Private airlines allowed to operate
1995 : Jet, Sahara, Modiluft, Damania, East West
2003 : Air Deccan as India’s first LCC
2005 : KF, Spicejet, IndiGo, Go Air, Paramount
2011 : IndiGo international ; KF exits
2012 : Govt allows ATF import, FDI -49%,
For class discussion at NDIM
14
Indian Aviation Sector – Current Scenario
% Market shares of Aviation players in India (By Passenger Traffic)
Indigo has the Highest Market Share
15
Indian Aviation Sector – Profitability
Airline
Estimated Net Profit (Loss) in
US $ Millions (FY 2012-13)
Indigo
100-110
Go Air
(15)
Spicejet
(34)
Jet Konnect
(53)
Jet Airways
(87)
Kingfisher
(510)
Air India
(950)
• Indigo – India’s Only Profitable Airline – On Time
• Air India with Maximum Losses among all Indian
airlines survives on Government funding
• Kingfisher with almost half of Air India Losses - Perishes
16
The Kingfisher Story
Established in 2003
May 2005: Indian Commercial operations commence. Losses since 2005 itself
USP:
Best in class, luxury airline, fancy meals, top domestic in flight
entertainment, focus on quality flying experience
Sep 2008: International operations also started
Nov 2010: Largely due to KF losses, UB Group shares at Rs 82 down from 52
week high of Rs 315
Mar 2011: Banks convert Rs 1300 crore of debt to equity at 61% premium,
give little breather to KF, which continues to lose money
Sep 2011: KF Discloses substantial losses to the BSE
Nov 2011: Financial results disclose the company is drowning in high interest
debt and losing money
Nov-Dec 2011: Bank accounts frozen twice
Sep 2012: Market share shrinks to 3% from 15% in 2009
Oct 2012: Flying License suspended
Feb 2013: Government withdraws domestic & International flying entitlements
For class discussion at NDIM
17
Jet – Etihad Deal
• Etihad to invest Rs 2058 crores in Jet for 24% stake, premium of over 20%
– Values Jet at Rs 8500 + crores – Naresh Goyal owns 51% stake in Jet
• FIPB yet to clear the proposal. Main issues to be considered
– Who has Effective Control and What is the Ownership Structure
• Need to convince the regulator Eithad’s control is in line with its 24% stake
– Deal signed within 2 days after an agreement between India & Abu
Dhabi assigned ~37,000 additional seats to Etihad
– Did Jet-Etihad know what the Government was planning and are the
two deals linked?
• GOM initially approves the deal, PMO retracts
• SEBI yet to accord final clearance
• Deal being reviewed
For class discussion at NDIM
18
Current Policies in Indian Aviation
• FDI upto 49% is allowed in Indian Airlines
• In July 2013 a proposal to raise the FDI limit from 49% to 74%
was rejected
• Up to 100% of NRI investment is allowed by the means of
automatic approvals pertaining to the domestic air transport
services
• Proposal to allow airlines to directly import ATF
• Discussion on Lifting the freeze on international expansions of
private airlines
– Current you can not fly internationally unless you operate
for 5 years and have 20 aircrafts
For class discussion at NDIM
19
FDI & FII
• FDI is an investment that a parent company makes in a
foreign country.
• FII is an investment made by an investor in the markets
of a foreign nation.
• FII can enter the stock market easily and also withdraw
from it easily.
• But FDI cannot enter and exit that easily.
• Foreign Direct Investment targets a specific enterprise.
• The FII increasing capital availability in general.
• The Foreign Direct Investment is considered to be
more stable than Foreign Institutional Investor
For class discussion at NDIM
20
FIPB
The Foreign Investment Promotion Board
(FIPB) is a national agency of Government
of India, with the remit to consider and
recommend FDI which does not come
under the automatic route.
It provides a single window clearance for
proposals on FDI in India.
For class discussion at NDIM
21
Aviation in India
• FIPB: Foreign Investment Promotion Board to
approve projects which are not under the
automatic route
• FDI Automatic: This is permitted for certain
categories of services in Aviation sector
• FDI requiring FIPB Nod: FDI norms specify that
the FIPB nod is mandatory for certain categories
of services, whereas approval of SEBI is
mandatory for all Joint venture projects
For class discussion at NDIM
22
Aviation in India: Benefits of FDI
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More Capital Infusion for fund starved airlines
Enhanced market access for carriers
Better consumer choice
Adding to government revenue earnings
Supporting Growth of hospitality sector
Transfer of technology and best practices
Scope for more employment
For class discussion at NDIM
23
Aviation in India: Limitations of FDI
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Heightened Competition and price wars
Industry consolidation is inevitable
Spate of mergers and acquisitions
Scope for cartelization
Severe operational challenges for airlines/ carriers
Few Survivors and consumer choice gets limited as
market is dominated by select few
• Large scale lay offs and unemployment
For class discussion at NDIM
24
Aviation in India
For class discussion at NDIM
25
Aviation in India
For class discussion at NDIM
26
Aviation in India
Recent Govt. initiatives & Investments:
• PPP mode for mega projects & operations viz
– Green field airports
– Operation of some selected airports
• To invest Rs 20000 crores for
– New international airports in Bhubaneswar & Imphal; and
– 50 low cost domestic airports
For class discussion at NDIM
27
Indian Travel Websites
• Started around 2006-07 ie a time when Indian skies were buzzing with
airlines, more were expected
• Airline commissions have fallen from 5% to 2% in the last 4 years, expected
to decline further
– Airlines losing money are looking to cut costs & commissions
– Airlines started to woo customers directly on their websites
– Example: Online bookings for Southwest Airlines are only on its own website
• Future for these sites seems to be with Online Hotel Bookings
– 5 Domestic Airlines Vs 45,000+ Premium Hotels in India itself
– Only 500 Branded hotels, rest are fragmented, opportunity for a booking website to add
value to customers
– Commissions with Hotels typically 5 times higher than airlines
– Already 75% of hotel sales are online
• 60-70% of Current revenue of Yatra.com & Cleartrip.com is from Ticket sales
• Ticket & Hotel sales expected to generate 50:50 revenue in 18 months
Source: Economic Times June 30-July 06, 2013
28
Aviation Industry: Key Takeaways
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Understanding the dynamics of the aviation sector
Assessing the factors determining profitability
Assessing the global and Indian market trends
Understanding the operational/ Business Models of Low Cost carriers
Vs Full Service Carriers
Identifying success stories for select airlines abroad and in India
Examining the reasons behind failure and bankruptcy of key airlines
Awareness of new initiatives by Government of India and thrust on FDI
Identifying the benefits of FDI for all stakeholders and the implications
for the airline industry
For class discussion at NDIM
29
THANK YOU
For class discussion at NDIM
30